By Alex Vuchnich, CPA, CFE - I overheard a fellow member of the profession the other day protesting the peer review process and the new transparency initiative that the AICPA is implementing. Under the new initiative, members who have not already opted in by becoming members of the various audit quality centers, may opt to have their reports included in a public filing database. This information would then be sent directly to the applicable State Boards for firm licensing purposes. The comment I overheard was a complaint about the peer review process as a whole. The individual was responding to a comment made by an AICPA staff member that approximately 94% of firm's undergoing peer review receive a pass (unqualified) opinion. The individual attempted to make the argument that since over the past five years firms have proven with a 94% pass rate that audits have been conducted in accordance with professional standards that it is no longer necessary to incur the expense and effort associated with the peer review process.
This comment clearly indicates a lack of understanding as to the value of peer review and of periodic attestations in general made on any system of quality controls or even financial data for that matter. What if this practitioner's clients came to him after he had completed the fifth year of financial statement audits and claimed that the bank/investors/stakeholders should no longer need annually audited financial statements since they had passed their audits the preceding five years. I presume the practitioner would see the fallacy of this argument and respond that the assurance provided by the opinion does not span past the financial statement date. Being a CPA and accepting membership in the AICPA implies that our work is of a higher level of quality. Therefore it is important that we continue to 'prove' that the system of quality controls that are in place within a firm are continuing to operate effectively to maintain the value associated with the services provided by members.
One other observation to draw from this is that the cost benefit analysis made by the practitioner misses the mark of what value a clean peer review report provides. I personally do not believe that mandatory peer review transparency is necessary. That is not based on the idea that firms should be allowed to hide deficient auditing, instead it is because I believe a market solution for transparency already exists. Firms that have clean opinions will want to advertise that fact to existing and prospective clients. All that we really need is an outreach campaign to let those receiving services from our fellow practitioners know to ask for a peer review report as part of the initial proposal. The peer review report should be something that a firm touts to all its clients. Firm's love to claim the high level quality of the services they provide. The peer review report backs up that claim. It should be viewed as a badge of honor and an excellent marketing piece instead of just another cost of complying with State Board and AICPA membership requirements.