Peer Review from the Inside Out
2006 - In the past five years, the accounting profession has
seen a great deal of discussion about self-regulation and
what it means. In 2004, then–NYSSCPA president John
Kearney appointed Stephen F. Langowski to head a Quality Enhancement
Policy Committee to study all of the ways quality is evaluated,
by the profession, by the Society, and by the state of New
York. The Committee was charged with focusing in particular
on the current issues of peer review, ethics, and education.
The first topic the Committee studied in depth was the peer
review program. It asked whether peer review was working adequately
to meet the needs of today.
A CPA Journal
Panel Discussion on Quality Review
of the panelists—Thomas E. Riley, of TFG CPAs, Brian
A. Caswell, of Caswell & Associates CPAs P.C., Andrew
M. Cohen, of Weiser LLP, John H. Eickemeyer, of Vedder Price
Kaufman & Kammholz (public member of QEPC), Mark Ellis,
of Michael C. Fina, Martha A. Jaeckle, of Jaeckle Kearney
& Lepselter, Stephen F. Langowski, KMPG LLP, Vincent
J. Love, of Kramer Love & Cutler LLP, Michael L. McNee,
of Marks Paneth & Shron LLP (original QEPC member, reappointed
January 30, 2006), and Robert E. Sohr—served on the
committee that developed the white paper on Quality Review,
which appears in its entirety on page 12 (“Quality
Review”). The panel discussion, moderated by CPA Journal
publisher and NYSSCPA executive director Louis Grumet, encompassed
the concepts put forward by that white paper and the state
of peer review in the accounting profession.
Peer Review Up to Date
Grumet: The Quality Enhancement Policy Committee’s
white paper takes a close look at the peer review system
that has been in place in the profession over the past few
decades. What do you think of peer review as it exists in
the profession, and specifically in New York?
J. Love: I think when peer review was first
put into place it met the needs of the time. Those needs
have changed, particularly over the last two or three years,
so that today it doesn’t meet the needs of either
the public or the profession. The time is right to look
at peer review and see what could be done to improve on
it, to meet our current needs.
In your view, what are the major provisions
of peer review that need to be addressed for today’s
I think the white paper’s suggested
changes for the future, which address discipline and the
transparency of the process, are the place to start. By
discipline I mean all of the remedies that would be available
to the peer review committee, and they could run from the
purely educational to the remedial, and, for people who
habitually breach the standards, to some kind of disciplinary
E. Sohr: Another change is that our white
paper would make peer review mandatory. Right now, there
is no requirement in New York State for a CPA to have a
peer review; 38 states do have a requirement; New York does
A. Caswell: I think it’s important to
note that standards which have such an effect on our profession
cannot be static when the profession itself is so dynamic.
We need to review any such standard, if for no other reason
than it has been in place for a great length of time. This
gets into what Vince said: Is peer review responsive to
our needs and to the needs of members—not just the
largest firms, not just the smallest of firms, and not just
people who are in public practice? Is our standard of peer
review itself—which has been called, along with education
and ethics, one of the three legs that form the very foundation
of profession—still meeting its original needs?
I also think that the timing right now very much has to
do with the public’s changed perception of the profession
in the wake of the audit failures of major public companies
around the turn of the 21st century, including WorldCom
and Enron, and, subsequent to that, the Roslyn School District
on Long Island. I think we really need to take a fresh look
at peer review and take a proactive approach in order to
restore a very high public confidence level in the profession.
E. Riley: There’s also been a change
in how peer review is used, and the way it was intended
to be in the beginning: an educational tool for the firms
that chose to use it. We’re almost 30 years into the
peer review program, and we’re past that. In the public’s
perception, a peer review means you’re being audited.
I think peer reviews are being used, by both firms and the
public, for different purposes than the original intention.
I also think that the profession has been
drifting from its real anchor, which is public trust, and
has become too commercial. I think changing these peer review
standards, and bringing us back to our real foundational
roots as trusted professionals, is important. I think we’re
losing that perception.
How was the profession drifting?
