Increasing Transparency in Peer Review: Members Speak Out

BY ADAM SNYDER

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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