Peer Review Transparency: Taking the Next Logical Step

By John J. Kearney

Last month, at a hearing to consider reforming New York’s accounting statute, Society representatives beseeched members of the state Senate to implement peer review as a mandatory requirement for firms performing attest and compilation services. During the hearing, they raised an interesting, albeit ironic, question for the lawmakers to contemplate.

“How can you mandate transparency,” they asked, “if you don’t mandate peer review?”

Currently, the national body of the CPA profession, the American Institute of CPAs, is grappling with a similar irony in its own peer review program. In the AICPA’s own words, that irony, quite simply, is this: “How can we support greater transparency of our client’s information when we are unwilling to support it for our own?”

Currently, the AICPA is examining methods for increasing the transparency of its peer review process, considering the possibility of making the results of participating firms readily available either to the public or to state boards of accountancy, or both. This initiative stems from a resolution approved by the AICPA’s Governing Council last spring and features an awareness program carried out by the Institute and state societies, including this one. Once the AICPA has completed this educational dialogue with its 350,000 members, the Institute plans to hold a vote on the resolution. A two-thirds vote in favor of the resolution will be required to make any changes to the AICPA’s peer review process.

As president, I would like to state that the Society supports the AICPA’s leadership’s efforts to make the reports of its peer review program more accessible to regulators, users of CPA services and the general public. In fact, this is an issue that, even before Council’s resolution, NYSS-CPA officers, including immediate past President Jeff Hoops, strongly encouraged the AICPA to take up. Like Jeff, I believe greater transparency for the AICPA’s peer review program is an appropriate response to a changing professional environment and one that will reinforce the public’s trust in our work and our commitment to the highest ethical values.

Though it got its start in the 1970s, peer review became a mandatory requirement of AICPA membership in January 1988, following a membership-wide vote to adopt a referendum that incorporated two principles. These principles maintained that peer review would be remedial rather than punitive in nature, and that the results of peer review would be kept confidential.

Under the current system, the accounting and auditing practices of approximately 900 firms are subject to the AICPA’s Center for Public Company Audit Firms’ (formerly the SEC Practice Section) peer review program, while the same functions of approximately 33,000 other firms are monitored through the AICPA Peer Review Program (formerly the Private Companies Practice Section and the AICPA’s Quality Review Program). Of this total number of firms, approximately 6,400 voluntarily place their peer review results in a public file, while another 15,000 provide peer review results to clients or to regulatory bodies as part of regulatory requirements, such as those called for by government auditing standards. As expressed through the 2004 resolution, the AICPA would like all firms to place their peer review results in a public file.

To achieve this, the AICPA membership will of course have to forego the confidentiality principle that accompanied the decision to require mandatory peer review. But, in my view, better the members make this decision than someone else make it for them.

The accounting profession has and will continue to evolve. This evolution came into full view in recent years following the major financial reporting scandals and the creation of the Sarbanes-Oxley Act and the Public Company Accounting Oversight Board. Given new reporting requirements and an atmosphere of heightened accountability, the peer review process has taken on increased significance to an audience that now extends well beyond CPA firms to regulators, clients and credit grantors, among others, all of which expect greater transparency. Before we have the initiative taken from us, the profession should recognize this expectation and adapt in a manner that best suits CPA firms and the public interest.

As for the other defining principle behind mandatory peer review, this resolution is not intended to change the elemental purpose of the program. Designed to help CPAs enhance their accounting and auditing practices, peer review plays a corrective role, not a punitive one. Though increased transparency could lead to punitive action taken against firms with negative comments, I am confident that these firms, as well as the entire accounting community, will continue to make the most of their reviews, steadily improving the quality of their practices. Only those firms that receive adverse reports and fail to address deficiencies will regard peer review as punitive rather than remedial.

This spring, the NYSSCPA will help conduct an awareness program about peer review transparency and would like to receive your feedback on the resolution. In the meantime, you can visit an extensive website on this subject, available at www.aicpa.org/transparency/index.htm. AICPA members also can submit comments to peerreviewtransparency@aicpa.org.

In conclusion, I’d like to draw your attention to famed American writer James Thurber. He once wrote, “There are two kinds of light: the glow that illuminates and the glare that obscures.” In both a figurative and literal sense, peer review transparency is its own source of light, and we, as a profession, have a very important choice to make about it. Either we can take a proactive position and help this light illuminate for others, or we can stand back and shield our eyes from the glare of refusing to embrace fundamental change.