Using Peer Review to Protect the Public Interest

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MARCH 2006 - The proposal on revamping peer review developed by the NYSSCPA’s Quality Enhancement Policy Committee (QEPC) and approved by our board of directors last December has been generating significant interest. Many diverse viewpoints are being expressed, which is both constructive and welcome.

A significant change that the proposal calls for is that peer reviews should be conducted by individuals drawn from a pool of reviewers from different firms. This would replace the current firm-on-firm structure and would better accomplish learning and an exchange of information among reviewers and reviewed firms. Assigning qualified individual reviewers, not firms, out of a pool would obviate potential weaknesses in the current program, in which firms select their own reviewer. A pool of reviewers would mitigate issues concerning firm-on-firm reviews or the rotation of reviewers, because each review would be conducted by a new team composed especially for that one-time review project.

Opponents of the reviewer-pool concept have been telling the Society that if CPAs can no longer select their own peer reviewers, then the profession is beginning to descend a slippery slope. Some of them ask: What’s next? Companies not being able to hire their own auditors? This analogy shows a lack of understanding about what peer review is, and of the differences between an audit and peer review, which has been one of the accounting profession’s self-regulated functions, carried out to ensure that CPAs meet the profession’s own standards.

Making the Profession the Client

If peer review isn’t helping the profession achieve continuous improvement, then the government may feel obligated to intervene in order to protect the public interest, the same as when the passage of the Sarbanes-Oxley Act in 2002 mandated the establishment of the Public Company Accounting Oversight Board, which replaced peer review for auditors of publicly owned companies with its own inspections.
A better perspective might be to see the CPA profession itself, not the reviewed firm, as the client. In effect, the AICPA and state societies, or other organizations conducting the reviews, would be acting on behalf of the entire profession.

Under this system, the fee for a peer review would be an assessment not dissimilar to the fees the PCAOB charges publicly owned companies to pay for auditor inspections. Similarly, review fees would be paid to the entity that selects peer reviewers from among its pool. The client relationship would be between the administering organization and the reviewers in the pool. Viewing the peer review program this way makes particularly good sense for firms that audit governments and government-funded nonprofit organizations.

This framework is analogous to the idea that the investing public, not publicly owned companies, is the true beneficiary of PCAOB inspections. It underscores the mission of CPAs to protect the public interest in matters of financial reporting and public accounting.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA

Editor’s note: The text of the QEPC’s white paper appears on page 12; a panel discussion of the proposal appears on page 22.




















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