| Embracing
the Evolution of Peer Review
CPA firm
peer review as a quality-control mechanism has always had
its supporters and detractors. On the plus side, it has fostered
best practices within the accounting profession and facilitated
registration of firms in a number of states. On the minus
side, many in the accounting profession have worked to avoid
direct ties to any government regulator, resulting in self-regulated
peer review with one-size-fits-all rules that serve no one
well, including the public. Peer
review began in the mid 1970s, when the profession and Congress
butted heads regarding quality control. The resolution included
establishing the Public Oversight Board (POB), to oversee
the accounting profession with an emphasis on public company
auditors. The POB’s funding came from the AICPA, and
its work included peer review for public company auditors.
The AICPA also created a membership section called the Division
for Firms, membership in which required peer review.
The
NYSSCPA has supported peer review as a requirement for both
firm registration and Society membership. Recognizing that
the Sarbanes-Oxley Act has effectively ended peer review
as a closed system, the NYSSCPA Board of Directors recently
passed a resolution that includes preparing an amendment
to the Society’s bylaws that would make peer review
mandatory for all NYSSCPA members working for firms which
perform engagements that are subject to peer review. Fully
realized, this would include making peer review records
available to the New York State Board of Accountancy and,
in some form, to the public. Part of the NYSSCPA’s
objective is to connect peer review to disciplinary mechanisms,
so that when a firm does not correct the points at issue
in a negative report within a reasonable timeframe, some
part of that report is made transparent and given to other
organizations to act upon within their jurisdiction.
One
concern is that if the NYSSCPA and other state societies
don’t address peer review, the New York State Education
Department and its counterparts in other states will. Enforcing
the resulting diversity of state requirements for CPAs who
need to practice across state lines would be impossible.
Peer
review is already evolving into a mandatory requirement,
to some extent because of market and economic forces. The
effective result is that auditors that don’t participate
in peer review or don’t meet its standards are excluded
from certain types of engagements. Auditors performing Yellow
Book audits must subject themselves to peer review and submit
a copy of the report to any government agency hiring them.
Many
banks now require copies of peer review reports with unmodified
opinions from auditors of private companies. Moreover, last
month the AICPA considered a resolution to move toward making
some level of peer review information available to the public,
and the NYSSCPA Board of Directors voted in support of that
resolution.
Around
half of the 36 states that currently require peer review
for firm registration also require informing state authorities
of the outcome and making some part of it public. Those
36 states also require that a state agency monitor the peer
review process.
Simply
put, the best reason to make peer review mandatory and transparent
is to demonstrate that auditors accept public accountability
for the quality of their work. If the profession embraces
this concept, more firms will see peer review not a requirement
to be grudgingly endured, but rather as a valuable tool
for improving the quality of audit services.
Louis
Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA
lgrumet@nysscpa.org
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