by Roger D. Johnson, CPA

It's not ambiguous at all -

The audit organization should have a program to ensure that its staff maintain professional proficiency through continuing education and training. Thus, each auditor responsible for planning, directing, conducting or reporting on audits under Government Auditing Standards should complete, every 2 years, at least 80 hours of continuing education and training which contributes to the auditor's professional proficiency. At least 20 hours should be completed in any 1 year of the 2-year period. Individuals responsible for planning or directing an audit, conducting substantial portions of the field work, or reporting on the audit under these standards should complete at least 24 of the 80 hours of continuing education and training in subjects directly related to the government environment and to government auditing. If the audited entity operates in a specific or unique environment, auditors should receive training that is related to that environment.

The audit organization is responsible for establishing and implementing a program to ensure that auditors meet the continuing education and training requirements. The organization should maintain documentation of the education and training completed.

This requirement for continuing professional education (CPE) is unchanged from the 1988 revision to Government Auditing Standards (the Yellow Book) that became effective for audits starting January 1, 1989 - well over a decade ago. I've heard all the arguments:

· "There are no good programs that I haven't already taken."
· "There are no programs in my area."
· "I'm familiar with the client and the audit. I don't need additional CPE just for this audit that I've been doing for nearly 20 years."
· _________________________ - (Fill in the blank. I've probably heard it.)

We have grown weary of mandatory CPE requirements and there has been a noticeable shift in our profession toward life-long continuing education that does not necessarily involve accumulating credit hours by sitting in a classroom or burying ourselves in self-study material. Yet, for now at least, the Yellow Book's 24/80 hour CPE requirement is still with us. There are several relevant questions that are often asked of me, and of peer reviewers. Some of these are:

· What constitutes "substantial portions of the field work?"
· What subjects (or do particular subjects) count toward the 24-hour requirement?
· What time period should the firm use in measuring its compliance?

These are all important questions, of course. Some judgment necessarily must often be exercised in answering them. Some guidance is available, including the General Accounting Office's "Interpretation of Continuing Education and Training Requirements." (The interpretation was issued in April 1991.) But the question I want to address is this:

· Compliance with mandatory CPE requirements is evaluated in a firm's peer review. What happens if a firm is not in compliance with either the 24-hour or the 80-hour CPE requirement of Government Auditing Standards?

Guidance from the AICPA Peer Review Board has always insisted that a firm's failure to comply with the Yellow Book CPE requirement be taken seriously. Peer reviewers, however, have not always dealt with the issue as aggressively as expected. The various administering entities (state society peer review committees) should expect peer reviewers to justify substantially all instances where the Peer Review Board's guidance is not followed. For purposes of a peer review where the firm has to a significant degree not complied with the Yellow Book's CPE requirement, all affected audits should be considered "substandard." Don't be confused. "Substandard" does not mean, at least in this context, that the related financial statements and/or the auditor's reports are considered misleading. It refers to the fact that, according to the Yellow Book, the firm was not technically qualified to perform the audit(s). This position is likely consistent with the posture of the various offices of the inspectors general if an engagement is selected for an oversight review by the responsible government funding department or oversight agency. I believe everyone agrees that this should be viewed as serious, even if it is taken lightly during a firm's peer review.

The obvious question is when do failures to meet the 24- or 80-hour CPE requirement rise to the level that it is considered non-compliance "to a significant degree?" That, of course, requires some degree of professional judgment. Let's look at two examples.

Firm A is a sole practitioner with no professional staff. Most of the firm's few audits are subject to Government Auditing Standards. During 1999-2000, the firm owner completed no CPE programs to satisfy the 24-hour requirement, although the 80-hour requirement was met and the firm completed programs in general accounting and auditing subjects. Except for the CPE failure, the firm's 2001 peer review results were "clean." In fact, there were hardly any exceptions noted in the governmental engagements and other audits selected for review. Also, only a few minor matters were noted in the review of accounting or other non-audit services or in the review of the elements of quality control.

