the Public Ready for Transparent Peer Reviews?
- The leaders of the accounting profession, including the
AICPA, are in the middle of a campaign to convince members
of the profession to support making peer review results transparent.
The AICPA has defined transparency as communicating the facts
clearly and truthfully to every one of our audiences—investors,
regulators, management, and the public. A simpler description
of peer review transparency is making peer review findings
publicly available. The AICPA is considering posting peer
review findings on the AICPA website (www.aicpa.org),
thus making the information readily available to the general
public, or providing the information to state boards of accountancy.
such findings can be published, however, the AICPA must
hold a member referendum on the issue. Questions that members
should consider prior to voting on the transparency proposal
include the following:
What are the benefits and risks of publishing peer review
Are potential users of the findings capable of understanding
and using the information?
Will small practices be unduly burdened by such disclosure?
accounting profession instituted peer reviews in 1988 in
response to the high-profile bank failures and corporate
bankruptcies of the late 1970s and early 1980s. The AICPA
convinced members to support peer reviews by making two
Peer reviews were to be remedial rather than punitive.
Peer review findings were to be kept confidential, except
to those administering the program.
of the AICPA’s Center for Public Company Audit Firms
(CPCAF) and Partnering for CPA Practice Success (PCPS) sections,
however, have made their peer reviews reports available
to the public on the AICPA website. Other members have chosen
to publish their peer review reports in marketing literature.
review reports have traditionally been prepared for the
use of the reviewed firms. Now, however, the reports are
being sought by other users to facilitate their assessment
of the quality of CPA firms’ practices. Both bank
regulators and the U.S. Department of Labor are on record
supporting greater transparency of peer review reports for
accounting firms that audit financial institutions and pension
plans. State boards of accountancy want access to peer review
reports to facilitate the licensing process. In addition,
firms are required to submit their peer review reports to
auditees that are subject to “Yellow Book” audit
requirements. Consequently, the AICPA has decided to initiate
an education program to persuade the membership to support
the idea of making peer review reports available, and therefore
increase peer review’s transparency.
Peer Review Program Today
AICPA has reported that its members do not fully understand
the peer review program. The program is designed to enhance
the quality of accounting, auditing, and attestation services
performed by AICPA members in public practice. This enhancement
is accomplished by identifying CPA firms with inadequate
systems of quality control, detecting performance that departs
from professional standards, and imposing corrective actions.
profession is currently using a three-tiered peer review
program: system, engagement, and report reviews. System
reviews are conducted for firms that perform engagements
under auditing standards (SAS), government auditing standards
(Yellow Book), or examinations of prospective financial
statements. The reviewer expresses an opinion regarding
proper quality-controls design and compliance with control
policies and procedures. Report reviews are conducted for
firms that perform compilation engagements under Statements
on Standards for Accounting and Review Services (SSARS)
that omit substantially all disclosure. Engagement reviews
are conducted for firms that perform accounting and examination
services that do not meet the criteria specified above.
Only limited assurance is provided on engagement reviews.
Cases For and Against Transparency
AICPA has done an admirable job of explaining why it supports
transparency. The reasons offered include the following:
Many peer review reports are already being publicized.
Publication will indicate the profession’s lack
of tolerance for rule-breakers.
Some users are demanding the publication of peer review
Publication may stave off a government takeover of peer
very little space has been devoted to discussions against
transparency, especially from the small CPA firm’s
perspective. In fact, the AICPA’s 2005 online survey
indicated that a substantial percentage of respondents did
not support transparency. Of 2,350 respondents, 41% supported
transparency and 43% opposed it, while 16% needed more information
or were unaffected.
did such a large percentage of the respondents oppose the
idea? First, publishing this information for small CPA firms
may be unnecessary. If the firm serves small businesses,
the nature of these businesses’ financial arrangements
limits exposure. Generally, these businesses borrow from
banks, and require only compilation services from accounting
firms. Sophisticated investors understand that accountants
provide little to no assurance in compilation services,
and banks take other measures to protect themselves from
potential losses from small business loans. One measure
used by banks is to require the owners of the businesses
to complete personal credit applications and to personally
guarantee repayment of much of the business loan. Banks
also hold liens on property as collateral. The disclosure
of peer review findings will be of little benefit to such
investors. If sophisticated investors receive little benefit
from peer review findings, perhaps expanded disclosure is
directed at unsophisticated investors.
investors have been said to behave as if accountants that
issue only compilation reports are providing some assurance,
even though the report clearly states otherwise. An expectation
gap exists between the assurances provided by accountants
and the assurances unsophisticated investors think they
have been given. If unsophisticated investors cannot comprehend
the meaning of a compilation report, these investors are
unlikely to discern the intricacies of the peer review program.
