A Question of Transparency

By Emily P. Walker

Should peer review results be available to state regulators? Should the public be able to see them? That's the heart of the peer review transparency issue now being openly discussed by the American Institute of CPAs (AICPA).

In the spring of 2004, the AICPA Council approved a resolution that supported increased transparency and directed AICPA staff to initiate a member education program and solicit feedback on the topic. Become educated on peer review transparency with the following background information and advantages and disadvantages.

The Beginning

Since its inception in the 1980s, the AICPA Peer Review Program has been committed to enhancing the quality of accounting, auditing and attestation services performed by members in public practice. Over the years, more than 160,000 peer reviews have been performed on more than 50,000 CPA firms and that doesn't include those firms that participate but are not members of the AICPA.

Peer review became reality after Congress, the Securities and Exchange Commission and the Federal Trade Commission pushed the accounting profession to either accept additional responsibilities or have the federal government take those responsibilities from it.

The AICPA took action, creating a referendum that all AICPA members in public practice must work in a peer reviewed firm. Prior to presenting the peer review referendum to the membership for a vote, the AICPA facilitated a member education program to explain the proposed changes, which included increased educational requirements and a new code of professional conduct.

Despite criticism for their aggressiveness, AICPA leadership felt strongly that the proposed referendum was necessary to protect the public, raise the stature of the profession and improve the quality of practice.

Their efforts paid off. AICPA members voted overwhelmingly to adopt the series of changes, which became effective in January 1988. Shortly after, the VSCPA followed suit for its members. In both cases, an important component of the referendum was that the results of firms' peer reviews would be kept confidential.

Transparency Now

The peer review program has undergone many changes since becoming mandatory, often because of the climate surrounding the accounting profession. However, two main tenets have not changed: the program is designed to be educational and remedial in nature, and it is confidential.

Increasingly, peer review reports have been sought after and used by a variety of parties attempting to assess the quality of a firm's practice. Public accessibility of peer review documents is required for members of the Center for Public Company Audit Firms (CPCAF) and Partnering for CPA Firm Success (PCPS), and reports are available to anyone via the AICPA Web site.

Many firms voluntarily make their peer reviews available to their clients. Of the 16,000 firms performing audits, approximately 11,000 make parts of their peer review available to outside parties.

In addition, many state boards of accountancy, such as Virginia, and other government agencies require peer review regardless of membership in the AICPA or a state society. For a Virginia public accounting firm performing audits, reviews, compilations or attest engagements to receive a firm license from the Virginia Board of Accountancy (BOA), they must participate in a peer review program no less stringent than the AICPA's program. They are also required to submit to the BOA selected peer review documents for adverse reports or second consecutive modified reports.

Increased Transparency 

Despite the various ways peer review documents are transparent to regulators or the public, transparency is still not required by the AICPA.

According to Webster's dictionary, transparency refers to "free from pretense or deceit" — and that 's exactly the aim of increasing peer review transparency, with the objective to make the results of peer reviews more accessible to parties outside of the firms themselves.

There are two primary approaches under consideration by the AICPA: providing online access of peer review results to the public, or facilitating access to the reports for state boards of accountancy.

Ultimately, AICPA members will make the decision. Mandatory disclosure of peer review information can only pass with a two-thirds membership vote.

Advantages

According to some peer review participants, as well as the AICPA, increasing transparency can have the following advantages:

  • Firms will have an incentive to do everything necessary to obtain an unmodified report.
  • Firms will be completely accountable — whether they have an adverse or unmodified report. Firms will be forced to publicly acknowledge results, regardless of the positive or negative impact this could have on their practice.
  • Firms and their clients will gain assurance that financial statements are being completed correctly.
  • Transparency will help dispel the view that peer review is an "insider" process with firms "scratching each other's backs."
  • The peer review program will gain credibility in the eyes of the public, who will recognize that the profession doesn't have anything to hide.
  • The peer review program will become more accurate. Reviewers will be more accountable to write meaningful recommendations and eliminate sloppy writing.

In addition, proponents argue that because many firms already voluntarily publish or publicize peer review results, requiring transparency won't be that much of a change from current practice.

Finally, echoing the argument used to institute mandatory peer review years ago, many supporters feel it is better for the profession to increase transparency itself before the federal government steps in.

Disadvantages

Opponents of increased transparency argue:

  • When peer review was approved by AICPA members and instituted, the program was promised to be educational and remedial rather than punitive. A publicly available adverse report, however, could potentially harm a firm.
  • The CPA profession would be taking on a responsibility that should be left to government regulators.
  • Peer reviewers may be less candid in reviews out of concern that constructive comments would instead be viewed as criticism and potentially hurt the reviewed firm.
  • Because the resolution would only affect firms that are AICPA members, peer reviewed firms that are not members of the AICPA would have an unfair advantage by not being required to participate in transparency.
  • Many small firms believe they must unfairly comply with new rules and regulations as fallout from Sarbanes-Oxley. Those firms may see transparency as yet another new requirement that they didn't ask for and do not need.

Opponents want to make sure that everyone voting on this issue is fully aware of the repercussions. However, more than half of AICPA members are not in public practice and do not have experience with peer review. However, they will be asked to vote on — and could potentially approve — an issue on which they have limited knowledge and which does not affect them.

Stay Informed

As a member of the accounting profession, it is your responsibility to strive for a better understanding of the issues surrounding transparency in order to develop an informed viewpoint.

Visit the VSCPA Web site at www.vscpa.com for links to peer review transparency resources and FAQ's, or check out the AICPA's site at www.aicpa.org/transparency/index.htm. Watch Disclosures and other VSCPA communications for information on VSCPA town hall meetings to be held in different locations this summer.

We want your feedback! E-mail us at transparency@vscpa.com or the AICPA at peerreviewtransparency@aicpa.org to submit your comments on the issue.

Don't delay — if approved by AICPA Council, the AICPA is planning to take this issue to a membership vote sometime in 2005.