New York State does not have a mandatory peer review process, despite the fact that 41 other states have opted into the American Institute of CPAs' nearly 30-year-old peer review program.All this may change, however, as both the New York State Society of CPAs and the AICPA have come out with proposals that urge peer review to be made part of the CPA licensing process. The New York position, in fact, goes a step further by suggesting that the process involve disciplinary teeth, as well as educational and remedial programs.
"We never had it in New York, and we're trying to get it mandated by the legislature," said Lou Grumet, executive director of the 33,000-member New York State Society of CPAs. "Consequently, we took a longer and deeper look at it, because we're trying to get it mandated. The state legislature likes the idea, but they think some adjustments need to be made."
The New York proposal also recommends a team approach, with reviewers pooled from different firms, rather than the traditional firm-on-firm method.
"The peer review program has been a remedial program," said Grumet. "A firm looked at your firm and then quietly told you the things that were wrong. Confidentiality was a key component, and they would work with you to correct your faults."
"It was a very good and noble program, but its goals are antiquated and dated," he said. "The public thought the program had tougher penalties than it did. There's a real need for a very vigorous self-regulatory program based on peer review."
An AICPA task force also recently released a set of recommendations to enhance the transparency of the institute's peer review program. The proposals recommend that the peer review reporting model be simplified, and for those firms that have received a second consecutive modified peer review report, and any adverse report, direct access should be given to state boards.
"Since 1988, when peer review became mandatory, the program has served the profession well," said Lee Wunschel, a member of the AICPA board who also chaired the task force. "But the world has changed in the past two decades. Just as the CPA profession has evolved to meet changing needs, the task force believes that the peer review system should evolve, too."
The recommendations are on the agenda for the institute's regional council meetings, according to Anne Sittmann, national director of media relations for the AICPA.
The task force's points include the recommendation that all state boards of accountancy should require peer review as a condition of licensure. Currently, 41 state CPA societies administer the AICPA peer review program, and 39 states require peer review as a condition of licensure. Of these, about half require some form of disclosure of the results.
In addition, thousands of AICPA firms place the results of their peer reviews in a public file as an enrollment requirement of the Center for Public Company Audit Firms peer review program or as a membership requirement of AICPA audit quality centers and the Private Companies Practice Section. In addition, thousands of firms provide their peer review results to clients to comply with governmental or regulatory requirements.
"We decided that if we were to put together the perfect program in New York, we would build on the AICPA plan but add things to it," said Grumet. "One of the things we looked at was a much more direct tie to discipline, in a progressive way. If a peer review says you need help, we believe it should be remedial and you should get help, but if time goes by without any change, there should be ties to discipline and the licensing process."
"Second, as years have gone by, we didn't think that a firm-on-firm approach was doing as good a job as we would like them to have done," he continued. "Our proposal envisions more of a pool of talent, with a multidisciplinary team. This approach works well with college and university accreditation, and we think a similar approach should work with peer review."
Ideally, according to the New York proposal, peer reviews should be viewed as only one aspect of a comprehensive quality review system. "The goal of a quality review should be to ensure that firms are complying with their own continuous, self-imposed systems of quality control," it stated.
"A quality review program without an effective disciplinary component would not be acceptable to the public or public officials," according to the recommendation.
Under the proposal, progressive disciplinary action would have:
* Some degree of the force of law to enforce discipline;
* Public reporting;
* Comprehensive guidelines for reviewers;
* Provisions for feedback and corrective action by the reviewed firm;
* Documentation of findings and recommendations; and,
* A due process mechanism with realistic timeframes.
"Practitioners who can't be helped, who refuse to be helped and maybe shouldn't be practicing, will probably constitute the majority of people who require disciplinary remedies," said Vincent J. Love, of New York-based Kramer Love & Cutler LLP, a member of the panel that developed the proposal. "I have no problem with discipline when someone is not practicing the way they should be and they refuse to correct it - or can't correct it. If you can't correct it, maybe you can't be doing the work."
"I like the New York proposal - it's refreshing," said David Costello, chief executive of the National Association of State Boards of Accountancy. "I like what the AICPA is doing as well. They're both doing something that's long overdue, saying we have to get serious about peer review."
"We've been singing that tune for some time," he added. "If a firm is deficient, there should be enforcement and disciplinary action, not just additional education. The New York proposal is substantially different from the rest of the states. Most have a firm-on-firm review, and none have the disciplinary mechanism."
Costello noted that the changes in the Uniform Accountancy Act that were made at the end of last year would certainly make peer review results more transparent to the public. "Once an individual licensee receives a peer review report, it should go directly to the state board of accountancy," he said. The UAA is a model bill and a set of regulations that is a joint project of the AICPA and NASBA.
Not all states, however, are ready to follow New York's lead in the peer review process.
"It would be an extremely expensive proposition," said Linda McCrone, staff liaison to the Peer Review Committee and director of technical services for the California Society of CPAs. California, like New York, currently does not mandate peer review.
"The New York white paper talks about costs for the society, but it doesn't recognize that the AICPA prepares the standards, the checklists and workpaper formats that we use and doesn't charge us. They also issue guidance through alerts. If the New York legislature took it on, they would find it a very expensive proposition," she said.
Brian Caswell, of Phoenix, N.Y.-based Caswell & Associates CPAs PC, said at a recent panel of the committee that developed the quality review proposal that, "A certain percentage of firms will always do it wrong, with or without peer review. It's the firms in the middle that need peer review; they need the chance to get some education to see how to do it right."
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