THE IMAGERY AND REALITY OF PEER REVIEW IN THE U S INSIGHTS FROM INSTITUTIONAL THEORY

Description
Despite many challenges and highly visible failings, accountants in the U.S. continue to be a selfregulating
profession. In Loge part, this can be attributed to the emergence and acceptance of peer
review programs. This paper, using institutional theory as a template, addresses the discrepancies
between what this technology promises and what it delivers.

Accounting, Organfmtions and Society, Vol. 21, No. 2/3, pp. 243-267, 1996
copyright 0 1996 ELxvlcr wence Ltd
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THE IMAGERY AND REALJTY OF PEER REVIEW IN THE U.S.: INSIGHTS FROM
INSTITUTIONAL THEORY
TIMOTHY J. FOGARTY
Case Western Reserve University
Abstract
Despite many challenges and highly visible failings, accountants in the U.S. continue to be a self-
regulating profession. In Loge part, this can be attributed to the emergence and acceptance of peer
review programs. This paper, using institutional theory as a template, addresses the discrepancies
between what this technology promises and what it delivers. The discourse of peer review is reinter-
preted to e xamine its societal consequences and its implications for the future of professional claims.
Copyright 19% 0 Ekvier Science Ltd.
Accountants have enjoyed certain rewards
attributable to the belief that they provide valu-
able services unavailable from others. These
rewards have included a higher than average
income and the social esteem of the commu-
nity. The ideological position that accounting is
a profession has justified these rewards and, to
some extent, protected accountancy from
encroachments that would lead to their ero-
sion. Professional’ status has also legitimated
self-regulation as the primary means of protect-
ing the public from substandard performance.
However, over the last three decades the con-
vergence of several trends have eroded the
public’s belief in the work of accounting pro-
fession. Professional status alone is no longer
sufIicient to guarantee the customary levels of
deference and privilege.
In the U.S., the primary means used by the
accountancy profession to restore social confl-
dence in their core work has been peer review
programs. The inspection of audit work per-
formed by one practitoner by another practi-
tioner has been the main technology whereby
professional self-regulation occurs. This paper
applies institutional theory to understand peer
review and the wider dilemma of professional
self-regulation. Institutional theory Iirst labelled
by Meyer & Rowan (1973, has been applied to
a variety of accounting issues (Mezias, 1990;
Covaleski & Dirsmith, 1991; Fogarty et aZ.,
1991). By structuring a means for the explicit
separation of functional rationality and political
reality for social actors, this theoretical tem-
plate challenges the more conventional inter-
pretations offered by the accounting
profession.
PRACTITIONER REVIEW: A SHORT
HISTORY
Emergence
Oversight for the auditing activities of
accounting Iirms has been a recent phenom-
ena. Historically, the partner in charge of an
engagement has had the final and only review
of work done. With the growth and geographi-
cal dispersion of accounting Iirms, this resulted
in very decentralized review responsibilities.
During the 197Os, some large Iirms began to
institute second partner reviews, wherein a
member of the firm not involved in an audit
would review the work previously reviewed
by the engagement partner. Also in this era,
243
244 T. J. FOGARTY
following highly publicized audit failures and
corporate bankruptcies, courts imposed exter-
nal peer review on audit firms as a remedial
step towards attaining satisfactory audit perfor-
mance. However, these efforts were reluctant
and halfhearted and were insufficient to prevent
the conclusions drawn by the Congressional
inquiries of the late 1970s that the profession
was either unwilling or unable to regulate itself
(see Abraham, 1978; Belkaoui, 1985).
During this time, the American Institute of
Certified Public Accountants (AICPA) estab-
lished a voluntary program of peer review.
The program did not prove very popular and
never attracted a critical mass of practice units.
Firms resented the interference that this pro-
gram brought to bear on their practice, and
also found the costs of the program excessive
(Berton, 1987b). As a result, many firms left the
program. Its lack of success was best denoted
by its failure to forestall a second set of Con-
gressional inquiries ln the mid-1980s.