I think that public accounting started out
as an auditing profession, and it did, of course, over the
years, consult with its clients and give its clients business
advice. But a lot of things we do, we look at them now and
say: Maybe we’re not being as independent as we should
be, or maybe these services are affecting, if not the fact
of independence, then the appearance of independence.
of CPA firms started to focus on trying to make the same
kind of money as the investment banks, and it became a business
rather than a profession. The people that did the auditing
work, and I think this is true in a lot of the larger firms,
were true professionals. But they were surrounded by a firm
that was driven by a need to meet revenue targets. I think
that’s changing now; I think firms have realized that.
I see firms now focusing first on professional responsibilities,
and only then on the earnings that have to be managed anyway
to make sure the firm is making money, because if it doesn’t
make money, the firm won’t be doing anything for the
public. But that has become a secondary focus, not a primary
focus. Quality work is beginning, again, to become the primary
focus of the accounting profession.
Does everyone agree with Vince on that?
H. Eickemeyer: I think that the drift that
Vince spoke of came at a time, going back to the 1980s and
1990s, when the public’s perception, even before the
scandals Bob referred to, was that accounting, certainly
auditing, was a kind of public trust. The Supreme Court
decision in U.S. v. Arthur Young in 1984 contains
the kind of quotes that are thrown at me all the time, about
auditors being in a position of public trust. A great deal
of litigation has resulted from the perception that auditors
haven’t been living up to that public trust. This
perception has been there for a very long time, and it has
only been sharpened by the recent public company audit failures
and Roslyn. Hopefully, we’re getting back to a time
when there’s more of a convergence rather than a divergence
between the public’s and the legal system’s
perspectives on the auditing profession, and the profession’s
view of itself.
Is there any difference in the way the profession
views itself and the way the public views it, with regard
to firm size?
People tend to focus on the big firms, but
I don’t think it matters that much.
I think we focus on firm size, but I don’t believe
the average user does; they just think, CPA.
M. Cohen: I have an interesting story about
firm size. I recently went to a local university to participate
in mid-sized firms’ night, and very few students in
attendance had been exposed to firms other than the Big
Four. This is what they’re learning: Go to the Big
Four, they are the firms of choice. I think I helped enlighten
the students that night, and I’m happy to say there
was a line of interested students, and I stayed until I
talked to every single person. There might be a perception
that there are differences depending upon the size of the
firm, but a CPA should be a CPA.
There may be business differences in how firms are run,
but there should be no quality differences, no differences
in the delivery of services.
I would like to think that, but in the work that I do, I
find that even though a lot of audit failures by large firms
make the press, overall—and this is a general comment
that doesn’t relate to any particular small firm—the
larger firms have higher-quality oversight entrenched in
their audit practice than do smaller firms. This doesn’t
mean they don’t make mistakes and have bad audits,
but just because we see the big firms’ mistakes, and
not the smaller firms’ mistakes, doesn’t mean
they aren’t there. Most of my work is defending firms
below the level of the Big Four. There are a lot of lawsuits
against accountants, regardless of the size of the firm;
you just don’t read about the smaller ones in the
I agree 100%. On a higher level, the standards should be
the same, there should be no “big GAAP, little GAAP.”
That’s right. When you get a quality
person, regardless of what size firm they’re in, they’re
a quality auditor. I’ve seen those people in every
size firm, from sole practitioners up to the Big Four. But
I do think that in a larger firm, greater resources are
devoted to quality review. But then again, they also have
larger clients and could have potentially larger problems.
That’s the second point I was going
to make: By the nature of their size, the largest of companies
are more likely to be serviced by the largest of accounting
firms. By their very nature, larger firms may require a
certain level of resources devoted to the quality side or
to the review side. By and large, a small firm should have
the same percentage, or the same types of services, and
I agree with you that many times when there’s a failure,
it’s because such was not the case.
I want to be clear that my comment was a general one. I’ve
seen people at a small firm who can match any partner in
a larger firm, and vice versa. It’s the individual
professionals themselves. Yet in general, I think the quality
of the work is better at the larger firms—not necessarily
the litigation record at the larger firms—but certainly
I think that, overall and not in any specific situation,
the quality of the work is better at the larger firms.
