Our Own Toughest Critic: Seeking a More Robust Peer Review Program

Our Own Toughest Critic: Seeking a More Robust Peer Review Program

Continued from the Home Page

As I did this, reading about the admirable, albeit bold, objectives for the Society in the coming year, one expression kept entering my thoughts: “Words are cheap. It’s action that counts.”

I’m especially fond of this adage for I believe it serves as a valuable reminder for any organization that routinely sets an ambitious agenda for itself. The simple conceit helps keep a great organization like the NYSSCPA committed to the core mission of satisfactorily serving its membership, and it requires all of us, from the board to the chapters to the committees, to put our money where our mouth is.

In that light, I would like to tell you about an ongoing and major initiative that I believe best exemplifies one of the Society’s strongest assets: its ability to recognize the need to change, to know when to act before being made to react. I discussed this initiative in depth at last month’s NYSSCPA Annual Leadership Conference in Bolton Landing, N.Y., and am summarizing those comments here.

A little more than two years ago, the Peer Review and Ethics Task Force, led by Brian Caswell, recommended that the Society form a senior committee dedicated to peer review and ethics policy. The purpose of this committee, named the Quality Enhancement Policy Committee (QEPC), would be to ensure that peer review and ethics are meeting the needs of our profession. Composed of Brian, Andrew Cohen, John Eichenmeyer, Mark Ellis, Stephen Grace, Martha Jaeckle, Vincent Love, Michael McNee, Tom Riley, Bob Sohr, Stephen Valenti, Maryann Winters, Peggy Wood, and myself as chair, the committee examined the American Institute of CPAs’ peer review program in New York State, which the Society currently administers as an agent; and, in short, determined that it is not responsive to the challenges of today’s business environment and is in need of significant redesign.

However, before I discuss the committee’s findings and its recommendations, which are detailed in a white paper, I would like to explain why the Society feels that such close scrutiny of this nearly 30-year-old program is not only prudent but is in fact vital to the betterment of our profession.

As you all know, peer review is the process by which CPA firms review each other’s work in order to ensure compliance with professional standards, and to maintain accountability. For these very reasons, the accounting and auditing practices of nearly 35,000 firms across the country, approximately 900 of which have public company clients, participate in the AICPA’s peer review process. If you are interested in reading about the peer review program, I highly encourage each of you to read AICPA Chairman Bob Bunting’s article in the October 2004 issue of The CPA Journal.

Given the evolving professional environment, new reporting requirements and an atmosphere of heightened accountability, the peer review program has taken on increased significance to an audience that now extends well beyond CPA firms to regulators, clients and credit guarantors, among others, all of which expect a monitoring system that is effective, transparent and a model of integrity. Lest a government body eventually take the process from us for those firms that audit businesses that are not SEC regulated, the profession must recognize and work to meet these expectations and demonstrate in no uncertain terms that it can be its own toughest critic.

That said, the QEPC identified a number of problematic areas with the current peer review program. The first pertains to the fee structure, which is determined by a formula developed by the AICPA. Under this formula, two-partner firms that issue compilations with no disclosure and undergo the most basic formal peer review, for example, are paying the same fee as 10-partner firms that perform audits and are subject to a much more extensive review. At a minimum this fee structure can provide a disincentive to firms wanting to participate in the program.

The committee also focused on the current body of guidance for peer reviewers. The committee found that peer review guidance is fragmented into a variety of checklists and manuals which do not address the full range of issues that reviewers encounter.

The slate of and methods for selecting peer reviewers are also troubling. Under the program, firms choose their own reviewer, leaving open the possibility for firms to select “friendly” firms, undermining the core purpose of the program. This conflict of interest is exacerbated by a commonly held view that peer reviewers function as quality-control resources whose advice is sought by the reviewed firm. This practice could result in a peer reviewer reviewing its own advice.

Also potentially detrimental to the program’s objectives is the codependence on a limited number of firms that conduct reviews. In New York state, 10 peer reviewers account for more than 40 percent of the reviews performed, which conceivably prevents them from maintaining currency in their practice base and jeopardizes their ability to competently scrutinize other firms as a true peer. This issue is compounded by the fact that there are only 117 active reviewers, down from 206 five years ago.

Though designed as an educational and remedial tool to strengthen quality control and correct and prevent practice shortfalls, peer review’s lack of a disciplinary component, the committee found, has resulted in a program without real bite, weakening its legitimacy and efficacy.

Before listing the committee’s recommendations for peer review, I would first like to make clear that, at this stage, these proposals are only conceptual, raise a number of practical implementation issues, and lead to many unanswered questions that will need to be addressed. I would also like to point out that the AICPA has created a task force on the peer review process, which is expected to issue its own report by the end of the year. However, for the time being, the QEPC has chosen to focus its efforts on developing a new peer review system that goes beyond the scope of the current AICPA peer review model.

Under this new system, the peer review process would be progressively disciplinary, as opposed to solely remedial or educational. This feature of the program would take effect after a firm repeatedly fails to take corrective action, and would necessitate a recognized disciplinary body that can lawfully exercise enforcement authority. It would also call for a comprehensive and easily accessible set of guidelines for reviewers, for documentation of findings and recommendations, and for public disclosure of that information.

The committee also determined that a pooled team of different firms should conduct peer review, instead of the current firm-on-firm approach. The committee feels this concept, which would mandate more rigorous peer-reviewer qualifications, would mitigate conflicts of interest, raise the competency level of reviews, foster increased learning among reviewers and reviewees, and generally make the process more meaningful and effective.

Finally, the committee members agreed that any new peer review system should be more clearly focused on quality. Quality reviews are more extensive than peer reviews and even include aspects such as internal control reviews and assessment of a chief executive’s responsibilities relating to quality.

I have asked the members of the NYSSCPA Board to read the white paper and provide me with their comments by Aug. 5. Their feedback will be distributed to the QEPC for its meeting later this month.