What would prove to be critical in the road
toward peer review occurred in 1977 with the
reorganization of the AICPA into practice sec-
tions. The creation of a division for CPA tirms
enabled the AICPA to directly control CPA
practice units, as distinguished from their con-
stituent human members. The further bifurca-
tion of the CPA division into the Securities and
Exchange Commission Practice Section
(SECPS), for auditors of public companies,
and the Private Companies Practice Section
(PCPS), constructed a partition that segregated
those auditors that operated in the light of
greater governmental scrutiny. Within the
SECPS, further degrees of practice monitoring
came with the operation of their clients in
organized exchanges. Although voluntary
peer review occurred with greater frequency
in this section, the program did not acquire
intensity until the 1985 proposal by the Secu-
rities and Exchange Commission (SEC) to estab-
lish a governmental regulatory organization to
monitor the auditing of public companies
(Berton, 1985). The prospects of peer review
for the profession continued to be divisive
within the accounting community, pitting lar-
ger Iirms that supported the program against
smaller firms that opposed it (Berton, 1986).
The vote to amend the bylaws of the SECPS
to require mandatory review failed in April
1987, a result hailed as a victory by small firms
(Berton, 1987a). However, the opposite result
occurred in January 1988 on a second vote of
the issue, following a broad-based lobbying
effort and the announcement that the SEC
would launch its own review program. Despite
solid SEC support, a substantial minority of
nearly a quarter of the members still opposed
it ln the final ballot (Berton, 1988). A related
victory occurred two years later as the AICPA
mandated peer review for all members doing
an audit for a publicly held company.’ In the
same time period, the push to make SECPS
membership mandatory for auditors of public
companies overcame its opposition (White et
al, 1988; Berton, 1988) and thus extended the
coverage of peer review.
Contours
The scope of the AICPA’s peer review pro-
gram followed the nine elements of quality
control that were stipulated in Statement of
Auditing Standards 25 (AICPA, 1980) and State-
ments of Quality Control Standards No. 1
(AICPA, 1979).* In essence, peer review was
designed as a compliance test to ensure that
iirms designed, implemented and maintained
quality review systems. This is accomplished
through the review of documentation and a
test of procedures that are followed. These
’ Members actually have a choice between two programs: peer review and quality review. McCabe @. 43, 1993) states
“The objectives and requirements of peer review and quality review programs are so similar that it is difficult to tell them
apart.” Accordingly, this paper considers both under the term “peer review”.
* These elements are: independence, assigning personnel to engagements, consultation, supervision, hiring, professional
development, advancement, acceptance and continuance of clients, inspection.
PEER REVIEW IN THE U.S. -IMAGERY AND REALITY 245
recommendations are meant to provide iirm
flexibility in the ways they achieve profes
sional standards of quality by being sensitive
to cost/benefit considerations. Review teams
forward recommendations to the peer review
committee. Firms are provided with an oppor-
tunity to respond and to correct deficiencies
before the review report becomes linal.
In order to accomplish its self-regulatory pur-
poses, peer review bodies have several powers.
Teams and the board possess broad examina-
tion abilities that can be used throughout the
process. Reviewers can also alter the timing of
the reviews, including the acceleration of the
normal revisitation schedule. In addition, broad
authority exists to fashion corrective action
that addresses deficiencies. For uncooperative
iirms, the peer review program has the power
to reprimand, impose iines, and suspend or
revoke practice section membership.
Oversight over the AICPA’s peer review pro-
gram was formalized through the creation of
the Public Oversight Board (POB). This entity,
autonomous from the AICPA and composed of
members with backgrounds not limited to
accounting, was charged with the responsibil-
ity of pursuing the public interest in matters
pertaining to the SECPS. This entails supervis-
ing the progress of the peer review program
through standard setting, report review and
the monitoring of promised compliance. Sev-
eral formal meetings are held at which the
POB hears the views of others and formulates
its own positions on audit quality. The POB has
access to all peer review documents and
reviewer qual.&ations, and can attend review
exit conferences in order to ensure conformity
to SECPS standards and further the cause of
self-regulation. Aided by a staff of eight, the
board samples across peer review cases with
varying intensity, as deemed necessary by the
circumstances. By virtue of its position and
independence, the POB has become a very
visible element of the peer review process.