L. McNee: I’ve been thinking a lot about
what’s gone on over the last 10 years, and I view
it as the “perfect storm”: a combination of
1) the marketplace demanding more accountability because
of on the scandals that have occurred; 2) the resources
available to firms in the form of declining students—for
at least the past 10 years I would say the best and brightest
have not been entering the accounting profession; and, finally,
3) standards overload, the result of very complex transactions
that didn’t exist 20 or 30 years ago and have to be
treated with kid gloves.
I think that perfect storm has really given rise to a lot
of problems in the marketplace, and at this point the peer
review process is something that, if the public were to
really kick the tires on the process and get to know it
better, they would disagree vehemently with the process.
Let me push that question further. We’ve
been talking about the size of the accounting firm; let’s
talk about the type of client. In New York State, peer review
is not mandatory, unless you’re a a government agency
or a nonprofit, where the federal Yellow Book standards
require peer review. Yet many of our scandals appear to
be coming out of those areas. Do you think there’s
a different level of auditing going on, depending upon the
client being audited?
I think that’s true. I can speak about
GAO standards. I think a lot of practitioners believe very
strongly that they’re in full compliance with GAO
standards as they relate to education and their knowledge
base. In truth, though, many people think they’re
experts in something when they’re really not. And
I think that the peer review process, in its collegial and
educational way, should help those people along, it should
help them understand their role in the auditing process.
If those firms are not equipped to do the kind of work that
is necessitated under, in this case, GAO standards, I believe
the peer review process should root them out and not allow
them to do that work any further.
In many respects, Yellow Book audits have
become much more complex over the past 10 or 15 years. Without
regard to firm size, practitioners in general have not increased
their education proportionate to the increased complexity
I would attribute part of that problem to the commercial
aspect of the business. When you have government entities
refusing to pay the going rate and insisting on less-expensive
engagements, how much time can professionals devote to keeping
themselves on top of everything that’s happening in
a rapidly changing world? The cost of being at the top is
not being matched by the fees being paid by a lot of government
entities. I think that’s part of the problem.
As an ethical consideration, for example, what happens to
a firm when it is seeking the audit of a school district,
and the firm is told that the bidding will be $10,000 or
$20,000 on a project that might take $120,000 to do right.
What does the firm do?
This is an ethical dilemma. Once you accept the engagement,
you have an ethical responsibility to apply all of the standards
and to apply them properly, including the ethical due-care
standard. If the bidding is that far off from actual cost,
firms should start refusing to do the work, and start looking
into different audits or different kinds of business. Again,
once you accept an engagement, you are ethically bound to
perform that engagement, even though doing it right will
be at a loss. Otherwise, just don’t accept the engagement
in the first place.
Is peer review set up to deal with that issue?
F. Langowski: No, but that isn’t one
of peer review’s core objectives. The ethical questions
arise from critical weaknesses in how the peer review program
is currently structured. Certainly we’re all aware
of the pressures of the current environment. But the Quality
Enhancement Policy Committee went through a conscious exercise
to consider the three-legged stool, as Brian very aptly
described it: Which leg is shortest and needs the most urgent
we looked at it, certainly there was an issue regarding
the expectations from the environment. But when we started
to look at the professional ethics program and the peer
review program, we felt that, all things considered, the
issues in the peer review area were far more urgent. Partly
because of the environment, but also because of how that
program is executed. What we saw made it clear that peer
review was the area that needed immediate attention. I would
say that this decision was primarily driven by looking inward.
When you consider the actual mechanics and workings of the
program, you return to this fundamental question: Is it
working well, and what needs to be fixed?
question, some aspects of the program work well. But when
you piece it all together—when you look at the environment,
you look at some of the recent failures, and you look at
the underlying changes in what an audit is nowadays—the
program hasn’t really stayed in sync with practice,
with the risks, or with how things are actually happening.
What did the committee determine were the
most serious problems with the current peer review program?
One area we looked at was the quality of the people doing
the peer review: their experience, and their ability to
apply GAAP and GAAS in an industry, including the public
sector. I don’t know if higher standards for peer
reviewers will cure the problems, but, like Steve has said,
it’s a part of what needs to be done. Another part
is ethics, and maybe education as well.
