The internal value of peer review

By Harvey I. Milhiser, CPA
Gorfine, Schiller & Gardyn, P.A.
Member of the MACPA Peer Review Committee

At one time or another every CPA, sole practitioner, partner and director probably has questioned the value of peer review. Was the need to have the workpapers, financial statements, CPE records and independence of the firm reviewed by an "outside, independent CPA" worth all the time, expense, worry and trouble?

After some soul searching, the great majority of us answered a resounding "yes." We did so because we believed a peer review every three years sets us apart from other professions and tells the public we are dedicated to upholding the standards of our profession — and that we welcome the challenge.

This was a good reason, but perhaps it was not the overall best reason for our firm.

Knowing there would be another CPA looking over our engagement from inception (planning) to completion (financial statement) made us delve into our professional requirements in much greater detail than if we did not have peer review. We knew our firm would be judged against our industry's standards and other firms' performance.

How many firms would have planned and documented an engagement for a compilation, review or audit in the detail that we do now? Would we have gained knowledge of our clients' industries? Would we have performed analytical procedures and compared our clients to industry standards and their own expectations? Would we have considered whether our clients were going concerns or whether they would be out of business in a few months? A year?

Would we have given all of the required disclosures in the financial statements? Many times we all have believed that some of the disclosures were unnecessary to our clients. But were they necessary and helpful to the third-party readers of the financial statements?

In light of the recent auditing failures, many in our profession and the public in general might pause and believe our professional standards and requirements proved not strong enough for current situations. In addition, what did peer review do to find these errors in judgment? Is this a weakness in peer review?

I believe our professional standards and requirements were — and are — strong and good. We just had people who wanted to circumvent and find every loophole possible not to disclose and record valuable and correct information. Almost any system or set of rules can be avoided if enough people acting in collusion want to do harm to it. Remember 9/11?

Our firms have benefited from peer review in other significant ways. In my firm, we plan the engagements much better and are more focused than we would have been without peer review. By developing good planning habits, we have saved time on the engagements and done a better job of covering the key areas. This has cut down on write-offs, made professional time available for other engagements and allowed us to get the completed job to the client faster. By saving time, we possibly saved the hiring of an additional staff person. By completing the job quicker, we were able to bill faster, thereby increasing cash flow.

Documenting our files in a more professional and understandable manner has allowed us to be more confident and complete in our work. An engagement with clear and adequate documentation will allow the reviewer to complete the task in less time. Also, when we look back on our work the next year, we will see what was performed and why. In addition, if a firm is ever sued, a well-documented set of workpapers will be invaluable in court or in its defense.

Financial statement presentations required in certain specialized areas and in general presentation has been improved because of peer review. A financial statement that is complete, looks fresh and up to date in its presentation and format, and contains all of the required disclosures in a logical format will go a long way with clients, financial institutions, investors and investment managers in helping us obtain new and larger clients.

Under peer review, when we obtain a new client we complete the checklist forms and learn much more about our new client than we ever did previously. This allows us to make informed decisions about who is the best person to handle the client. In addition, will we need to obtain any new audit or accounting reference material specifically to service this client and industry?

We look forward to our peer reviews and our annual inspections. We believe the reviews should be learning processes. Are we doing things correctly? How can we improve our files, financial statements, documentation, hiring, advancement, marketing and internal functions? Just by talking to the peer review team captain and other members, we can obtain invaluable information at no additional fee. The peer reviewer becomes an additional resource tool for our firm, when the need arises. I enjoy receiving calls from the firms I review. If I can provide them with the help they seek or just become a sounding board for a problem, I have provided a valuable service to a colleague. I always learn from this type of inquiry.

Whenever you think about peer review, contemplate the many enhancements your firm has achieved from this program. I believe you will soon discover that the benefits far outweigh the costs.