It's no coincidence that within the past year both the New York State Society of CPAs and the American Institute of CPAs have formed committees to examine the accounting profession's peer review program. The process, as it is structured now, no longer responds to all the demands placed on it, especially by the public. The NYSSCPA and the AICPA know that the profession needs to quickly step up to the plate and make reforms to the program, before the government makes reforms for us.Alert to this need, the NYSSCPA formed the Quality Enhancement Policy Committee with the express purpose of ensuring that peer review is meeting the needs of the current environment. Understanding that practical implementation issues could alter some of its recommendations, the QEPC chose to first establish, on a conceptual level, the tenets of an ideal peer review system.
After two years of extensive deliberation and a thorough review of a wide range of sources and inputs, the QEPC determined that one of peer review's most basic components - the choice, training and background of the "peers" who actually perform the reviews - is also one of its most fundamental flaws. The QEPC focused on three particularly troubling aspects of this issue: the way in which firms select peer reviewers, their qualifications, and the current concentration of firms that perform peer review.
Currently, firms choose their peer reviewers subject to a general suitability matching through the AICPA computer system, leaving open the possibility for firms to select friendly reviewers, potentially undermining a core purpose of the program in the public's mind. Further exacerbating this situation, peer reviewers sometimes function as quality control resources to the firms that they review. When firms implement the advice they receive from their peer reviewers, those reviewers may eventually end up reviewing their own advice.
The program's standards for reviewer qualifications are also very broad. In some cases, a two-day course and current experience in accounting and auditing over the past five years are the only requirements for a reviewer. What's more, the most prevalent training ground for reviewers is within a firm that already performs reviews. And although there are extensive checklists and lengthy manuals, many issues arise in the performance and administration of peer review for which no clear guidelines are available. This system breeds a pool of reviewers with less experience than implied to public users of peer review reports.
Finally, many firms are exiting as peer review providers for a number of reasons, many of them related to the increase in demand for their expertise in more lucrative markets occasioned by the Sarbanes-Oxley Act. As a result, in some states, the number of active peer review firms has declined, concentrating the reviews in fewer firms. In New York State, there are currently only about 120 active peer reviewers - down from roughly 200 five years ago - and 10 peer reviewers account for more than 40 percent of the reviews performed.
This concentration raises the issue of whether the program can continue as a peer-on-peer endeavor. Most firms do not review any other firm, and a few firms are reviewing many. At what point does a reviewing firm cease to be a peer and become a professional quality control system reviewer, perhaps without an adequate practice base to judge the substance of a reviewed practice?
Fixing peer review
Realizing that implementation issues can overwhelm new ideas, the NYSSCPA has focused on conceptual ways of improving the substance and credibility of the peer review program. One concept to increase participation in the reviewing side of the program, to expand the base of qualified individuals, and to ensure that all areas of a firm's practice receive appropriate review, involves adopting a team-based approach for peer review.
Similar to accreditation processes in higher education, medicine and nursing, each firm in the program would contribute potential team members. A team headed by an experienced, qualified captain would be assembled by a central coordinator with all the qualifications to review a particular firm practice. One way to deal with a shortage of reviewers may be to require that all peer-reviewed CPA firms provide a certain number of reviewers to the professional community. Another would be to require participating firms to contribute a certain number of professional hours to the review program, based upon a sliding scale tied to firm size.
Given the evolving professional environment, new reporting requirements and an atmosphere of enlightened accountability, close scrutiny of the nearly 30-year-old peer review program is not only prudent, it is vital to the betterment of our profession. Peer review has taken on an increased significance for an audience that now extends well beyond CPA firms to regulators, clients, credit grantors and others, all of whom expect a monitoring system that is effective, transparent and a model of integrity.
Fixing the reviewer problem should be at the top of our list as we work to improve the current peer review program. A solid, mandated peer review process - incorporating a pooled team of reviewers - can do so much for the profession. By proving that we can be our own toughest critics, peer review has the potential to not only improve our own standards and performance, but also to show the public that CPAs are as determined as anyone to produce quality standards and root out fraud. And equally important, if we don't maintain a strong peer review program, some governmental program is likely to do it for us.
Lou Grumet is the executive director of the New York State Society of CPAs.
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