Peer review effectiveness

Purpose - To assess peer review effectiveness by identifying potential loopholes that could lead to Type II errors, that is, loopholes that would allow reviewed firms to pass their peer review when they should not pass. Design/methodology/approach - A questionnaire was mailed to a random sample of 500 CPA firms in the USA. A total of 200 responses were received for a 40 percent response rate. Findings - This study found many firms allowed to self‐select will select their engagements least likely to contain violations, allowing firms to review engagements selected before submitting them to the reviewer is a problem, 1 percent of respondent firms neglected to fulfill relevant professional standards because the firms felt there was an insignificant chance of the engagements being selected, and 9 percent of respondent firms indicated they had duplicated work papers and may not have actually done required procedures. Research limitations/implications - If improprieties were occurring within respondent firms, those firms could fear some form of backlash from answering the survey truthfully, thus limiting the usefulness of responses received. Practical implications - Many loopholes discussed in this paper are not supported by results showing large percentages of firms violating peer review standards. However, many violations are so significant (e.g. auditor's intentionally violating auditing standards), that even few violations could harm the profession. Originality/value - Prior research has not been extensive in this area and generally surveyed auditors or users of financial statements to obtain their opinion of peer review. This study gathered data on specific problems contained within peer reviews.