Clearly the most controversial part of your
report deals with just that—who does the peer review,
and whether it should be done via the traditional firm-on-firm
method, or by a pool of experts, which would somehow be
determined by an outside body. Would anyone like to comment
The public has lost confidence in the profession’s
ability to police itself. The idea that you can have this
triangular arrangement, where A reviews B, who reviews C,
who reviews A, so that you have a small circle of reviewers.
I think this is a major problem, and it drives the public’s
suspicion that the profession is unable to govern and regulate
itself. Public perception will inevitably work its way through
the system to a legislative response, for good or ill, and
I think that the response to this perception has deepened
the problems the profession has been having.
We tried to keep the white paper at a conceptual
level, and to look at what would be an ideal situation.
In terms of how a peer review team would be selected, I
think that there will be serious implementation issues.
It does remain an open question as to whether the team concept
is an objective that can be achieved.
Whatever words we use, the bottom line is that the CPA firm
that audited the Roslyn School District passed peer review.
How did that happen? And was it an isolated system failure
incident, or indicative of a systemic problem in the program?
I always tell people that accounting standards
have become very complicated, and that auditing standards
have certainly become very demanding. When you have the
same firm coming in every three years, the review firm may
not know anything about current emerging issues—for
example, derivatives, or FIN 46. These standards affect
small companies as well as large, and the reviewer firm
may not recognize the issue and miss it the first time around,
the second time around, perhaps even the third time around.
If you have a pool of reviewers, though, there is at least
the chance that somebody new will come in and each year
it will not be the same old situation.
Remember that a misstated financial statement
does not necessarily mean that GAAS was not applied in the
audit engagement. It’s not prima facie evidence of
that. The same can be said for a peer review. We may think
that the peer review of Roslyn was deficient in some way,
but we really don’t know, we’re just speculating.
In terms of how I view the knowledge we have
of what happened at Roslyn, the peer review was not the
compelling point. The more compelling points, even in the
absence of a Roslyn story, were the details of how the program
operates in this state. And I think that Roslyn helps sharpen
people’s views, and helps you look at areas that need
to be changed. Personally, I think even without Roslyn I
would have come to the same conclusion.
I’ve always been under the impression, until this
committee started, that there was some kind of federal or
state oversight of Yellow Book audits. And I was surprised
when the GAO came out and said, It’s not our responsibility
to oversee them, we just set the standards. Mike, were you
as stunned as I was?
Well, that would be the perception of the average person.
Sure, I am amazed. Our firm underwent a HUD review—they’re
looking at the firms in the country that do the greatest
number of HUD audits. It was a very PCAOB-like process.
It’s the first one I’ve gone through with a
government agency. But, by and large, for the standard OMB
A-133 kind of work that’s going on in the government,
I don’t know that anyone other than a desk clerk looks
over the information. It’s a fascinating situation.
It depends on the agency. Some federal agencies
are very proactive and take their professional responsibilities
very seriously and do a very significant amount of oversight.
They really get out there and kick the tires. In those situations,
they are not shy about pushing the button where they believe
that engagements are not being performed according to professional
standards; they are quite serious and quite aggressive about
When we look at the failures in peer review, or the perceived
failures in peer review, and we say that something’s
wrong, we shouldn’t disregard the fact that peer review
has been helpful. For those people who buy into peer review,
who want their firms reviewed properly, who want to learn
from someone else looking at their work, the quality of
their work goes up. Take peer review out of the mix, and
would we be in the same position? I don’t know. Just
as you can’t tell if the peer review process didn’t
work when a particular audit was examined, by the same token,
it may be working in a lot more situations than we realize.
Although I doubt any peer review system will necessarily
eliminate future audit failures, we should strive for a
higher level of excellence. As Andy Cohen pointed out, the
complexity of accounting standards and auditing procedures;
the complex commercial arrangements entered into by corporations
today, which necessitate complex accounting arrangements;
and the possibility of very sophisticated frauds, unfortunately
make it likely there will be audit failures in the future.
The problem is more than just complexity.
The velocity and quantity of the transactions have gone
up substantially, and it all relates to the information
technology revolution—we couldn’t have any of
the things we call complexity if we didn’t have computers.
