Is peer review ready for transparency?

NOTE: The following article is provided by the AICPA. Read more about the AICPA Peer Review Program here.

The concept of peer review has been part of the CPA profession for more than 30 years. Hundreds of thousands of peer reviews have been conducted. Peer review is truly part of the fabric of our profession, something that has touched almost anyone connected with the world of CPAs.

Despite this history, in 2005 there apparently remains multiple answers, some of them conflicting, to questions about the AICPA peer review program, such as:

What is peer review?
How does it work?
How effective is it?

A common understanding of the answers to these questions is of vital importance today, when the profession is engaged in a debate about bringing greater transparency to peer review results.

When peer review was born, the focus was on the remedial aspects of the program. The promise of confidentiality of results clearly induced many members to vote in favor of mandatory peer review. Over the years, however, things have changed dramatically. For a number of different reasons, tens of thousands of CPA firms make peer review results available beyond the reviewed and the reviewer.

Based on the changing business environment, the AICPA's governing Council passed a resolution in May 2004 that supports the need for increased transparency of the AICPA Peer Review Program and directed the Peer Review Board and the staff to assist members in meeting their regulatory reporting obligations.

In addition, demand for access to the results of peer reviews is at an all-time high. Emblematic of that demand are calls from officials of the National Association of State Board of Accountancy for their member boards to have "unfettered access" to peer review results.

Peer review as experienced by most CPA firms remains a key piece of our profession's self-regulatory system, along with our code of conduct and the Uniform CPA Examination. It is evident that the current system must become more transparent for all peer reviewed firms if any self-regulatory aspect is to be maintained. The regulators have made this crystal clear.

However, it is also clear that that a common understanding of what peer review is, and what it isn't, is not in place.

Members raise concerns

In 2004, the AICPA's Board of Directors and governing Council, having agreed that greater transparency of the peer review process is appropriate, asked the AICPA staff to engage members in an education and feedback effort focusing on the need for greater transparency of peer review results. Part of that member dialog was an online survey of members that contained several open-ended questions.

A number of members took advantage of the open-ended questions to express their opinions on certain aspects of our peer review programs. Some members provided recommendations for change to improve the program. Member views are quite logically shaped by their particular experiences with the peer review process. Many members responding to the survey expressed opinions that were contradictory to other members' perceptions. It was also evident that members' perceptions about the peer review program had an effect on their willingness to embrace a system of greater transparency of peer review results.

So, once again, what is peer review? How does it work?

The program

The AICPA Peer Review Program is dedicated to enhancing the quality of accounting, auditing and attestation services performed by AICPA members in public practice.

The program was put in place to establish a layer of public protection and to improve firms' accounting and auditing practices. It does so by identifying CPA firms that have inadequate systems of quality control, detecting non-performance in accordance with professional standards in all material respects and imposing corrective action to rectify deficiencies.

Oversight

The peer review process includes rigorous checks and balances to help assure that peer reviews are appropriately and consistently performed through the administration and oversight of the process. Peer reviews are administered and reported on in accordance with the Standards for Performing and Reporting on Peer Reviews and other guidance adopted by the AICPA Peer Review Board (PRB).

The program is administered by 41 administering entities (primarily state CPA societies) and is overseen by the PRB and its staff to ensure consistent application of the peer review standards and guidance throughout the nation. The PRB's oversight program requires that each administering entity have its own formal oversight process. Visitation of each of the 41 administering entities, which often includes recommendations for improvements in administering peer reviews, must occur every other year. Some administering entities are also overseen by a state board of accountancy. This, combined with the PRB's oversight, is an effective means of ensuring that the program is being administered in accordance with standards.

Discipline

A disciplinary process is incorporated within the peer review program for any firm that refuses to cooperate, fails to correct material deficiencies, or is found to be so seriously deficient in its performance that corrective actions are not adequate. The PRB may decide, pursuant to due process procedures, to appoint a hearing panel to consider whether the firm's enrollment in the program should be terminated or whether other actions should be taken. The public is notified of firms that are terminated from the program via The CPA Letter and the AICPA Web site. State boards are notified of a firm's termination from the program via direct notification.

A separate disciplinary process exists for peer reviewers and administering entities in the event that performance issues arise at that level.

Board task force

In February 2005, the AICPA established a board-level task force to review the feedback from the online poll of members, reflect on the current market and regulatory environment as well as the recent enhancements to the program and determine if further changes to the peer review program should be recommended.

The task force has identified a number of key issues based on members' comments in response to the online poll:

Since its inception, the current peer review model has been primarily remedial and educational. Does this remain the appropriate model or should it move toward being more disciplinary and punitive?
If the results of peer review are to be made available to the public, users and potential users of that information must not only be able to understand the information, but the process behind it. What changes are needed to accomplish this?
The current peer review reporting process is difficult to understand, and potentially contains information that may be misunderstood or unintentionally or intentionally misused by third parties, including use in litigation. What can be done to address these issues?
Are there changes to the oversight process that can address the performance of reviewers and their qualifications on specific reviews as well as inconsistencies in the performance among peer reviewers and administering entities?
Should changes to the services covered by peer review be made?

The task force's efforts, findings and recommendations will be further discussed by the Board of Directors, the Peer Review Board and the CPCAF Peer Review Committee at their meetings in January and February 2006.

Through a combination of the willingness of reviewed firms to improve, the professionalism and expertise of the reviewers, the quality of the standards and guidance issued by the PRB and the effectiveness of the oversight process, peer review has been effective in meeting its goal of improving the quality of practice.

At the same time, the AICPA recognizes the need to constantly examine and improve the process and understands that members have expressed legitimate concerns about the process in the context of transparency and do not have a shared understanding about all aspects of peer review.