Peer Review: Dealing with the Reality of Perceptions

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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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