Increasing Transparency in Peer Review: Members Speak Out
At its spring 2004 meeting, the AICPA’s governing
council approved a resolution in support of increased
transparency in the peer review process. It also
authorized a member awareness program to inform members
about peer review and the related transparency issues and
to assess their desire for greater transparency. Two
principal options for increasing transparency of peer
review information under consideration are (1) creating a
public file that would be available for the general public
to view similar to that which exists today for member
firms of CPCAF, PCPS and the new employee benefit plan and
government audit quality centers and (2) a state
regulatory file that would provide access to peer review
information only to regulators.
This article is the result of an informal survey of
members from small firms practicing in 10 states about
increasing transparency by making peer review information
public. More information is available at
www.aicpa.org/transparency/index.htm
. Members also are invited to submit comments to
peerreviewtransparency@aicpa.org
.
I n 1989 Gray & Co. PC, a CPA firm
with four professionals in Norman, Oklahoma, was competing
with two local firms for an important financial institution
client. “The other firms had never been through peer review,
and I’m convinced that made the difference in our getting
the job,” says Janice Gray, CPA, a Gray & Co. principal.
“Since then, in all our literature, and every time we
respond to a request for a proposal, we not only provide a
copy of our peer review information, but also try to educate
clients and prospective clients as to what it means. We’ve
made our peer review information public for almost twenty
years, and I really think it’s helped us.”
“We brag
about our peer review reports,” agrees Diane Conant, one of
three partners in the Las Vegas CPA firm, Conant, Nelson and
Conant. “It’s a matter of pride. We want to be looked at as
a quality firm. In fact, I suggest to prospective clients
they request peer review reports from all firms they are
considering.”
SUPPORT FOR PUBLIC DISCLOSURE
While
many firms already place their peer review information in a
public file, and many others provide it to clients,
currently under discussion is whether the AICPA should
require all firms to make the information available to a
wider audience. “Making our peer review report public shows
we’re confident about the quality of our work,” says Bert
Denny, CPA, a partner at Regier Carr & Monroe LLP, which
has offices in Arizona, Kansas and Oklahoma. Because the
firm is a member of PCPS, its peer review report is in a
public file on the AICPA Web site, accessible to anyone with
an Internet connection.
“That’s an incentive to do
everything necessary to retain that positive report,” Denny
notes. “We’re constantly reminding staff and partners that
it’s critical to comply with quality control policies and to
keep ahead of standards. I firmly believe our public peer
review has made us better auditors. The quality of your
firm’s work improves when people know a reviewer is going to
come in every three years and that the information is going
to be made public.”
Bob Bezgin, CPA, a sole
practitioner in Pennsylvania, uses Olympic drug testing as
an analogy. “If you want to start a race, you want to make
sure everyone is clean,” he says. “Making results available
forces accountability, forces firms to stand up and say my
practice is clean.”
Many small firms say they
wouldn’t mind sharing the idea that the peer review process
is a simple way to monitor the quality of their work. “I’ve
never had one client ask me if I was ‘peer-reviewed,’ but I
wouldn’t hesitate to disclose the report,” says Steven
Saxenian, CPA, part of a two-person tax practice, Carlisto
& Saxenian in Mamaroneck, New York. “We don’t do audits,
we just have report reviews. Our state board doesn’t require
us to be peer-reviewed, but we do it because it gives us
assurance that we’re completing financial statements
correctly. Why wouldn’t we want to make that public?”
Gray points out that many firms—even if they aren’t
members of PCPS and therefore don’t place their peer review
reports in a public file—give them to clients and prospects.
She also notes that any firm that conducts government
(yellow book) audits is required to do so anyway.
Denny adds: “Between the PCPS mandatory public file and
yellow book audits that require submission of peer review
information, many firms already make their peer review
reports public. If it serves the public in yellow book
audits, I don’t see how it doesn’t in every instance.”
Others familiar with the peer review process say that
making all information public also will make the program
more meaningful. “I think the perception is that peer review
is an insider deal in which we’re just scratching each
other’s backs,” says Jeff Mock, CPA, whose small firm in
Washington state is a member of PCPS and who himself has
been a member of the state society peer review committee for
many years. “One way to change that perception is to make it
all public.”
“It will show the public that we don’t
have anything to hide,” adds Walter Webb, a partner in the
CBEW Professional Group, with 10 CPAs in four offices in
Oklahoma.
