What Is a CPA Peer Review and why is it Needed for a Franchise Audit?

Definition & Purpose

A CPA peer review—also known as a practice monitoring review—is an external evaluation of a CPA firm’s system of quality control and its compliance with professional auditing, attestation, and review standards. Essentially, it’s an “audit of the auditors.”

The aims are to:

• Ensure audits and related services meet recognized professional standards (like GAAS, SSARS, SSAEs, Yellow Book).

• Promote public trust by confirming an accountant’s performance remains up to standards.

• Provide an educational, rehabilitative process, identifying deficiencies and guiding improvements.

Types of Peer Reviews

There are two main types:

        1. System Review

• • Examines the firm’s quality control system across multiple elements: leadership, ethics, client acceptance, HR, engagement performance, and monitoring—including a sample of actual engagements.

       2. Engagement Review

• • Focuses on a sample of specific engagements, typically for firms not conducting full audits (e.g., reviews or compilations).

Frequency & Requirements

• Firms conducting attestation services—like audits, reviews, or examinations—must undergo peer review every three years (some states require every 3.5 years).

• Reviews must be performed by qualified, independent reviewers via AICPA-approved administering entities, such as state societies or the National Peer Review Committee.

• Firms must enroll in the AICPA Peer Review Program (through PRIMA) within a regulated timeframe (e.g., within 30 days of performing an attest engagement), and complete the review within 18 months of first providing attest services.

Outcomes & Remediation

Peer reviews result in one of three ratings:

• Pass

• Pass with deficiencies

• Fail

If deficiencies are found, firms must undergo remediation—addressing weaknesses in processes, documentation, or control systems. Persistent failure can result in disciplinary action by state boards and could risk licensing.

Why Peer Reviews Are Required for Franchise Audits

1. Ensuring Consistency Across Franchisee Financials

Franchise operations heavily depend on consistent, reliable financial reporting—for royalty calculations, performance tracking, territorial compliance, and brand integrity. A peer-reviewed CPA provides assurance that audit work on franchisee financial statements upholds industry standards, ensuring comparability and reliability across locations.

2. Regulatory and Licensing Mandates

• State boards of accountancy mandate peer review for firms performing attest services, including franchise audits. It’s not optional—not just an AICPA requirement.

• Without passing peer review, firms could face disciplinary action, lose licensure, or be prevented from practicing audits, including those for franchisors or franchisees.

3. Upholding Audit Quality for High-Stakes Decisions

Franchise audits are often used by:

• Franchisors who vet franchisee performance

• Lenders evaluating loan eligibility

• Investors assessing unit profitability

Poor audit quality risks misinformed decisions, financial misreporting, and legal disputes. Peer review mitigates that risk.

4. Maintaining Brand and Systemic Trust

Franchises rely on brand reputation. If franchisee audits are flawed, it can compromise:

• Royalty collection

• Compliance with franchise agreements

• Financial transparency to investors and third parties

Peer-reviewed accounting firms provide an extra layer of credibility and assurance.

5. Addressing Public Interest and Compliance Standards

Given that franchise audits may indirectly involve public interest entities, especially when public companies or public financing are involved, peer reviews help ensure compliance with standards like the Yellow Book (GAGAS).

A Real-World Walkthrough

Consider this scenario:

1. A CPA firm begins performing audits for a franchisor’s multi-unit startup.

2. They enroll in the AICPA Peer Review Program via PRIMA within required timeframes.

3. A system review is conducted, inspecting their processes and selecting some franchisee audits.

4. The firm is rated “Pass with deficiencies”:

   • Maybe documentation was incomplete, or quality control lapses found in sampling.

5. The firm implements corrective actions and undergoes a follow-up review.

6. Once fully passed, the franchisor—and any stakeholders—can rely on the audit reports with confidence.

Without peer review, the franchisor may question the reliability of financial statements, potentially hindering franchise expansion or lending.

Benefits Beyond Compliance

• Quality Improvement: The review identifies best practices and areas to enhance procedures.

• Competitive Advantage: Firms with “passed” reviews can differentiate themselves when bidding for franchise clients.

• Public Confidence: A peer-reviewed audit firm signals trustworthiness to franchisors, networks, and external stakeholders.

• Risk Management: Reduces exposure to audit failures or litigation tied to franchise financials.

Peer Review in Practice: Insights from Professionals

From industry discussions on Reddit and across professional forums:

Costs vary: one CPA recalled paying a $3,000 retainer, with total costs possibly rising above $4,000–$11,000 depending on firm size and review scope.

Peer Review Requirements: Overview by Timeframe

Why Peer Reviews Matter for Franchise Audits

1. Regulatory Obligation: State boards and AICPA mandate peer reviews for attest service providers.

2. Quality Assurance: Ensures audit work meets professional standards—especially critical across multiple franchise units.

3. Credibility & Trust: Builds confidence in franchisor, lender, and investor communities.

4. Risk Mitigation: Helps avoid audit deficiency, litigation, or brand damage.

5. Continuous Improvement: Identifies systemic issues and supports process refinement.

In short, CPA firms must undergo peer review not just because it’s a rule, but because it elevates audit standards, reinforces public and franchise trust, and underpins the legal-validity of franchise financial reporting.

For information on how to find a CPA who can prepare franchise audits, contact Franchise Marketing Systems:  www.FMSFranchise.com