Peer review: Auditing the auditors;

              Peer Review: Auditing
AA r j^by J. Michael Cook
"In our opinion, the system of quality control that was in effect with respect to your
United States audit practice (including coordination of your audit services with those
performed outside the United States for your clients) during the year ended March 31,1977
provided reasonable assurance of conforming with generally accepted auditing standards."
We take substantial pride in this ex­cerpt
from the report of Ernst &
Ernst issued at the completion of the
toughest test of our quality controls, their
application and the people that make them
work - a comprehensive review by our
peers. Although the opinion confirms our
own knowledge and the results of the com­prehensive
internal practice-review pro­gram
that we have conducted for many
years, we believe that this "audit" provides
us, our clients and others who rely on our
opinions on financial statements with a
meaningful evaluation of the continuing
quality of our professional services. This ar­ticle
describes briefly the background and
recent developments of the peer-review
program of the American Institute of Cer­tified
Public Accountants (AICPA) and the
review of our audit practice conducted by
Ernst & Ernst.
Mike Cook, a partner in Executive Office, is
the assistant to the managing partner. Mike
was responsible for coordination of our peer
review by Ernst & Ernst and has participated
in the development of quality control and peer
review standards by the American Institute of
Certified Public Accountants. He was a
member of the peer review committee appointed
pursuant to the Securities and Exchange
Commission's Accounting Series Release
No. 173.
The AICPA
Peer Review Program
Various peer review programs have been
discussed in the AICPA for almost ten
years. The genesis of the current program
was the work of the Special Committee to
Study Quality Review for Multioffice Firms
which was appointed in January 1974. In
April 1974 the Voluntary Program for
Reviews of Quality Control Procedures of
Multioffice Firms was adopted by the
AICPA Board of Directors. However, in part
because of disagreements concerning publi­cation
of the results of such reviews, none
were conducted under this program.
In connection with the work of the
AICPA Committee on Self-Regulation,
there was extensive discussion of the peer
review program at the AICPA Council meet­ings
in May and October 1975 and at the
1975-76 Member Forums and Winter Re­gional
Council meetings. In view of the
interest in the peer review program ex­pressed
by the Securities and Exchange
Commission (SEC), firms with SEC prac­tices
believed that the voluntary program
should be implemented promptly; other
firms believed that more time should be de­voted
to studying the implications of the
program. Consequently, a discussion
document on a Voluntary Quality Control
Review Program for CPA Firms With SEC
Practices was issued for comment in Feb­ruary
1976. The program was approved by
the AICPA Council in May 1976. At the
same time, the Council instructed the
Committee on Self-Regulation to develop a
peer review program for firms without SEC
clients. The results of these efforts were in­corporated
into a combined Voluntary Qual­ity
Control Program for CPA Firms, which
was adopted in October 1976.
Two committees were appointed to im­plement
the program. The Special Com­mittee
on Proposed Standards for Quality
Control Policies and Procedures was formed
to provide guidance on the quality control
policies and procedures that would be ap­propriate
for participating firms and to de­velop
guidelines for conducting and report­ing
on reviews. The Quality Control Review
Committee, chaired by DH&S partner Hal
Robinson, was charged with developing ad­ministrative
procedures necessary to im­plement
and operate the program.
While these committees were working
diligently on their respective assignments,
a major change in the program took place in
1977. At the AICPA Council Meeting in Sep­tember,
the AICPA Division for CPA Firms
was established with an SEC Practice Sec­tion
and a Private Companies Practice Sec­tion.
One of the requirements for member­ship
in each Section is mandatory peer
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