THE DISSENT: BREAKING A COVENANT
One
of the primary objections to making peer review information
public, whether in a true public file or a file accessible
only to state boards of accountancy, is that any such change
would break a commitment the AICPA made to its members in
1988. “In order to get members to agree to mandatory peer
review, it was set up as educational and remedial, not
punitive,” notes Phill Coley, a partner with Coley, Eubank
& Company PC, a five-person CPA firm in Lynchburg,
Virginia. “If we force firms to send their peer review
information to their state boards of accountancy or make it
public in any other way, we’re violating that promise.”
Bill Madigan, CPA, a former Virginia state society
president, also is concerned that if any changes in the
confidentiality rules are put to a membership vote, members
who have no experience with peer review may impose their
will on those who do. Coley agrees: “The fact is that more
than half of AICPA members are not in public practice. That
scares me about putting it to a vote.”
Another
concern about making peer review information public is that
the profession would be taking on a responsibility many
think should be left to the regulators. “If state boards
want to mandate something, that’s fine,” Madigan says. “But
I don’t see why we should do their work for them.”
Still, others believe it would be better for the
profession to increase transparency before the government
steps in and does it for them. “The less government
intervention the better,” says Webb, who was a member of the
AICPA peer review board from 1994 to 1997 and its chairman
from 1998 to 2000.
PEER REVIEWER ISSUES
Opinions are
divided on the effect disclosure would have on peer
reviewers. Some CPAs are concerned that making the results
public might make reviewers less candid, rendering the
recommendations less helpful to the reviewed firm. “As a
reviewer you might hold back if you know that your comments
will be made public,” says Madigan, who has been a peer
reviewer for almost 20 years. “You might not be so inclined
to be helpful because your constructive comments could be
construed as criticisms.”
On the other hand, Mock
argues, making peer review reports public would actually
improve their quality. “When reviewers know the documents
don’t really go anywhere, they take wide latitude in the
language,” he says. “I think a public file would eliminate a
lot of sloppy writing and ensure that reviewers write
recommendations that make sense.”
SMALL FIRM CONCERNS
Even supporters
of making peer review information public acknowledge that
some small firm practitioners will object. “The AICPA should
be careful not to push this too hard,” cautions Conant.
“Because of Sarbanes-Oxley, small firms believe that many
new regulations have inappropriately been pushed on them and
will wonder why the AICPA is imposing yet another new
requirement.”
Conant would much prefer that state
boards rather than the AICPA take the lead in requiring
broader disclosure. “If it’s only an AICPA requirement,
those who are not AICPA members will have an unfair
advantage,” she says.
Others are concerned about any
new costs being imposed on small firms. “Already I’ve heard
from some small firms that it will be too expensive and
shows a bias against small firms, that it’s an attempt to
drive them out of audits,” says Mock. “But I’m about as
small as you can get and I support greater transparency.
Given recent events, this is something the profession needs
to do.”
Gray argues the actual cost of peer review
is far less than many firms expect, and that public
disclosure will not appreciably add to its cost. “Making the
information public shouldn’t add any cost to firms at all.
The mechanism for making it public is already in place.”
AWARENESS VITAL
Members generally
agree that before any new measures for greater transparency
are implemented, prospective clients and members themselves
must become better informed.
“Oftentimes we have to
explain the report to clients in very simple language,” says
Denny. Gray believes that for greater transparency to have
any resonance, users have to be taught how to better
understand the reports. “Peer review is misunderstood,” she
says. “Just as there’s an expectation gap in audits, the
expectation by most of the public is that an unqualified
peer review report implies the firm is perfect, that the
firm has a system in place that should recognize or prevent
errors—but that’s not an absolute.”
Mock adds that
it will be equally important to raise awareness among
members. ”The only way something like this will pass is with
proper education,” he says, “so that members understand that
making peer review public is an inevitable step toward
fulfilling our obligations to protect the public interest.”
As directed by council, the AICPA has embarked on an
awareness campaign to inform members about the issue of
greater peer review transparency and to assess their
desire for it in preparation for a possible membership
vote sometime next year. More information on this subject
is available at
www.aicpa.org/transparency/index.htm
. Members also are invited to submit their comments and
views to
peerreviewtransparency@aicpa.org
.
—Adam Snyder
ADAM SNYDER is a freelance
business writer.
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