Academic journal article Journal of Managerial Issues

Perceptions of the Peer Review Program of the Accounting Profession: Implications for Management [*]

Academic journal article Journal of Managerial Issues

Perceptions of the Peer Review Program of the Accounting Profession: Implications for Management [*]

Article excerpt

The peer review program is one way to reassure the public and regulators that the accounting profession is serious about maintaining and enhancing the quality of audit services (Francis et al., 1990). In 1988, the membership of the American Institute of Certified Public Accountants (AICPA) made the periodic quality review of public accounting firms a mandated requirement. Firms that are members of the AICPA's Division for CPA Firms satisfy this requirement through peer review, a program which provides "an effective means of assuring the public that a firm has performed its accounting and audit engagements at a satisfactory level of professional achievement" (Public Oversight Board, 1989: 6). Evidence that the peer review program is effective would address concerns expressed at the hearings of the Dingell Subcommittee of the House Energy and Commerce Committee on Oversight and Investigation regarding the quality of audit work and the effectiveness of the profession's self-regulatory programs (Shad, 1985). Suc h evidence would support the position that the peer review program contributes to the improvement of audit quality which, in turn, would enhance public confidence in the reliability of audited financial statements (File et al., 1992). [1]

The objective of this study is to examine the effectiveness of the peer review program in improving audit quality as perceived by groups of key constituents. For this purpose, this study focuses on perceptual measures of effectiveness of the peer review program in performing its functions/processes and achieving its goals. The effectiveness of the audit process is critical to the issue of self-versus public regulation. The results of our study suggest that peer review appears to improve audit practices and the self-regulation of auditors. Hence, managers of audit client firms should require that their auditors undergo a regular peer review and that new auditors must provide summary results of their most recent peer review. In the following two sections, we discuss the peer review program and the constituencies' effectiveness perspective, followed by research questions and hypotheses. In the subsequent three sections, we describe the research methodology, present the analyses and interpretation of findings, a nd discuss the implications and limitations of the study.

Managerial Considerations

The strategic planning of a business is influenced by the long-term objectives of its stockholders, which is generally maximizing stock value. Consequently, strategic plans should consider all those factors which affect the value of the stock. For instance, management should consider consumer tastes and preferences, technological developments, sources of financing, investment opportunities, and social, regulatory, and cultural factors in planning and operational decisions. Insuring that plan objectives have been met is the purpose of strategic control (Preble, 1992). For purposes of implementing plans and achieving goals, firms design and use internal controls to improve the relevance and reliability of information for internal decision making (Kinney, 2000). Specifically, internal controls could provide reasonable assurance regarding the achievement of business objectives in the following areas: effectiveness and efficiency of operations, reliability of financial reporting, and compliance with laws and regulations (Committee of Sponsoring Organizations (COSO) of the Treadway Commission, 1994).

Managers periodically provide information about the results of their planning and operational efforts to the stockholders in the form of financial statements. However, managers have a vested interest under the agency contract (e.g., Davis et al., 1997) to obtain the highest quality assurance about the financial statements in order to convince the investment community that their financial representations are credible and reliable. Hence, they acquire the best external auditors they can afford. …

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