When people reach a certain age, a questioning of purpose and direction often happens. Although the entertainment media often satirizes such events, the opportunity to reflect about basic values and to review meaningful accomplishments after a long run may have unrecognized value. Along similar lines, when a profession adopts a program designed to achieve valuable results, an interim review is warranted.

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AICPA Peer Reviews

The AICPA’s (2017) triennial peer reviews form a critical component of its practice-monitoring requirement. Peer reviews help CPAs show the public and regulators (e.g., the PCAOB, SEC, Government Accountability Office, Department of Labor, and the U.S. Department of Housing and Urban Development) that their audit, review, compilation, and attestation services—but not consulting and tax services—meet applicable AICPA professional standards. Specifically, firms performing audits or examinations of prospective financial statements must undergo on-site system peer reviews, while firms whose highest level of service is reviewing or compiling financial statements with disclosures need only receive off-site engagement peer reviews. State CPA societies and the AICPA Peer Review Board’s National Peer Review Committee collaborate to implement AICPA Review Programs (AICPA, 2017). CPA firms facing PCAOB inspections must also meet the AICPA’s peer review requirements—including its Peer Review Program (PRP) standards.

CPA firms directly benefit from receiving peer reviewers’ comments on how to improve quality. Intangible benefits include a source of pride and competence, and a means to market their firms’ quality to bankers and other parties. But Russell and Armitage (“An Examination of AICPA Disciplinary Actions: 1980–2014,” Current Issues in Auditing, vol. 10, no. 2, pp. A1–A13, 2016) found that increased noncompliance potentially resulting from the AICPA relying on other investigative bodies may defeat the peer review system’s purpose to ensure engagement quality. Also, Kilgore, Radich, and Harrison found that audit committee members and fund managers viewed peer review as the least important attribute of audit quality (“The Relative Importance of Audit Quality Attributes,” Australian Accounting Review, vol. 21 no. 3, pp. 253–265, 2011).

Many smaller firms who perform relatively little attestation work often do not appreciate regulators demands for peer reviews. Many accountants believe that peer review is just a part of how things are done, as AICPA peer reviews first began in 1973. With this legacy, some CPAs believe that peer review is starting to be taken for granted. Peer review has become even less visible to many small CPA firms since passage of the Sarbanes-Oxley Act of 2002, largely due to the PCAOB’s focus on reviews of selected public companies.

AICPA peer reviews remain important. Most audit services are provided to nonpublicly held clients, making peer review the profession’s key claim to self-regulation. In addition, employee benefit plan work exists outside of the SEC’s jurisdiction, thus mostly in the realm of peer review. When peer review started, many CPAs opposed it largely due to its cost and the disruption to practice; with a mature program, now is the time to reassess its support among practitioners.

Survey and Analysis Approach

To examine CPAs’ viewpoints regarding peer reviews, the authors conducted a survey of 163 practitioners. The survey contained both closed- and open-ended (i.e., free-response) questions, organized into five themes:

  • Practitioners’ perceptions about the peer review process;
  • Attributes of peer review providers;
  • Strengthening peer reviewer qualifications;
  • Strengthening peer review standards; and
  • Improving users’ perceptions about peer reviews

Respondents were asked to answer on a five-point Likert scale anchored between “strongly disagree (1)” and “strongly agree (5).” Upon analysis, the respondents were classified into subgroups in order to compare responses from partners, managers, experienced peer review respondents, inexperienced peer review respondents, small firms, and large firms. (A full description of the survey sample and responses will appear with the article on https://www.cpajournal.com/.) A summary of the survey responses with respect to how often CPA firms should undergo peer reviews and who should oversee this process is shown in Exhibit 1 and Exhibit 2 and discussed further below.

Exhibit 1

How Often Should Firms Undergo the Peer Review Process?

Every Four Years; 34.2% Every Three Years; 45.8% Every Two Years; 11.0% Every Year; 3.9% Never; 5.2% Total; 100.0%

Exhibit 2

Which Group Should Monitor the Peer Review Process?

SEC; 0.6% PCAOB; 4.5% AICPA; 28.8% State Board of Accountancy; 32.7% State CPA Society; 33.3% Total; 100.0%

Practitioners’ perceptions about the peer review process.

The response to the survey’s first set of five general questions found reasonably strong support for the goals of peer review. Most respondents stated that the process encourages firms to maintain quality standards. Thus, this improved audit quality led respondents to encourage CPAs to support peer reviews rather than not perform attestation work.