And then the accounting has to keep up with it. The people
on the cutting edge are the ones who look at auditing as
a primary means of employing technology. It’s important
when you look at the problem to understand that it’s
more than just complexity, it’s also velocity and
Which to me means we really do need to improve peer review,
as well as make other improvements in our professionalism,
an emphasis on continuing education, and a number of other
issues, because we all have to strive to do the best job
we can if we’re going to catch everything.
I think we’ve said this before, but a certain percentage
of firms will always do it wrong, with or without peer review.
A certain percentage of firms will always do it right, with
or without peer review. It’s the firms in the middle
that need peer review, that need the chance to get some
education to see how to do it right.
Let me add, when you talk about complexity
and all of that, this gets to the whole difference between
firm-on-firm and a team-based approach. If you reflect on
an entity that is performing audits, the complexities could
cover a wide range, even for smaller firms, and I think
it would be a miracle to find another firm with the appropriate
mix of skills to be able to appropriately evaluate the work
being done in different situations. Maybe years ago you
could, but now there are so many specialties that clients
are involved with, I think there’s no other way to
deal with it, to properly manage the risks of the profession,
than to have a team of specialists who do have the right
mix of skills to address an entity’s practice. Again,
it would be a miracle if you pulled a firm out of a hat
at random that could do that. It would be an exception to
the rule, and we wouldn’t be properly managing our
And one of your recommendations is that the
state should somehow have a certification process for who
can do a peer review.
Cohen: There is no selection process now. I can get a qualified
firm or not, whoever I choose. That firm should want to
make sure it’s qualified in the specific areas they’re
choosing. Under the current system, the choice of reviewer
is totally at my discretion.
How would your proposals differ from the current system
To me, while we have discipline in there,
what we really should be emphasizing is that we want to
give firms the opportunity to first remediate any issues
uncovered through peer review in order to improve their
practice. Discipline is the stick that you wield only if
that improvement doesn’t occur.
When you think about it, the people who really want to get
something out of it will use the early-stage educational
remedies to help improve their practice. Practitioners who
can’t be helped, who refuse to be helped and maybe
shouldn’t be practicing, will probably constitute
the majority of people who require disciplinary remedies.
I have no problem with discipline when someone is not practicing
the way they should be and they refuse to correct it—or
can’t correct it. If you can’t correct it, maybe
you can’t be doing the work.
A progressive system again gives honor, in a sense, to those
who are dealing with everything on a professional basis:
those practitioners that would take whatever recommendations
that came out of the peer review as educational and use
it to improve their practice and impart knowledge to their
respective people to make sure that whatever deficiencies
the reviewer found don’t happen again.
if that improvement doesn’t occur, you start climbing
a ladder. And the steps on the ladder basically take you
from education to something that, while it may have some
of the earmarks of education, will be fairly heavy-handed.
The next rung may involve some kind of additional oversight
over your practice or your peer review. If you reach the
highest rung of the ladder, where you have not learned your
lessons, then it may be time to consider if the a firm or
individual warrants continuation of their licensing privileges.
That’s obviously the worst-case scenario; there are
intervening levels. But if you have a peer review system
of some form, how do you provide an incentive for firms
to perform properly? And I think people kid you if they
don’t admit that some degree of oversight is healthy
and that fear is as much a motivator as professional pride.
When you put the whole system together, I think discipline
does serve as a driver. But the issue is, we as a Society
don’t have the power to do this, but another body,
in this case the licensing body in New York State, does.
I don’t know if we can say it any better
than in the white paper: “It maintains emphasis on
the value of a system that can impart knowledge to firms
but does not lose sight of the fact that there may be some
who lack the will to comply to high standards without sanctions.”
That says it all. The number-one objective is to improve
the profession. The second objective is to weed out of the
profession those who refuse to maintain a high standard
of excellence or to comply with the program.
A. Jaeckle: The regulators seem to be interested
only in the bad apples, though. They don’t want to
spend time going through piles of good peer-review reports,
they just want to know about the bad ones. We heard it over
and over, they’re not interested in everybody’s
I think the marketplace will evolve over the
next few years. Clients that have to have an audit done
under GAO standards may require that the firm give them
their peer review reports as part of the proposal or the
engagement letter. If the peer reviews are not done properly
over time, the marketplace will not accept it as a quality
firm. The market could extend beyond the FDIC and GAO and
others that currently ask for these reports. If the general
public starts asking for these reports as a condition for
hiring an accounting firm, you better believe accounting
firms will come up to speed real quickly. Staying in business
is the greatest incentive.
