Is the Public Ready for Transparent Peer Reviews?

By Herbert Vessel

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JULY 2006 - 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 (, thus making the information readily available to the general public, or providing the information to state boards of accountancy.

Before 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 findings?
  • Are potential users of the findings capable of understanding and using the information?
  • Will small practices be unduly burdened by such disclosure?

Historical Perspective

The 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 promises:

  • Peer reviews were to be remedial rather than punitive.
  • Peer review findings were to be kept confidential, except to those administering the program.

Members 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.

Peer 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.

The Peer Review Program Today

The 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.

The 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.

The Cases For and Against Transparency

The 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 reports.
  • Publication may stave off a government takeover of peer review.

Conversely, 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.

Why 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.

Unsophisticated 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.

The 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.

The 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.

In 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.

Another 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.

Some 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.

Finally, 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.

Generally, 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.

Many Questions, No Easy Answers

AICPA 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.

There 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.

Herbert Vessel, PhD, CPA, is an associate professor at Southern University, Baton Rouge, La.





















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