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Hypothesis H3 concerning differences in the constituents' perception of the peer review program characteristics was supported by the significant MANCOVA results (Wilks lambda .49, p [less than or equal to] 0.001, see Table 4). Univariate F-tests and post hoc tests identified that the constituents differed in their perceptions of the effectiveness of 5 out of 11 program characteristics examined providing partial support for H3. The mean differences among the constituents along with the significance of the effect of the control variable (covariate) on the perceptions of each process are displayed in Table 4. [3]
CPA firms and audit client firms agreed somewhat that peer review enhances the quality control of audits by assuring that the accounting firms have adequate quality control systems and apply quality controls standards in their audits (see #1 and #2, Table 4). In contrast, bankers and financial analysts disagreed somewhat or were undecided regarding the peer review program's effect on these two quality control processes.
CPA firms disagreed with the notion that peer review enhances an accounting firm's ability to detect fraud in financial statements (#3, Table 4). In contrast, audit client firms and financial analysts were undecided on this issue while bankers agreed slightly with this statement. The constituents exhibited fairly strong differences of opinion on this issue as indicated by the rather large F test. These strong results persist despite controlling for the level of program familiarity which did account for some of the perceptual differences on this issue. The constituents' perceptions varied on whether the lack of sanctions hindered the effectiveness of peer review (#5, Table 4). Bankers and analysts were somewhat undecided on this issue while CPA and audit client firms disagreed slightly on the role of sanctions.
In general, the constituent groups were not optimistic regarding the investment community's understanding of the peer review process (#9, Table 4). Audit clients and bankers were undecided on this point while CPAs and financial analysts were pessimistic regarding the investment community's understanding. Again, the strong differences noted by large F tests persist when controlling for program familiarity which was significandy related to constituent perceptions on this issue.
Contrary to our hypothesis 3, there were no significant differences in the perceptions of the four constituent groups on the six remaining processes. All of the constituents agreed somewhat that the probability of audit failure is reduced for firms that undergo peer review (#4, Table 4) and that clients should insist that their CPA firm undergo peer review (#7, Table 4). This suggests that the constituents agree on the value of the peer review program. All four constituents were neutral regarding whether peer review is more of an educational versus a control process (#8, Table 4). Finally, the constituents disagreed with the use of legal proceedings filed as a measure of the program's effectiveness (#6, Table 4) and the constituents also disagreed that clients and the public have a good understanding of the role of the peer review program (#10 and #11, Table 4). The significant main effects of the constituent groups on five of the program variables when controlling for their familiarity with the peer review program indicates that other factors (e.g., needs, perspective) explain their different perceptions of peer review characteristics.
Conclusions
This study explored the effectiveness of the peer review program's goals and characteristics as perceived by four constituents groups (i.e., CPA firms, audit clients, bankers, and financial analysts) of the SEC Practice Section of the AICPA Division for CPA firms. The results of hypothesis Hi indicate that the peer review program is effective in terms of its two primary goals: "improving audit practices" and "self-regulation," but not in terms of four other program goals, partially supporting H1. Contrary to hypothesis H2, there were no significant differences among the constituent groups concerning the level of goal achievement in improving audit practices. In support of H3, there were significant perceptual differences among the constituents over characteristics such as quality control, fraud detection, use of sanctions, and investor knowledge. Nevertheless, the constituents agreed that peer review reduces the probability of audit failure and that CPAs should undergo peer review. The constituent agreement on self-regulation, improving audit practices, and reducing audit failure does indicate that the program control processes appear to be consistent with the Committee of Sponsoring Organizations of the Treadway Commission's (1994) recommendation that management monitor components of internal controls on a regular basis. However, the constituents also felt that most stakeholders do not understand peer review, indicating that peer review is not yet a fully effective control system because it does not sufficiently meet Walton's (1985) criteria of understandability and, therefore, acceptability by key constituents.
These results must be interpreted in light of the limitations of the study. This study uses subjective (versus objective) measures of effectiveness. However, multiple measures were used to obtain more accurate perceptions. Although a single subject per firm provided our data, their tenures and responsibilities indicate they should be quite knowledgeable about the issues. Our analyses also controlled for prior familiarity with peer review. Below we offer some implications for practice.
Implications
Managers can obtain some assurance that peer review appears to improve the audit practices and self-regulation of their auditors. It, therefore, provides a level of "control" over the quality of audit procedures employed. Thus, managers should require that their auditors undergo a regular peer review by the AICPA. In order to be better consumers of auditing services, managers need to educate themselves on the key goals and processes of the peer review program and request that each CPA firm bidding for their audit work provide the summary results of their most recent peer review.
CPAs should see that their firm undergoes regular peer review as this provides a measure of control over the adequacy of their audit practices. Such reviews are perceived to reduce the probability of audit failure, hence, providing some assurance of the level of quality of the audit services provided to their clients.
The accounting profession has work to do in improving certain goals and characteristics of the peer review program. The goals beyond self-regulation and the improvement of audit practice need to be clarified. There is also a need to clarify the educational versus the control function of the peer review program. Imposing specific sanctions for poor reviews might strengthen the program in the eyes of other constituents. The profession should also develop a clear rating/ grading system to summarize the outcomes (e.g., excellent to poor) of peer reviews that are understandable to a wide variety of constituents. This would offer greater assurance of the level of audit services provided by accounting firms. Finally, the profession needs to develop a public relations campaign to inform their constituencies of the key goals and processes of the program so these constituents can be better consumers of such information. As one of our survey respondents observed: "The peer review program needs to be promoted much more among non-accountants so they understand (1) that it exists, (2) what the purpose is, and (3) how effective it is." Similarly, Albrecht et al. observed, "... a major criterion in achieving audit effectiveness is a clear understanding of both the roles and benefits expected of ... auditing by all parties involved (1988: 4)."
Users of financial statements should familiarize themselves with the peer review program and determine if the audited statements they are using have been performed by a "peer reviewed" firm. This might give them greater confidence in the financial information. However, investors should be aware that, as currently designed, the peer review designation does not guarantee that the CPA firm is any better at detecting fraud. Peer review only provides greater assurance that appropriate practices were used to perform the audit.
Suggestions for Future Research
An area for future research suggested by this study would be a comparison of subjective versus objective measures of peer review effectiveness (e.g., type of opinion rendered, number of peer reviews) to determine the extent to which they overlap or complement each other. A comprehensive review of the peer review program is likely to include both types of measures. Other research might seek to expand the type of subjective assessments used for various constituents beyond the ones employed in this study. In addition, one could examine how various constituencies learn about the peer review program and how this information is disseminated among the relevant constituents. These and other studies might shed further light on the best means to assess the peer review program of the accounting profession and thereby lend greater confidence in the use of auditing as a means of managerial control.
(*.) We are indebted to the AICPA'S Division for CPA Firms and the Institute of Chartered Financial Analysts for providing the mailing addresses of the sample firms. We are thankful to M. Abdolmohammadi, R. Bricker, J. Fuglisler, D. Law, M. Pearson, R. Rudesal, W. Wallace, two reviewers, and the editor of this Journal for helpful comments and suggestions. We are also thankful to J. Evers of the Public Oversight Board for providing us data on the peer review program, to J. Baker, L. Chen, and S. Gornik for assistance in data collection, and to L. Poje for word processing assistance. The first author wishes to acknowledge the financial support of the Research Council, Kent State University.
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