Audit committees should want a copy of the peer review report
too. I think audit committees are developing their own policies
in this area to varying degrees.
Let me share a real experience. I was on a
high-profile audit committee where the number of audit firms
bidding on the work was substantial. The competition was
very stiff, and the members of the audit committee came
to the conclusion that any firm that had a letter of comment
associated with its peer review report would not be considered.
Whether you agree with this or not, this was how one audit
committee decided to approach the situation.
I would disagree with that approach, but I’m glad
to hear that people are paying attention to peer review.
Ellis: I think our white paper recommendations
change the whole playing field. Making peer review mandatory,
that the state is going to say every firm must be reviewed,
tells me that we are going to start looking at all firms,
which is fundamental, and then we’re going to look
much more at quality. The fact that we’re going to
look at quality within every firm in the state is, to me,
a very big change.
I’ve always been amazed at the low percentages of
adverse and modified reports issued. With the increasing
pressure on peer reviewers, and the pressure for transparency,
I think we’ll see a big rise in those percentages
if peer review is mandatory.
I’d like to make a point that an effective change
in peer review was forced on a segment of the profession.
It’s not called peer review, it’s called the
PCAOB inspection. And it’s interesting to note that,
in a sense, the PCAOB also has a progressive disciplinary
system, in that part of the PCAOB’s findings are not
part of the public record initially. As long as a firm improves
its processes and eliminates the deficiencies that are found,
it never becomes part of the public process. So, in essence,
even the PCAOB is emphasizing the need to improve the quality
of the practice.
I reiterate: For a lot of professionals, higher
penalties and enforcement will make no difference. They’re
doing as well as they can, they volunteered for peer review
long ago, they want to do better, a more strict program
may find more deficiencies, but they are already trying
their best. I think there’s probably a few on the
other end that probably shouldn’t be practicing but
will take their chances until they get caught. And then
you have the ones in between, for whom peer review may make
a difference. In the current environment, peer review will
make those firms behave a little differently.
I think what we’re trying to do is raise the bar.
The theory is that if everybody knows somebody’s watching,
it’ll make a difference in quality. If this new system
the white paper calls for comes to pass, will it make any
difference in litigation?
One could make a good argument that, given an increased
emphasis on self-examination by the profession, courts ought
to give greater recognition to the privilege for self-evaluative
information. In the past, the privilege has generally been
recognized when the court felt like recognizing it, and
that was probably a minority of the instances in which the
issue arose. That will be a big issue in future litigation:
If peer review is mandatory, should accounting firms be
able to assert privilege against the production of those
peer review reports?
issue is whether a firm’s response to a peer review
can be taken as evidence of negligence. In most cases, a
subsequent repair of a condition—a physical condition,
a defect in a product, or what have you—would not
be admissible as evidence that the manufacturer of the product
or the party that maintained the facility was negligent.
So that’s another threshold issue that will arise
in litigation. It’s hard to conceive that implementing
this kind of program could result in more litigation than
we have already.
it might do, as the profession’s program matures and
as peer review gains some recognition as an effective program,
is to help to restore some of the public’s faith in
the profession’s ability to regulate itself and correct
itself when defective performance is identified. This may
in turn push the judicial pendulum back toward the middle.
I think the accounting profession between the mid-1980s
and 2000 had a pretty good run of positive legal developments,
beginning with the Credit Alliance decision in
New York, and continuing with a number of states adopting
more restrictive rules on privity, New Jersey moving away
from a very porous test, and the profession-friendly Private
Securities Litigation Reform Act.
I’ve observed over the past few years is not so much
statutory enactments or particular landmark decisions that
have broadened the profession’s exposure to liability,
as much as a judicial attitude: The filter to letting claims
get through to the jury is not as fine as it used to be,
summary judgment is not given as readily as it used to be,
and claims that might have been knocked are now getting
to the jury. The courtroom is a pretty hazardous place for
the profession to be in this environment, because studies
indicate that juror attitudes have been negatively impacted
by recent audit failures. So in the long run, as this kind
of program develops, it might begin to have some salutary
effects in the litigation area.
