Perceptions Of The Peer Review Program Of The Accounting Profession: Implications For Management [*].(Statistical Data Included)

The accounting profession is characterized by constituents who are "regulated" by the professional code of conduct and who, in turn, provide input to or lobby for rules affecting them (Watts and Zimmerman, 1986; Meier et al., 1993). According to the constituencies perspective, the effectiveness of a system is determined by the system's perceived effect on its constituencies, including goal achievement and the methods used to attain them. This is also the definition of effectiveness adopted by this study. Effectiveness is assessed subjectively by all constituents. Although constituency views may reflect a diversity of opinion on specific goals and characteristics, agreement on one or more goals/characteristics would provide evidence in support of the effectiveness of the peer review program.

The measurement criteria/standards for assessing effectiveness of the constituencies view consist of the perceived ends (goals, standards) and means (characteristics) which have been developed through interaction and exchange among the constituents. For example, the goals of the peer review program include improving audit quality and reducing audit failure through the maintenance of AICPA Quality Control Standards. Processes include the examination of the quality control system of the reviewed firm, as well as the system's "effects," such as public confidence in the accounting profession.

Walton (1985) has noted that a sign of effective control systems is both its understandability and its acceptability by those affected. Thus, the effectiveness of the peer review program in improving audit quality will be assessed by examining the differing perceptions of CPA firms, audit clients, bankers, and financial analysts concerning the importance of certain goals and characteristics of the program. The perceptions of these constituents concerning the effectiveness of the peer review program is of interest because (1) the program was essentially designed to improve audit quality and eventually benefit them, and (2) their opinions ultimately affect the credibility of the SECPS and the POB.

Research Questions and Hypotheses

This study explores whether the peer review program provides adequate control of the auditing practices of accounting firms. This issue is investigated by examining the opinions of key constituents concerning the perceived effectiveness of the goals and processes of the peer review program. The general research questions guiding this study are: (1) How effective is the peer review program according to its constituents? and (2) To what extent do various constituents agree with each other concerning the effectiveness of the peer review program? The specific hypotheses related to these general questions are developed below from the existing accounting and management control effectiveness literature.

Goal Effectiveness

Complex systems, such as the peer review program, pursue multiple ends or goals (Pennings and Goodman, 1977; Lewin and Minton, 1986; Van de Ven and Ferry, 1980). The peer review program seeks to assure proper internal professional controls to improve the quality of accounting and auditing practices. For example, McCabe et al. (1993) found that CPA firms' managing partners believe that peer review strengthens firms' practices and procedures, improves quality control and morale, and enhances firms' prestige. Hence, peer review achieves the profession's goals of improving audit quality, minimizing audit failures, detecting fraud in financial statements, and providing a mechanism of self-regulation.

Given the peer review program's multiple goals, its constituents may differ not only on which goals are important but also on what constitutes a satisfactory level of goal achievement (Cameron, 1986). In the accounting literature, Jennings et al. (1987) report constituents' perceptual differences on the concept of materiality among auditors, bank loan officers, financial analysts, and credit managers. Prior literature also shows that different constituents require differing levels of managerial controls. For example, CPA firms may value control via self-regulation as a primary goal, whereas users of financial statements may place more value on auditor controls that avoid audit failures. Or, with respect to goal achievement for example, accountants may feel that the peer review program has been effective in reducing audit failures, whereas users of financial statements may disagree that this goal has been achieved. Thus, the following goal effectiveness hypotheses, in alternate form, are offered:

H1 The peer review program's goal effectiveness will be perceived differently by its constituents in terms of the relative importance of the key goals of the program.

H2 The peer review program's goal effectiveness will be perceived differently by its constituents in terms of the degree to which each constituent's primary goal has been achieved.

Program Effectiveness

The peer review program's effectiveness is likely to be perceived differently by its constituents for two reasons. First, multiple characteristics, like multiple goals, will appear differently to each constituent based on his/her different perspectives and needs, as described earlier. Second, differences in perceptions of program effectiveness also arise because some constituents define effectiveness in terms of results while others are concerned whether the means for achieving those results are effective (Tsui, 1989).

