Embracing the Evolution of Peer Review

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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




















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