Better Peer Reviewers
How do we get more people to do peer reviews?
I think the fees have to be commensurate with
regular practice. There has to be some incentive to do this
We are in business. We all have to earn a
living. And so the fees have to provide an adequate return
for people to be interested in it.
Engagement letters also need to protect peer
reviewers, in terms of representations made by firm management
over systems that are in place, and so forth. If those things
turn out to be other than as they were reported to be, and
two years down the line another Roslyn occurs, the peer
review firm would be held to account. I think there needs
to be some protection from that.
We also need to convince firms that becoming a peer reviewer
is excellent training for their higher-level staff or managers.
When our firm does peer reviews, people love doing it, they
learn during the process. We like being peer reviewed, but
we like doing them just as much.
We’re faced with a dilemma, because I don’t
think we want to see a new class of accountant become “professional
peer reviewers.” In the past we’ve gotten more
peer reviewers by appealing to their professionalism, which
is what Tom Riley just said. We have to try everything,
but somehow avoid that professional class of people who
do nothing but peer review.
Then it’s not a matter of peers anymore.
I had an interesting conversation with someone
who does a fair amount of peer review. His view was that
this year, as opposed to earlier years, he will actually
have a little more of a combative view than before, just
because of the changes made in the AICPA rules on peer review.
I think that, as this proposal hopefully goes into effect,
the peer review relationship will change to some degree,
however much we might not want it to; it will look a lot
more at quality and it will be much less collegial.
Your report calls for transparency, and I believe the AICPA
will be calling for more transparency as well. The more
transparency you have, the more what Mark Ellis is talking
about will occur. The reports may be required to be filed
with the State Education Department, in the Office of Professional
Discipline. You or I or any other New York citizen will
probably be able to get them. That will change a lot of
To some extent this will force the peer review
program to step back a little bit. Where maybe before people
didn’t get excited about a letter of comment, and
viewed it just as a constructive tool to help their practice
be better, now people will try to hide their weaknesses.
I think you’ll eliminate the kind of feedback that
the current model provides.
From an implementation standpoint, the transparency issue
will become major. The question is, how can we can keep
the knowledge base as well as keep minor issues out of the
public domain until the firm has had a chance to deal with
them? If you look at the PCAOB process, a portion of the
inspection report is not made public initially. The report
is available, but the comments are not in the public domain
until the firm has a chance to deal with them—and
if the firm remediates them before the next review, they’re
never in the public domain. So I think certain implementation
issues that are critical to the success of the system can
be dealt with. Reviewed firms must recognize that objective
number one is to improve the quality of the profession and
their firms, and that peer review is a learning process.
It should be clear that any sanctions will
be used only when someone is blatantly not following auditing
standards. We’re out there looking for people who
are just blatantly not doing their job. In those circumstances,
the sanctions should be harsh, but as professionals we should
all be out there doing a competent job.
In much the same way as the definition of a reportable condition
is a step down from a material weakness, one definition
is a comment that was made in a prior year that met neither
the level of a material weakness or a reportable condition,
but nonetheless might have been an internal control–related
deficiency that repeats itself in a subsequent year and
thus automatically falls into a reportable condition.
in the same sense, I think there should be a bright-line
standard in terms of prior comments and their level of public
availability. If comments repeat themselves in subsequent
periods, perhaps that should open up the door of public
disclosure. I know that remediation envisions having firms
be reviewed on a more frequent basis, more than every three
years when they receive comments, but it seems like this
should be an absolutely mandatory requirement. If the firm
is not doing what it should be doing, certainly coach them
along, help them become better, but do the reviews on a
faster track. That’s an absolute necessity.
Thank you all for your insights. The committee
has put together a very interesting white paper that will
provide a starting point for a lot of constructive discussion
on the topic of peer review.
Note: The opinions expressed by the panelists
above are their own and do not necessarily represent those
of their employers or the NYSSCPA.
are encouraged to write to The CPA Journal with their thoughts
and reactions to the quality review white paper and its
proposed changes. Send your thoughts to
Interesting letters on any aspect of the issue may be published
in an upcoming issue.