Resolution - At a minimum, the firm's 2001 peer review report should be modified. The firm owner is responsible for all the firm's audits, and the entire Yellow Book audit practice must, technically, be considered "substandard." The Yellow Book practice is a significant part of the firm's accounting and auditing practice and the presence of "substandard" audits (albeit for technical reasons) is considered evidence that the firm's system of quality control did not provide the firm with "reasonable assurance of conforming with professional standards in the conduct of its accounting and auditing practice." So, a firm successfully endures its peer review in terms of acceptable, even commendable, quality of its engagements. However, in light of this situation where there is lack of adequate CPE, the peer review report should be modified for Personnel Management. If significant findings were noted in the audit engagements reviewed or arose during the peer review of the firm's accounting practice, an adverse report should be considered.

Firm B is a firm with three owners. A few of the firm's audits are subject to Government Auditing Standards, and two firm owners have responsibilities for these audits. During 1999-2000, one firm owner with Yellow Book responsibility completed only 16 of the necessary 24 CPE hours in governmental subjects. No other Yellow Book CPE exceptions were noted, including any exceptions for the three non-partner professional staff members assigned to the Yellow Book audits. There were a few documentation, reporting or performance findings in the Yellow Book and other audit engagements reviewed. However, these were minor and not pervasive and there was no systemic pattern to the errors. Only a few minor matters were noted in the review of accounting or other non-audit services or in the review of the elements of quality control.

Resolution - The firm's 2001 peer review report need not be modified. Only one of two firm owners, and one of five individuals, subject to the 24-hour CPE requirement failed to comply with the Yellow Book CPE requirement. Further, the individual completed sixteen of the necessary twenty-four hours. Although this is clearly less than the mandatory requirement, the peer reviewer's further investigation reveals that there were no exceptions in earlier periods (1995-1996 and 1997-1998). Accordingly, the reviewer reasons that the firm is in compliance "to a significant degree" and an unmodified report is appropriate even though "substandard" audits are present. However, the presence of several errors or significant errors on the governmental engagements selected for review may suggest that the CPE failure led to the performance errors.

Of course, there are countless examples of possible situations that might be found in firms. In many of them, the decision is very subjective. At the least, however, a peer reviewer must justify an unmodified report in substantially all situations where there are failures to comply with either the 24-hour or the 80-hour CPE requirement. The greater the effect of a lack of required CPE has on the firm the more likely it will result in a modified or an adverse report (e.g., affected personnel compared to total owners and total professionals subject to the CPE requirement; or total affected engagements compared to the firm's total accounting and auditing practice).

A few final and important points should be made. The aforementioned interpretation does make provision for "making up" deficiencies. Auditors who have not completed the 24- or 80-hour CPE requirement for any two-year period have the two months immediately following the two-year period to make up the deficiency. If this is done, hours used to make up a deficiency cannot be used toward the requirement for the next two-year period. However, be cautious when implementing the two-year "make up" resolution. Most firms, for purpose of monitoring CPE requirements, use the calendar year as the firm's CPE year. Thus, a deficiency in a two-year period can only be made up during the following January and February. If your practice, like most, has a demanding tax season schedule in January and February, you don't exactly have time to direct toward CPE even if you can find suitable programs or materials. Also, this two-month grace period is considerably shorter than the six-month grace period allowed by some state boards of accountancy to make up deficiencies for their purpose. The interpretation also advises that an auditor may not carry over CPE hours earned in excess of the 24- and 80-hour requirement from one period to the next two-year period. Finally, remember that if a client is operating in a "specific or unique environment" specialized-industry CPE is expected. (Not-for-profit organizations are usually considered "specialized.")

To conclude,YES the bar has been raised. Firms should more carefully monitor compliance with the Yellow Book's CPE requirements. Otherwise, they may be unpleasantly surprised in their next peer review.