How Objective is Peer Review? Evidence from Self-Regulation of the Accounting Profession

Abstract

I test whether peer reviews performed under the AICPA's Peer Review Program were objective indicators of audit quality. Using PCAOB inspection opinions of audit firms as a neutral, independent benchmark of audit quality, I find that firms that themselves review other firms consistently receive more favourable opinions from peer reviews than from PCAOB reviews. Firms with peer reviewers who are less likely to be independent (or more likely to be friendly), such as smaller, non-competing firms and firms likely to be `peer review specialists', also receive significantly more favourable opinions from peer review than from the PCAOB. Also, while positive peer reviews from relatively independent reviewers are negatively related to the likelihood of Accounting and Auditing Enforcement Releases, positive peer reviews from more friendly reviewers are not. These findings suggest that not all peer reviews were objective or rigorous, and that some firms were able to control peer review outcomes by choosing friendly reviewers. However, it is unclear whether audit committees impounded the independence of peer review opinions when using these opinions in decisions to hire or fire auditors.

Keywords: peer review, self-regulation, Sarbanes-Oxley Act, Public Company Accounting Oversight Board

JEL Classification: M49, G38