Prior studies have not directly examined the peer review program effectiveness. Ehlen and Welker (1996) examine the perceived fairness of the procedures used by AICPA in adopting the peer review program and the perceived fairness of the procedures used by the reviewer firm in conducting peer review. Yardley (1989) reports perceptual differences between lenders and accountants on posterior probabilities with regard to the existence of financial statement errors across clients in non-audit engagements involving the use of prescribed processes. We examine the program effectiveness by addressing the issue of whether accounting firms have installed and implemented adequate quality control standards to reduce audit failure and detect fraud in financial statements. Program effectiveness is also achieved when various constituencies believe that peer reviews do achieve the goals of the program. However, the program's effectiveness is subjective because it is likely to be perceived differently by the constituents. Thu s, the following alternate hypothesis on the program effectiveness of the peer review program is offered:

H3 Constituents will differ in their perceptions of the effectiveness of the peer review program's characteristics.

Recent evidence suggests that prior knowledge may bias peer review evaluations (King et al., 1994). Since each of the constituent groups has a different level of involvement in the peer review program, an obvious source of variation in opinions would stem from these fundamental differences. CPA firms have a direct involvement while the other groups have no direct involvement, but might be indirectly affected based on the soundness of the CPA firm's audit practices. Thus, the level of familiarity with the peer review program was assessed to control for such fundamental differences among the constituents.

Research Design

Sample and Data Collection

Data for this study were collected from subjects representing four types of SECPS constituents using a mailed questionnaire. The research instruments completed by the subjects were pretested by an average of six persons, including academic colleagues and representatives from each professional group to ensure completeness and clarity. To avoid sample selection bias, random samples of subjects, one from each of the four SECPS user constituencies, were drawn from the following sources: (1) CPA firms--the AICPA Division for CPA firms, (2) audit client firms--Who Audits America, (3) bankers--Polk Bank Directory, and (4) financial analysts--Institute of Chartered Financial Analysts.

A copy of the research instrument with a cover letter explaining the study was mailed to each subject. To increase the overall response rate, a follow-up letter was sent one week after the first mailing. These procedures yielded a total of 233 usable responses, resulting in a 39.0% overall response rate (107 CPA firms - 53.5%; 51 audit clients - 44.1%; 42 banks - 42%; and 33 financial analysts - 18%). Our response rate compares favorably with recent studies. For instance, Martens and McEnroe (1993) and Ehlen and Welker (1996) report response rates of 16% and 20%, respectively. In order to check for response bias, we compared our respondents to a random sample of non-respondents on selected characteristics such as firm type and location and subject's position/title. Based on z-test (not reported), we conclude that our respondents do not differ significantly from non-respondents. Thus, our respondents appear to be representative of the firms and subjects sampled.

Profile of Sampled Constituents

Descriptive statistics of the firms and respondents are displayed in Table 2. Panel A shows that CPA firms and financial analysts represent a variety of firms from local to international, with the majority serving a local market. The majority of audit client firms are in manufacturing (44%), whereas all banks are commercial. The firms from all constituent groups range in size (based on number of employees) from small to very large. These data suggest a broad range of firms are represented in our sample enhancing the generalizability of our findings. Panel B indicates that the majority of the respondents from the firms in each of the four constituent groups are at the level of vice president or higher and have from 8.1 to 17.2 years of tenure with their firm. This suggests that the respondents have the level of responsibility and experience to provide informed opinions on key issues affecting their firm. The majority of CPA firms (95.3%) have undergone peer review in the last three years. Although the majorit y of the other constituents are satisfied with the quality of CPA audits their firm has received, there is still considerable variation among these constituents on this issue. Thus, the peer review program of the accounting profession appears to be a relevant issue to these constituents either because they are subject to peer review (e.g., CPA firms) or because they are clients of CPA firms who perform such audits.

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