Can anything good come out of a $65 billion Ponzi scheme?

Dave Moynihan, CPA, the incoming president of the New York Society of CPAs, has a candidate: The Bernie Madoff debacle helped to push his state's legislature last December to adopt a long-sought accounting industry regulatory reform package.

The measure included a provision putting New York on track to join 45 other states that require accounting firms that provide attest services to undergo peer review every three years.

California, which remains among the small minority not requiring periodic peer review, is also moving towards adopting such a mandate. That would leave only Colorado, Delaware, Florida and Hawaii as holdouts - although the American Institute of CPAs has long required its members to subject themselves to peer review, regardless of their states' policies.

New York, whose new peer review mandate won't take effect until 2012, is scrambling to find enough CPAs willing to perform reviews, according to Moynihan.

He estimated that when the mandate kicks in, the number of CPA firms in New York subject to peer review (firms with only one or two practitioners would be exempt) would nearly double, from approximately 1,800 to about 3,000. New York only has about 100 qualified peer reviewers who conduct approximately 600 reviews annually, he said.

Indeed, the current nationwide pool of approximately 1,700 peer reviewers is barely adequate to the task of performing approximately 10,000 peer reviews a year (one-third of the roughly 30,000 firms subject to the triennial scrutiny). Moreover, the dearth of peer reviewers is projected to become more acute due to the looming retirement of the Baby Boomers.

And even if the dwindling army of peer reviewers were willing to pick up the pace to get the job done, the concept that the "peer" may be lost worries Moynihan. "The question becomes, are you dealing with a firm that does peer reviews, or are they really your peers, doing reviews?"

"The idea when you hire a peer reviewer," he added, "is to get someone who is familiar with your area of practice, and getting another set of eyes to look at it. Expanding the pool is critical."

PEER POWER

But to hear those who conduct peer reviews talk about it, there should be no shortage, as the exercise yields professional, financial and psychic benefits.

The recruitment pitch on the New England Peer Review Association's Web site asserts that being a peer reviewer "will open doors to incredible opportunities." Veterans aren't quite that effusive, but insist that the benefits outweigh the costs.

It may be impossible to quantify the psychic value of "giving back to the profession" - often given as a motivation to serve as a peer reviewer. But from a pure financial standpoint, peer reviewers say the work is nothing to scoff at.

"Historically, the rates [for peer reviews] have been lower than most people's billing rates, but that has changed over time," said Thomas Parry, CPA, an executive with Benson & Neff in San Francisco. Parry heads the California CPA Society's Peer Review Committee.

Parry's counterpart in Lakeland, Fla., Crowe Horwath executive Ed Grossman, CPA, has thought of peer review projects as "summer, off-season work" whose negotiable fee structure doesn't always equal his standard billing rate. But peer review fees depend upon "the complexity of the practice," he explained.

However, in New York, Moynihan insists, "We either make our standard rates" on peer review engagements, "or we don't do them."

Dave Grippin, CPA, managing partner of Grippin, Donlan & Roche in South Burlington, Vt., said, "We're not taking any discounts on the [peer review] work that we do." Grippin does about five peer reviews a year.

Besides earning fee income, conducting peer reviews "helps me stay on top of all of the new regulations and changes in the profession, and helps us do a better job with our own work," he said.

Parry said that he has seen "some paperless systems that I've liked." And he also was recently inspired by a firm he peer reviewed "that did a particularly good job of preparing a reporting package for its clients that went beyond the standard auditor report." He has since emulated some graphs in presentations to his own clients.

A QUICK REVIEW

For the uninitiated, peer reviews come in two basic forms: system reviews, which appraise a firm's quality control systems, and engagement reviews, which are only performed for firms that do not perform audits, and which look at a sample of the CPA's actual accounting work.

Prior to 2009, the grade rendered by reviewers could be any of the following: "Unmodified without comments," "unmodified with comments," "modified" and "adverse."

But that system was somewhat opaque, and since Jan. 1 new standards passed by the AICPA stipulate that peer reviews can result only in a "pass," "pass with deficiencies" or "fail," according to Jim Brackens, the institute's vice president for firm quality and practice monitoring.

Most peer reviewers have already undergone training to conduct reviews under the new standards.

Brackens said that the new standards are more principles-based, much more focused on the objectives of peer review.

"It goes towards greater transparency," said Moynihan. "Now you are either going to pass or fail."

Brackens believes that the basic pass/fail rate itself won't change much under the new standards. In 2007, only 2 percent of system reviews resulted in "adverse" reviews - the equivalent of a "fail" under the new standard. Another 5 percent received "modified" reviews, indicating that the firm has "less than reasonable assurance of conforming with professional standards." More than half (51 percent) of firms reviewed in 2007 received an "unmodified without comments" grade, and 42 percent received an "unmodified with comments" score, according to the AICPA.

Those statistics are consistent with 2006 and 2005 results.

RISING TO THE PEERAGE

Eligibility requirements for peer reviewers leave the door wide open for those interested in joining the ranks. A peer review "team captain," according to Brackens, must be a partner in a firm, have a minimum of five years of experience, be currently engaged in conducting audits at his own firm, or performing an audit quality control function within his firm; undergo a two-day AICPA training course; and receive eight hours of continuing education every three years.

"It's not too hard to meet the requirements, but it's a time issue," added Grippin. "If you want to do it, you can."

But to maintain the integrity of the program, the state-level administering entity, such as the board of accountancy or a committee formed for the purpose, checks up on the peer reviewers.

Although intent on making the peer review system as effective as possible a tool to support members' efforts to maintain high standards for their audit work, the AICPA does not suggest that the system can prevent the next mega-Ponzi scheme.

"There are inherent limitations to the effectiveness of any system and, therefore, noncompliance with the system may occur and not be detected," according to an AICPA document describing the program.

The Madoff scandal may offer additional evidence that peer review systems cannot be a silver bullet. Ironically, the New York public accounting firm of Friehling & Horowitz - which was charged last month by the Securities and Exchange Commission with misleading investors by falsely certifying that it had audited Madoff's books, and saw the arrest of principal David Friehling - is too small to be covered by the state's recent law mandating periodic review.

The firm has subsequently been expelled by the AICPA.

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