The Peer Review Program:
No Guarantees Ever &
No Hope Sometimes
By Roger D. Johnson CPA
On February 10, 2009 the Associated Press reported the Securities and Exchange
Commission has an agreement with money “manager” Bernard Madoff that could
force him to pay a civil fine and return money raised from investors. The agreement
supposedly makes permanent a preliminary injunction that froze Madoff’s assets
following his December arrest. If approved by the Manhattan, New York federal
judge, this civil proceeding – separate from the criminal case against Madoff – would
offer some relief to investors Madoff bilked. It’s not likely, however, that frozen
assets will provide much of a “return”, never mind the corpus.
We all know what type of Old West justice would be swiftly delivered if Madoff’s shenanigans were pulled
125 years earlier. I’m not suggesting that action, but Charles Ponzi’s Ponzi scheme pales in comparison. When
Ponzi was arrested in August 1920 his liabilities were estimated at $7 million. That’s about $76 million in
2008 dollars, or less than 2% of Madoff’s astonishing $50 billion haul. Although he’s innocent until proven
guilty, a convicted Madoff should be punished to the fullest extent of today’s law. By the time this is read,
progress will have been made toward that end.
This article, however, is not about Bernard Madoff. Another question is asked in the professional circles in
which I move. What about Madoff’s auditor? How was a fraud of this magnitude not identified in an audit?
And there’s a related question much more significant to my circle of professional colleagues. How did that
audit escape scrutiny in a peer review of Madoff’s auditing firm? If there was an audit failure, regardless of
its nature, surely there must also have been a peer review failure. But to the uninformed choosing to
criticize the peer review program, I say this: Hold on a minute!
“What Does Madoff’s Auditor Say? No Answer”, in the December 15, 2008 version of CFO.com, reported the
CPA firm that issued an unqualified audit report on the financial statements of Madoff’s securities firm is
being investigated by the Rockland County, New York district attorney’s office. Early professional
scuttlebutt – its veracity now unquestioned – is that the CPA firm has not undergone peer review. The reason
is two-fold: (1) New York state, unlike most other jurisdictions, has not had mandatory peer review as a
condition of licensure (although that is changing as a result of the Madoff debacle); and (2) the CPA firm did
not voluntarily undergo peer review. So let’s not condemn the AICPA Peer Review Program and its
administration by the New York State Society of CPAs. But reason “(2)” requires a further explanation. At
least one individual in the CPA firm is (or has been, by the time this is read) a member of the American
Institute of Certified Public Accountants (AICPA). Firms in which AICPA members practice must be enrolled
in the AICPA Peer Review Program unless the firm provides no services subject to peer review. For over a
decade, Madoff’s auditor’s firm represented it performed no audits. Let’s be blunt about it. False
representations were made to the AICPA for 10+ years. Someone in the firm transgressed the ninth
commandment over and over again.
This gives a pause for consideration to those of us involved in administering the AICPA Peer Review Program.
We understand the program is founded on the principal of mutual trust and cooperation. “Mutual trust” is,
irrespective of one’s religious convictions, tied to the ninth commandment. Misrepresentations – especially
those with intent to mislead – at any stage of the process are defenseless on all counts. The peer review
program serves multiple purposes. An individual or firm subject to peer review may not care about AICPA
membership or regulatory requirements, but that misses the point. The goal of the program is to promote
quality in the accounting and auditing services provided by CPA firms and individuals, serving the public
interest as required by the profession’s ethical standards. ‡ Firms and individuals who believe the peer review
program is worthless and intrusive should at least recognize that lessons on effectiveness and efficiency are
part of the service provided by the most skillful reviewers. No CPA firm has maximized these two desired
practice qualities. A peer review of the CPA firm that audited Madoff’s investment business most likely
would have identified the “ineffective” audit, possibly greatly reducing investors’ losses. But there was no
hope of that happening.
The peer review program’s administrative staff, individual peer reviewers, and the committees that consider
peer review results occasionally identify possible, probable or certain inconsistencies in representations
made by firms or individuals and facts and circumstances revealed during the review process. These
inconsistencies are always presumed to be unintentional and innocently made, and they usually result from
misunderstandings or too little knowledge of requirements. Identified inconsistencies must be resolved,
regardless of a review’s status (in process or completed). However, any administering entity is naïve if it
concludes that deceitful practices and intentional misrepresentations are confined to “New York CPAs”. In
fact, we have seen our share.§ The intentional ones are resolved in the same manner as those innocently made
(as we must do to avoid prejudging one’s actions or motives) with no attempt to separate the two types.
The “pause for consideration” mentioned above, however, applies equally to firms and individuals subject to
peer review. Soon the day of reckoning will come to the CPA firm that signed off on Madoff’s false and
misleading financial statements. Litigation will delay the civil ramifications of that event. However, the false
representations regarding the peer review requirement probably will (or has) more quickly caused loss of
AICPA membership, professional credibility, and professional license. All CPAs in public practice surely
treasure the last two of these, and nobody wants to jeopardize either. The lesson is clear. Respond fully and
truthfully to inquiries regarding peer review requirements to which the firm is or might be subject. If
unsure of how to respond, a firm or individual should ask for clarification, guidance or assistance. The
consequences of incomplete or incorrect replies are an avoidable risk. Peer review committees of all
administering entities are committed to upholding the integrity of the program; and the day-to-day
administration of the program guards against others’ known impugnable actions.
▀
About the Author:
Roger D. Johnson, CPA is the technical reviewer for the AICPA Peer Review Program administered by the West
Virginia Society of CPAs Peer Review Project Group (committee). The comments and observations expressed above
are his alone and do not represent opinions of the committee or any of its members. Roger Johnson can be
reached at rdjcpa@insightbb.com.
“Standards for Performing and Reporting on Peer Reviews”, PRP §1000.02, and ET §53, Article II – The Public Interest,
Principles of Professional Conduct; AICPA Professional Standards
‡
Recently seen instances of incomplete or incorrect representations – suspected, at least – unlike Madoff’s auditing firm,
involve the types of services a firm performs, rather than whether or not a firm is subject to peer review. For example,
whether or not a firm performs audits (any) or audits subject to Government Auditing Standards or of employee benefit
plans subject to ERISA may be questioned. These higher-risk engagements are, quite understandably, more closely
scrutinized in a peer review. A firm or individual with a momentary (hopefully) careless thought might not want such
engagements critically reviewed by anyone, regardless of the confidential nature of the AICPA Peer Review Program.
§