| Peer
Review: Dealing with the Reality of Perceptions
SEPTEMBER
2005 - At the NYSSCPA’s annual leadership conference
in mid-July, there was a lot of discussion about peer review,
the process by which CPA firms review each other’s
work in order to ensure high standards. Peer review is basically
educational—helping to correct firms’ bad practices—rather
than disciplinary—enforcing laws and regulations.
The NYSSCPA’s Quality Enhancement Policy Committee
presented a recommendation for a progressive disciplinary
approach to peer review.
People
have vastly different perceptions about peer review’s
purpose, and its current image outside the profession is
not positive. This was confirmed when our conference keynote
speaker, New York State Assembly member Richard Brodsky,
candidly said that the Assembly hasn’t approved making
peer review mandatory because the Legislature’s perception
is that the current peer review system doesn’t work.
Understanding
the Paradigm
Many
people view peer review as collegial, with the outcomes
generally not reported to state boards of accountancy, and
not connected to disciplinary or licensing authorities.
This paradigm dates from peer review’s origins in
the late 1970s as a program designed to help firms improve
their practices voluntarily. Some of the program’s
supporters say that it is effective at least partly because
its nondisciplinary, confidential nature allows a reviewed
firm to be very open with its reviewers.
On
the other hand, both inside and outside of the profession,
many of the people who say that peer review doesn’t
work point to cases such as Enron and Long Island’s
Roslyn school district, two notable cases where the auditors’
peer reviewers found nothing wrong. They say peer review
should be a badge of excellence that tells third parties,
such as users of financial statements that the firm has
audited, that the firm can be relied upon. They also say
that firms that have problems noted on their peer-review
report should, if they don’t correct the problems,
be subject to discipline, and that the problems should be
reported to the state board of accountancy.
The
contradictions in these viewpoints—confidential and
educational versus transparent and disciplinary—have
not been fully discussed and resolved. In 2002, with insight
gained from accounting scandals such as Enron and WorldCom,
the U.S. Congress said that peer review for public company
auditors wasn’t working. The Sarbanes-Oxley Act effectively
replaced peer review for auditors of public companies with
the PCAOB’s mandatory inspections of registered firms.
In the PCAOB’s program, remediation is only the first
step, and the board has shown that it will discipline firms
when necessary. However, auditors of nonpublic companies
aren’t subject to PCAOB regulation, although the GAO’s
Yellow Book standards are thought to at least partly resolve
the issue by requiring peer review for auditors of governments
and government agencies—federal, state, and local—as
well as for many nonprofit organizations.
Accomplishing
the Society’s goal of making peer review mandatory
requires us to recognize and discuss the different perspectives
about the program’s fundamental objectives and find
a solution that is appropriate for New York.
Louis
Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA
lgrumet@nysscpa.org
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