The CPA Journal

Peer Review: Raising the Bar for Audit Quality

Questions about the accounting profession’s ability to regulate itself have motivated Congress and the SEC to consider proposals that would significantly transform the practice of public accountancy. Quality control of audits by the government is a part of both proposals, and we need to try to help regulators and legislators understand peer review, the profession’s quality-control mechanism. If they are going to make changes, they need to understand what they are changing and avoid unintended consequences.

The AICPA has two national peer review programs, both designed to improve the accounting and auditing services firms offer the public. All AICPA members in public practice must belong to one of these programs and undergo a peer review every three years. Firms that perform audits are reviewed on their quality-control system, and those that issue reviews and compilations are reviewed on the quality of the financial statements they issue.

Every AICPA member that audits one or more of the 17,000 publicly traded companies subject to SEC regulation must belong to the AICPA SEC Practice Section and participate in its practice- monitoring program. A national oversight committee reviews such peer reviews, the reports of which are available online at peerreview.aicpaservices.org/publicfile/default.asp.

Peer reviews of all other AICPA members’ firms are overseen by the AICPA Peer Review Board, assisted by state CPA society committees. The results of these reviews are not public, but can be requested directly from the reviewed firm. Unless a CPA is licensed in one of 35 states that require peer review for licensure, there is no requirement for a peer review if the CPA opts not to join the AICPA. Most states with peer review licensure requirements accept the AICPA peer review program, and their rules are similar. In the other states (including New York), peer review is voluntary.

The firm to be reviewed solicits proposals from the AICPA’s roster of qualified reviewer teams and chooses one. The team reviews working papers and related financial statements or reports, interviews the firm’s staff, and assesses the firm’s quality-control procedures or reports it has issued. At the conclusion of the peer review, the team issues one of three reports:

Any firm that doesn’t cooperate with the AICPA practice-monitoring programs can have its participation in the program—and potentially its AICPA membership (and, in states requiring peer review, its license to practice)—terminated. If the firm belongs to the SECPS, that membership is terminated as well.

The AICPA publishes terminations from the peer review program and SECPS membership in The CPA Letter, sent to about 365,000 people, including all AICPA members.

The NYSSCPA Peer Review Committee statistics show an encouragingly steady increase in unmodified reports for subsequent reviews during the 1990s, and adverse reports are consistently rare. I think this shows that the peer review process helps firms improve their practices and produce consistently higher-quality work, even though professional standards are becoming more complex.

As good as this system may be, there’s room and need for raising the bar. On the plus side, the present system provides a sound self-improvement mechanism. Unfortunately, it doesn’t help practitioners who don’t participate in the process. Also, the standards for an adverse report aren’t as rigorous or interpreted as strictly as some would hope, and the program lacks serious consequences for a single adverse report.

In New York, there is currently no relationship between peer review and the New York State Board for Accountancy. For example, peer review reports are not filed with the board, and the board has never looked at those available for public review. Indeed, the NYSSCPA has called for legislation to require the filing of peer review results with the board.

Currently, the disciplinary aspect of peer review is mild. The rare termination from the program is based on failure to cooperate, including three consecutive peer review reports other than unmodified, and involves a due process of hearings and other formal proceedings.

A significant and worthwhile change would require peer review for all CPAs that issue financial statements, and the NYSSCPA Board of Directors has called for state legislation that would do exactly that. But we must move carefully in extending peer review beyond education and self-improvement, because associating it with the disciplinary and licensing process could generate unintended negative consequences. For example, a firm that feared a negative result might be less forthright with the reviewer. And, because the reviewer’s selection of engagements is based on sampling, an isolated error may not indicate a systemic problem. Additionally, giving peer review a disciplinary function could weaken the informal but useful technical advice network that has evolved between many firms and their peer reviewers.

In addition to continuing to provide high-quality peer reviews in New York, the NYSSCPA wants to help take peer review to the next level as part of the professional standards and licensing environment. If you have thoughts or ideas, please let me know.