When selecting a CPA firm, these investors are more likely
than not to resort to a simple rule of thumb. A lack of
findings could be thought to indicate that a firm is competent
and worthy of consideration, while having peer review findings
could be thought to indicate that the firm is incompetent
and should be avoided.
AICPA has indicated that many CPA firms are voluntarily
publishing their peer review findings in their marketing
literature. These voluntary disclosers are likely publishing
only their positive review results. A report that criticizes
a firm is not going to make that firm appear attractive
to a potential client. Accounting firms are not going to
provide negative reviews to prospective clients.
AICPA’s Peer Review Board has indicated that firms
with negative reviews will need to manage client expectations
by sharing their plans for enhancing firm quality. Such
expectation management may not be possible, however, if
potential clients can access peer review findings without
notifying the reviewed firm.
instances where peer review findings are currently published
on the AICPA website, identifying information about the
reviewer is also provided. Providing information about reviewers
can be self-serving to the reviewers. Reviewers may see
the publication of peer review findings as an opportunity
to promote themselves at the expense of the firm being reviewed.
Reviewers may become much more thorough, or perhaps even
overly zealous in their pursuit of findings. An example
of the inordinate effort that can be made when an inspector
wants to identify findings is provided by Ernst & Young’s
2003 limited inspection by the Public Company Accounting
Oversight Board (PCAOB). After having discovered instances
where the requirements of EITF 95-22 were inappropriately
applied at another auditing firm, the PCAOB staff searched
public databases that included the more than 2,500 of Ernst
& Young’s SEC audit clients to identify EITF 95-22
violations. Thus, extra time and effort may be devoted to
finding problem areas, and insignificant findings may be
published. More exhaustive searches for findings are both
time-consuming and expensive.
potential problem with the expanded publication of peer
review findings is that of regulation and its impact on
small accounting firms. Making peer review findings public
is just another way to further regulate the accounting profession.
With the advent of public disclosure, the general public
will assume a regulatory role, a role in which it can dispense
harsh penalties. The current peer review system makes allowances
for human errors. This is the reason that peer reviews were
initially made remedial and confidential in nature. The
current system allows CPAs to learn from their mistakes
and to continue to provide services to clients. Publicizing
errors and oversights could, however, result in the marketplace
unduly punishing offenders by not patronizing their businesses.
have argued that the Sarbanes-Oxley Act was intended to
purge the accounting profession of incompetent and unethical
members that serve public companies. The problem is that
competent ethical members will also be lost in the purging
process. As the number of firms serving publicly traded
companies has shrunk, the workload of surviving firms has
increased, resulting in a seller’s market where fees
can be increased substantially. (One company reported a
tenfold increase in audit fees.) Publishing peer reviews
will likely result in a purging of private-company service
providers. Conversely, a practitioner may choose to avoid
potential negative publicity by voluntarily ceasing to provide
services that could result in peer review findings. Thus,
the increased public scrutiny could result in a further
consolidation of small firms that provide accounting, auditing,
and attestation services.
harsher treatment of professional standard violators is
not needed. The current follow-up actions are already punitive
and extensive enough to remediate wayward firms. Possible
actions include the following:
A reviewer revisit
Pre-issuance review of engagements
An accelerated peer review.
one or more of these actions would motivate a firm to correct
any deficiencies found during a review. If, however, a firm
fails to cooperate, fails to correct material deficiencies,
or is found to be so seriously deficient in its performance
that education and remedial, corrective actions are not
adequate, then further disciplinary actions will be taken.
The AICPA proposes that these actions could include termination
of a firm’s enrollment in the Peer Review Program
and subsequent loss of membership in the AICPA and in some
state CPA societies.
Questions, No Easy Answers
members, especially those in small firms, will soon have
to make a decision: Should you support or reject the AICPA’s
proposal to publicize peer review findings? If peer review
findings are published, should the general public be given
direct access to them, or should the findings be made available
only to state boards of accountancy? Providing the information
to state boards would make it publicly available through
a Freedom of Information Act (FOIA) request, a process more
cumbersome than direct public access.
are no easy answers. However, one approach that can be used
to answer these questions is to consider the costs and the
benefits of publishing the findings. At a personal level,
practitioners should ask themselves, “What’s
in it for me?” If the benefits exceed the cost, then
support the proposal. Otherwise, reject it.
Vessel, PhD, CPA, is an associate professor at Southern
University, Baton Rouge, La.