I have read with interest the recent columns in Accounting Today by Lou Grumet (Sept. 26-Oct. 9, 2005, page 6, and Nov. 7-27, 2005, page 6), and applaud his efforts and those of others in New York to suggest improvements to peer review. As states like New York research how to implement a mandatory peer review requirement, it is critical that state boards and state societies form an effective partnership to carry out such a program for the good of the public and, in turn, for the good of the profession.The history of peer review bears this out. Peer review was initially developed as a membership requirement for the American Institute of CPAs and some state societies. It was a commendable first step by the profession to improve quality of practice, but over time, many in the profession realized that only a requirement mandated by statute would ensure that all CPAs would comply and, in turn, adequately protect the public.

Today, 39 states require peer review in some form as a mandatory requirement for re-licensure; however, New York is not one of them. While I am sure there are many CPAs and CPA firms in New York that undergo peer review as part of the voluntary membership program, what about those who are not AICPA members? Only a mandatory program will subject them to review. I hope New York will move quickly to add such a statutory requirement.

Since 1992, the State of Texas has had a mandatory peer review program for licensed CPA firms that perform attest services. The Texas State Board of Public Accountancy is the authority for overseeing the program and ensuring compliance with the laws and regulations. The Texas Society of CPAs is the principle professional organization that carries out and administers the vast majority of peer reviews for licensees, but any organization that meets the state board's standards can administer peer reviews to comply with the requirement.

The TSBPA, through its Peer Review Oversight Board, provides oversight of the program to ensure that the TSCPA and other administering entities perform properly and that peer reviews are being conducted appropriately. The TSCPA, through its Peer Review Committee and its many dedicated volunteers and peer review staff, provides the necessary resources and people-power to carry out and maintain a successful peer review program.

In Texas, licensed CPA firms must send the state board copies of their peer review reports, letters of comment and letters of response, to demonstrate compliance with the requirement. CPA firms that receive two consecutive modified or adverse reviews or report reviews with significant comments are subject to an accelerated review of their practice.

If that accelerated review results in a modified or adverse report or a report review with significant comments, the state board can restrict the firm's practice and preclude it from performing any accounting or attest work for a period of three years or until the state board gives it permission to resume this practice. The program gives licensees a reasonable opportunity to demonstrate adequate compliance, but does not allow substandard practices to continue unabated.

We know from our experience that mandatory peer review has made a difference in the quality of practice in Texas. In some cases, the state board has used its authority to restrict the practices of CPAs who have been unable to complete a satisfactory peer review, but that is only part of the practice enhancement that has taken place.

The implementation of a mandatory peer review program in and of itself caused some CPA firms to re-evaluate their practices and question whether they were adequately qualified to provide attest services. In some cases, firms elected to forgo this type of work. In others, they added new professionals to their firms with the needed expertise to provide quality attest services. Most firms raised their levels of performance as a result of the requirement, because they knew they were subject to review and that an unsatisfactory review could ultimately lead to negative consequences. As a result, the quality of attest practice is better today than it was a decade ago.

The peer review program was also recognized by legislators and the public as an effective part of the overall regulatory framework for the profession in Texas. The Texas Sunset Commission, comprised of both legislators and public members, examined the program as part of the Sunset Review Process for the TSBPA in 2002-2003, and concurred that it was beneficial for the public and was being administered effectively.

Previous columns in Accounting Today have suggested that inspection teams similar to those at the Public Company Accounting Oversight Board be formed at the state level. However, most state boards do not have the resources to run a program like the PCAOB. And unlike the PCAOB, they cannot assess a fee to private companies, not-for-profits or government agencies to help generate funds. As with everything, cost is a factor that must be considered in the implementation of a peer review requirement.

With appropriate oversight, a state board can rely on the profession's peer review program and ensure that it is functioning properly to benefit the public. The program in Texas has demonstrated this, and provides a cost-effective means of enhancing quality of practice.

Is today's peer review program perfect? Of course not. Could it be improved? Certainly. But that process, like most, will be evolutionary. Today's peer review program is better than when it started, and over time it will continue to improve if state boards and state societies work cooperatively to make it so.

John Sharbaugh, CAE, is chief executive and executive director of the Texas Society of CPAs.

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