El aborati ons
Movement toward mandatory peer review
has also led to parallel expansions of its
domain. Over time, the investigation arm,
charged with the task of exploring audit failure
situations, has grown more prominent. This
body, Iirst called the Special Investigations
Committee and then renamed the Quality Con-
trol Issues Committee (QCIC) has been able to
extract additional degrees of compliance from
Iirms suspected of an audit failure. This has
occurred through the leveraging of its favored
positions with the SEC and the POB. The POB
has also expanded peer review over time
through the progressive detailing of the stan-
dards for reviews and the extension of the pro-
cess into the iirms’ internal reviews and its
“tone at the top” (McCabe, 1993). The success
of peer review in its internalization by the pro-
fession can also be observed within the code of
ethics which has been interpreted to mandate
an unlimited scope for peer review as part of
doing whatever is necessary to maintain public
confidence (McCabe, 1993). Expansions into
the realm of non-public company audits have
been formally advocated (Public Oversight
Board, 1993). As peer review becomes more
a condition for auditor acceptability by federal
and state regulatory agencies, further expan-
sion, to the point where it is required for
license renewal, is possible.
THE INSTITUTIONALIZED ENVIRONMENT
OF ACCOUNTING PRACTICE
Institutional theory explores how organiza-
tional structure and action are molded by cul-
tural, political and social forces that surround
entities. This perspective posits that organiza-
tional behavior reflects the expectations that
accompany the totality of situations. As such,
the nominal purpose that action suggests pro-
vides an incomplete and sometimes unsatisfac-
tory explanation. A symbolic agenda that
creates initiatives and delimits otherwise
extendable solution strategies is a necessary
theoretical consideration.
Institutional theory seems particularly rele-
vant to the professions due to their paramount
interest in maintaining their often exclusive
246 T. J. FOGARTY
right to act in specified domains. Abbott (1988)
illustrates this well by showing that professions
legitimate themselves, not only by providing
their expertise, but also by attaching their
expertise to widely held values. Professions
uniquely vulnerable to public displeasure
must not only demonstrate that something
works, but also must show that it is right and
worthy of public admiration (Barzun, 1978).
How this applies to public accounting through
the use of peer review programs needs sys-
tematic examination.
Tbe need for l egi ti macy
Institutional theory operates in interorganiza-
tional fields that are characterized by the press-
ing
need for social legitimacy. These
environments dictate that organizational survi-
val is predicated upon some form of conformity
to prevailing values or standards for appropri-
ate behavior. New entities attempting to alter
established relationships usually must borrow
their legitimacy from both the wider culture
and from those organizations that are most sali-
ent and proximate (see Scott, 1991). Organiza-
tions that do not appreciate how their actions
are infused with values in terms of meeting the
expectations of important constituents may
lose support, and thus endanger their contin-
ued right to act. Legitimacy can therefore be
viewed as a resource that facilitates the acquisi-
tion of more tangible resources that directly
increase the chances for organizational survi-
val (Singh et al , 1991). Governmental units,
highly regulated organizations, and those in
the private sector, but which are highly depen-
dent upon public financing, provide the most
obvious examples of an institutionalized envir-
onment (see Kamens, 1977; Ritti & Silver,
1986).
The contents of an institutionalized environ-
ment evolve over time, and emanate from law,
custom and widespread belief. They vary from
generalized norms of rational behavior to
highly context specific rules about what is
acceptable. The important expectations for
the entity must be incorporated by the organi-
zation as part of its structure in order to insure
the continuity of confidence among external
groups. Although all organizations reside in a
socially constructed world, relative distinctions
can be made. Institutional environments flour-
ish where there is a lack of a measurable out-
come that summarizes organizational
performance. When outputs are highly qualita-
tive, or not subjectable to an agreed upon cal-
culus for combination, success depends heavily
upon the sustained belief of satisfactory opera-
tion among critical constituents.
Scott & Meyer (1991) suggest that profes
sional service organizations illustrate the com-
bination of strong institutional environments
and weak technical ones, despite their desire
to appear otherwise. To the extent that audit-
ing involves substantial components of perfor-
mance that cannot be reduced to technical
dimensions, an institutional environment can
be said to exist for the accounting profession.
In the absence of audit failure, audit perfor-
mance tends to defy measurement (Abraham,
1978). However, unlike governmental entities,
the contractual commitments to corporate cli-
ents, announced and expanded by an ideology
of customer service, prevent the total domi-
nance of the institutional environment.
