Commentary: New peer review program has established roots

The New York State Society of CPAs is often asked by CPAs and regulators from other states why it is pursuing changes to peer review that would separate it from the rest of the nation. In reality, though, the changes being pursued by New York grow from the roots of the American Institute of CPAs' program, and would, in many ways, bring us closer to other states.Momentum is building to fix the profession's peer review program in New York, and the cause took a major step forward on June 21, 2006, when the State Assembly introduced Mandatory Quality Review Bill A12027. The bill - based on the New York society's White Paper on Quality Review - would, if approved, create a new quality review program in New York State with the following major enhancements:

* Quality reviews would become mandatory for all CPA firms in New York State. As it stands now, 39 U.S. states or territories mandate peer review. New York is not one of them.

* Quality reviews would become progressively disciplinary. A progressive system is one that is both educational and disciplinary. It maintains emphasis on the value of a system that can impart knowledge to firms, but does not lose sight of the fact that there may be some that lack the will to comply with high standards without sanction.

* A pooled team of individuals from different firms would conduct quality reviews. This would replace the current firm-on-firm structure, and would allow for an exchange and learning among reviewers and reviewees, and be more effective and equitable. The assignment of qualified individual reviewers, not firms, out of a pool would obviate the potential conflicts of interest that could result from the current program, in which a firm selects its own reviewer.

* Quality reviews would become more public and open. Reviews would be given to the New York State Board for Public Accountancy and made available to the public. Right now, of the 39 states and territories that mandate peer review, approximately 20 also require that peer review information be submitted to a state board. Again, New York is not one of them.

The ultimate fate of the bill is still up in the air, but the possibility that it (or something like it) will pass is likely to improve soon, when - on Jan. 1, 2007 - New York State gets a new governor for the first time in 12 years. Both major parties' gubernatorial candidates are campaigning on tough platforms of reform, and accountability is sure to be at the top of the new governor's agenda, regardless of who wins.

As the plausibility of a bill increases, so too do the questions about its particulars and potential ramifications. One question I hear frequently goes something like this: "I like the concepts in the Mandatory Quality Review Bill, but wouldn't the bill create disparate standards and, as a result, problems for out-of-state firms doing business in New York?"

This is a good question and a valid concern, but it reveals a fundamental misunderstanding about the bill and the current peer review program in New York State.

For starters, New York's new Mandatory Quality Review bill would not create disparity with other states. On the contrary, if the bill passes, New York State would actually become much more similar to other states. Specifically, the Mandatory Quality Review bill would change two aspects of New York State law, which, at this time, make New York significantly different from many other states in terms of peer review.

First, the bill would mandate quality review for CPA firms in New York State, as it is in 39 other U.S. states and jurisdictions. Right now, most CPA firms in New York participate in the AICPA's peer review program voluntarily, or are required to do so under Yellow Book standards, and some choose not to participate at all.

Second, the bill would require the submission of quality review reports to the New York State Board for Public Accountancy - another aspect that would both improve the quality review process and bring New York State closer to many other states.

There are also concerns that creating a pooled team of reviewers would distance New York from other states. This, too, is not entirely correct. In fact, the pooled team of reviewers approach is very similar to a current, functioning AICPA program - Committee-Appointed Review Teams. CARTs did not work well in a number of states, but the program is alive and well in others. And just because CARTs was unsuccessful when it was tried decades ago in some states does not mean that something like it would not work now, or that the concept is not the most fair, equitable and amenable to public scrutiny.

Also, a new program in New York need not cause a firm practicing in both New York and another state to undergo more than one review. Why? Most laws that mandate peer review allow for the submission of alternative reports and - because New York's Mandatory Quality Review bill builds on and enhances the AICPA's peer review program - it would, in fact, surpass the minimum standards set forth by some other states' boards.

As a result, a quality review performed under New York's new bill could, potentially, count toward a firm's mandated review in another state. The NYSSCPA is working with the AICPA to develop changes to the bill that will deal with cross-border issues and facilitate interstate commerce.

Finally, some differences brought about by the bill would almost certainly be part of the AICPA program were it started today. Progressive discipline is the perfect case in point. Progressive discipline establishes a process of clear, timely, consistent and documented communications with a firm, and is designed to ensure an understanding of expectations, provide an opportunity to correct behavior, improve performance, and assure due process. In today's environment, a peer review program without an effective disciplinary component is simply not acceptable to the public or public officials.

In the end, there is nothing in the pending Mandatory Quality Review bill that did not grow from the roots of the AICPA's peer review program. Indeed, the NYSSCPA's White Paper, on which the bill is based, specifically says that New York State's quality review program should, to the extent feasible, be consistent with a national program.

New York simply wants to keep the best aspects of the AICPA's program, build on them and create the most ideal quality review system possible. We also, however, want to develop a program that will promote consistency of quality throughout the profession, and be acceptable to the New York State Legislature.

Lou Grumet is the executive director of the New York State Society of CPAs.