The CPA firms undergoing peer review pay for the reviews, understandably making practitioners focus on the cost; along with other issues, this presents a rather mixed picture about the program. Small firms, experienced peer reviewers, and partners expressed neutral positions on proper peer reviewer compensation; managers, inexperienced peer reviewers, and large firms view such reviewers as not receiving excess compensation. Respondents’ free response comments echo these views; many complained that the marginal time and fees did not exceed the benefits provided and thus they no longer provided compilation, review, or audit services.

Attributes of peer review providers.

Maintaining the self-regulation of the profession may well depend upon whether CPAs perform quality peer reviews. The next two survey questions asked about respondents’ perceived attributes of peer reviewers’ background and competence. Although respondents were neutral on whether peer reviewers should perform enough reviews to constitute a minimum ratio of firm revenues, they wanted peer reviewers to have industry experience. This could account for many of them questioning their peer reviewers’ overall competence and experience. Apparently, many respondents were unaware that the AICPA requires peer reviewers and their team captains to take specialized CPE courses and have current industry experience in their peer review area.

Strengthening peer reviewer qualifications.

Given the importance of competent peer reviewers, the next three questions asked how the AICPA and other regulators could formally strengthen peer reviewers’ standards. The survey offered various proposals to enhance peer reviewer quality. Respondents agreed that peer reviewers should pass AICPA-developed qualification tests, but were neutral regarding mandating reviewers to take “higher levels” of CPE (e.g., pass competency exams at the end of CPE classes). Some practitioners (e.g., experienced, manager, small-firm respondent) supported a specialized credential that would distinguish those with peer reviewing skills.

Strengthening peer review standards.

The next five questions asked where the peer review processes could be strengthened. Respondents generally did not support major changes to the peer review. For example, overwhelming support exists for the current three- to four-year review cycle (see Exhibit 1); respondents believe in peer review, but they do not support more frequent peer reviews. Practitioners who receive several “clean” peer review reports perhaps should face less-frequent peer reviews than those who receive “problem” reports. Respondents were generally neutral regarding making peer review results public. History indicates that this very sensitive issue should be approached with caution.

In the long run, a constantly improving peer review is most likely to maintain support from the profession.

The survey next inquired if respondents would hold peer reviewers accountable for giving a “pass” opinion to firms that subsequently were held liable in malpractice litigation. This would turn peer review into something resembling an insurance policy, in that it would protect firms against their own lapses. Respondents did seem to support such a change, which is currently handled by AICPA PRP standards. Few respondents want to see SEC or PCAOB involvement in peer reviews, however, especially given the AICPA’s strong role in this process (see Exhibit 2).

Overall, respondents did not favor significant changes to the peer review process. In the free response section, many expressed hesitation about regulators modifying the peer review process, as they believe changes would worsen the process.

Improving bankers’ and other users’ perceptions about peer review.

Financial statement users are the key beneficiaries of peer reviews. (This topic is covered in the final two questions.) Respondents agreed that bankers and other third parties who rely on CPAs’ work receive “value added” from the peer review process, and that banks should require creditors to use CPA firms that have acceptable peer review reports.

Recommendations

The survey results suggest that there is support for changes to peer review that include improving the perception of its benefits. Respondents would like to have the profession better inform lenders, insurance companies, and others of peer review’s benefits. A “certified peer reviewer” credential or equivalent would show that a practitioner possesses the specific sets of knowledge and skills to competently perform reviews and provide attestation services. AICPA PRP rules negated the need for our respondents’ other two conclusions: 1) requiring peer reviewers to pass qualification tests, and 2) mandating them to have expertise in the relevant industry.

Overall, we found that CPAs appreciate the benefits of peer review, but would like to see changes in how they are performed. Many respondents also stated that they tend to see peer review as another form of excessive regulation. We think that many respondents underestimate peer review’s net benefits, largely due to not recognizing the content of the AICPA’s PRP rules and how users rely upon it.

Much comfort and certainty exists with the basic idea of peer review, at least to the extent that nobody seems to want revolutionary changes to the program. But in the long run, a constantly improving peer review is most likely to maintain support from the profession. To get there, a minor mid-life crisis might not be such a bad thing to have.

Timothy J. Fogarty, PhD, CPA, JD, is a professor of accountancy at the Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio.
Alan Reinstein, DBA, CPA, CGMA, is the George R. Husband Professor of Accounting at the Mike Ilitch School of Business, Wayne State University, Detroit, Michigan.
Natalie Tatiana Churyk, PhD, CPA, is the William F. Doyle Endowed Professor of Accountancy in the department of accountancy, Northern Illinois University, DeKalb, Ill.

The authors thank Abe Akresh (Retired), Barbara Apostolou (West Virginia University), Jack Dorminey (West Virginia University), Jerry Hepp (Gnosis Praxis Ltd), Mel Houston (attorney), and Phil Reckers (Arizona State University) for their helpful comments. on this manuscript.