Meyer & Rowan (1977) suggest that the pur-
suit of rationality exists in specific and power-
ful ways in organizations. This value has taken
on particular importance in so far that ration-
ality can be thought of as the sine qua non of
acceptability for organizations (Scott & Meyer,
1991). Rational action is not just a general value
but a guiding force in the development of rules
and the attachment of meaning to those rules.
What constitutes rationality is subject to
change in its primary expressions over time
(Pligstein, 1991). In recent years, adherence
to the tenets of “Total Quality Management”,
first popularized by Peters & Waterman (1982)
has been central in how rationality is con-
ceived. In this view, “quality” was abstracted
from its context and has become a free-
standing strategy or system that can be
injected into new areas of organizational con-
cern. The rational organization of the present
era is one that can document, benchmark and
PEER REVIEW IN THE U.S. -IMAGERY AND REALITY 247
convincingly claim the achievement of quality
(i.e., Peters, 1985; National Institute of Stan-
dards and Technology, 1991).
I somorphi c mechani sms
The mechanisms of institutionalism can be
categorized as coercive, mimetic, and norma-
tive (DiMaggio & Powell, 1983). Behind every
institutionalized expectation lies some threat of
enforcement likely to be revealed when an
appropriate structure fails to be reproduced
(Powell, 1985). The state, acting in its own
right or through the delegation of its powers,
becomes a central force in the coercion of
organizations through its control over
resources, its preemption of definitions of the
public interest, and its sanctification of certain
means-ends relationships (Singh et al ., 1991;
Jepperson & Meyer, 1991). Even apart from
the polity, a broad-based tendency toward cen-
tralization coerces organizational behavior.
Without coercion, organizational forms are
likely to consciously or unconsciously take on
attributes proven successful by similar entities.
Early success stories, as well as environmental
changes that make the adoption of certain imi-
tative actions less risky, furthers this type of
organizational parallelism (Fligstein, 1991).
Normative elements of the institutional envir-
onment pertain to the cognitive similarities
induced by similar training, career paths, and
conceptions of the disciplinary paradigms
(Levitt & Nass, 1989; Dobbin et al ., 1988;
Galashiewicz, 1985). The reverberation of
equilibrium disturbing events that mollify the
reproduction of past courses in a highly profes
sionalized institutional field are likely to be
more extreme (see Jepperson, 1991).
Throughout all three mechanisms, efforts
that result in similarity are conscious and sensi-
tive to existing constraints. In this way, the
institutionalized environment can be both sup
portive and antagonistic in its demands and
opportunities. The particular contiguration of
the environment should infhtence which
mechanisms are more decisive. For example,
professions sometimes rival the state as the
most important source of institutional inilu-
ence (DiMaggio & Powell, 1983).
Concepti ons of the pel d
Current theorizing of institutional environ-
ments has focused upon the existence of orga-
nizational fields or societal sectors. Rather than
limit the analysis to individual entities, this con-
ception stresses the bridge between the socie-
tal and organizational levels. Related entities
comprise societal sectors that can be under-
stood in terms of relative fragmentation and
centralization (see Scott & Meyer, 1991).
Therefore, how sectors become populated by
organizations becomes the key development
over time.
Within pecuniary relations, trade associa-
tions play a pivotal role as a source of influence
upon other organizations (Scott, 1991). These
bodies, existing outside of the usual competi-
tive relations, are able to overlay the benefits of
cooperation and stability on others (Galashie-
wicz, 1991). Oliver (1990) suggests that trade
associations are an instance where institutional
pressures become very explicit. Such organiza-
tions must continue to serve the needs of their
membership since the withdrawal of members
threatens organizational viability. This can be
assisted by the elevation of membership itself
into a symbol of rationality and superior qual-
ity. This self-interested advocacy, however,
requires deference to some element of the
broader public interest. The trade association
succeeds in negotiating advantage for members
only if it can convince non-members that it also
acts in their interest. In doing so, it institutes a
higher level of institutionalization, perhaps by
speeding the diffusion of influence from sec-
tors of the polity (DiMaggio, 1991).
A body charged with the regulation of pro-
fessionals must convince society that it is acting
rationally in the sense that substantive and
meaningful oversight of its members is con-
ducted. The primacy of the trade organization
reiterates that professions also can be under-
stood as action spaces for the expression of
coercive, mimetic and normative influence.
