After the unimaginable devastation in the aftermath of Hurricane Katrina, the embattled director of the Federal Emergency Management Agency announced his resignation from his position as the organization's chief.The public's perception was that FEMA responded inadequately to the tragedy and, in the end, this perception was enough to necessitate the director's resignation.
The accounting profession's peer review program suffers from essentially the same problem. To be sure, there are some very real concerns with peer review, one of which I wrote about in an earlier column in Accounting Today, "Rethinking the 'peer' in peer reviews" (Sept. 26-Oct. 9, 2005, page 6). As a follow-up to that article, I aim to show that the need to reform the program may ultimately not be about the issues. In fact, the issues are only partially relevant.
When it comes to peer review, it is also about perception.
People have vastly different perceptions about peer review's purpose, and its current image outside the profession is not positive. This was confirmed when - at the New York State Society of CPAs' annual leadership conference - the keynote speaker, New York State Assembly member Richard Brodsky, D-Greenburgh, candidly said that the Assembly has not approved making peer review mandatory because the legislature's perception is that the current system does not work. One Assembly member in New York cannot be the only legislator who is thinking this way.
Brodsky's speech made the often-contentious debate about the viability of the current peer review program seem almost trivial. Instead, it brought into focus an often-overlooked fact: When it comes to peer review, the legislature and the public believe it must be strengthened.
Right or wrong, the way people perceive the world matters. To disregard the public's view would be nothing less than willful ignorance and create another dubious perception, this time with potentially disastrous consequences. If the profession does not take action soon, it will seem entrenched, closed and intransigent in the face of the long list of accounting-related scandals where the auditors' peer reviewers found nothing wrong with the auditing firms' procedures.
Ignoring the improprieties on this growing list of major corporations, school districts and municipalities will further tarnish the image of the CPA and may ultimately lead to a government usurpation of the entire peer review program - a reality that nobody wants, regardless of whether or not you believe the peer review program has objective deficiencies.
One need look no further for evidence of this than the creation of the Public Company Accounting Oversight Board by Congress. In regard to public companies, Congress has made it clear that adherence to the then-current peer review standards when auditing public companies was no longer enough. Laws now prohibit CPA firms from preparing or issuing audit reports for U.S. public companies unless and until they register with the PCAOB. The PCAOB has abandoned the entire premise of peer review, opting instead to conduct inspections of firms through an internal staff of inspectors.
In the PCAOB's program, remediation is only the first step, and the board has stated that it will discipline firms when necessary. However, auditors of nonpublic companies, nonprofits and governmental agencies are not subject to PCAOB regulation, although the Government Accountability Office's Yellow Book standards require peer reviews for auditors of governments and government agencies - federal, state and local - as well as for many nonprofit organizations.
Ultimately, the public expects the profession's peer review process to be nothing less than thorough, stringent and transparent - a program that holds firms accountable to the highest standards of professional conduct and reflects a profession constantly striving to achieve the same.
For over a year now, the NYSSCPA's Quality Enhancement Policy Committee has been working diligently to align these expectations with reality. The QEPC's White Paper on Peer Review - which the society's board of directors recently endorsed - outlines in detail the tenets of an ideal peer review system. (For more information on the white paper, visit www.nysscpa.org.)
One of the committee's most significant recommendations is that a revised peer review program be progressive. 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 some may lack the will to comply with high standards without sanction. The disciplinary aspect comes into play after a firm fails to take corrective action. A quality review program without an effective disciplinary component would not be acceptable to the public or to public officials.
Another of the committee's major recommendations is that a pooled team of reviewers conduct the 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 result from the current program, in which a firm selects its own reviewer. A pooled team of reviewers would make issues concerning firm-on-firm reviews or the rotation of reviewers irrelevant, since a new team would be designed for every review.
A healthy peer review program is essential to the future of the profession. It has the potential to dramatically improve the public image of the CPA and ultimately make us stronger and more accountable. But it must be done right. The review system that we seek to implement must be a major step up from the current program, in terms of standards and comprehensiveness, perception and reality.
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