Jurisdictional claims that exist implicitly in
248 T. J. FOGARTY
professional work (Abbott, 1988) draw upon
general cultural forms to create a particulari-
zed combination of technological and institu-
tional conditions that delimit fit organizations
in such sectors.
Specific expectations
Ample evidence exists to establish that
accounting regulatory agendas in the U.S.
reflect a dynamic body of external expecta-
tions. Turner &Jensen (1987) illustrate the his-
torical cycles of governmental attention,
regulatory proposal and changes in patterns
of self-regulation. However, public expecta-
tions about “audit quality” and professional
competence has not led to a crystallization of
what behaviors these goals might entail. The
social sector concerned with the delivery of
auditing services has grown increasingly struc-
tured and populated. Perhaps initiated by user
groups, government involvement stimulated
the emergence of special bodies and directed
the attention of existing trade entities. The
identification of a “public interest” in audit
practice occurred rather suddenly but has
become an important force in the dissipation
of resistance to the erosion of traditional
degrees of organizational autonomy. Over
time, the institutionalized environment, inclu-
sive of a public interest component that is both
unique and a generic manifestation of the
demand for higher accountability, becomes
natural to participants so that the original dis
juncture of its imposition becomes forgotten or
obscured.
Two of the more important developments in
public accounting ln the US. over the last few
decades have been the growing concentration
of audit practice and the malpractice liability of
auditors. Together, they identify specific com-
ponents of the institutionalized environment
facing the accounting profession.
The stratification of accounting practice into
a small number of global entities at the core of
the profession and a large number of small
operations at the periphery has been well
documented (Carey, 1970; Previts & Merino,
1995). The portrait of auditing in Mautz and
Sharaf ‘s l%l monograph me Pbilosopby of
Auditing imagined a broad set of audit service
providers. This contrasts sharply with the cur-
rent domination of the market by six large firms
(see Wootton and Wolk, 1992). The trend
toward fewer public accounting firms has dis
placed the focus on individual practitioners
with one that highlights professional entities.
Legal liability for professional malpractice,
scarcely worthy of notice by Mautz and
Sharaf, pervades many aspects of modem prac-
tice (see Fogarty et al, 1991). A recent text
marketed for advanced auditing classes, neu-
trally entitled Contemporary Auditing: I ssues
and Cases (Knapp, 1993) provides a bell-
wether. By assembling materials around the
infamous audit failures, this text implicitly sug-
gests that avoiding legal losses is the preeml-
nent objective of auditing. A general trend
toward conservative auditing practice, even as
it conflicted with new economic realities and
technological capabilities, were thus encour-
aged at the fum level. More importantly, the
trend toward increased legal liability has exa-
cerbated the awareness of a shared fate among
practitioners.
Together these two developments contex-
tuallze the emergence of accounting firm peer
review. The response that came from a more
interconnected oligopolistic sector required
the reconfiguration of the sector and the altera-
tion of how institutional forces were experi-
enced.
SYMBOLIC CONFORMITY DISPLAYS BY
ACCOUNTING ORGANIZATIONS
Although organizations in institutionalized
environments are subjected to isomorphic for-
ces, they retain some discretion over their
actions as long as such actions display sym-
bolic conformity to the objective of those for-
ces (see Oliver, 1991). One possibility involves
the implementation of assessment criteria ori-
ginally exterior to the organization. This incor-
poration is usually reflected in the means the
organization adopts for the production of its
PEER REVIEW IN THE US-IMAGERY AND REALITY 249
approved sanctioned production. Those that
develop structures that fail to demonstrate
“social fitness” risk the loss of support and
trust of important external parties in the value
of their output. Professions, acting as organlza-
tions of similarly trained individuals, continu-
ously compete for hegemony over task
jurisdictions against other occupations (see
Abbott, 1988). Success, while subjected to
some technical achievement standards, is
highly dependent on a sense of social probity.
Organi zati onal structures
Structure should not be limited to the rela-
tionships specified by organizational charts.
Structure embraces the entire social contigura-
tion of an activity’s domain and is therefore
heavily cognitive in nature (Meyer, 1978).
Although usually mapped in means-ends
terms, structure involves the dynamic ele-
ments of consent, trust, and the language
through which descriptive accounts are
given. Moreover, the means organizations
choose also iteratively shape their environ-
ments (Meyer & Rowan, 1977). In the Iinal
assessment, organizations must signal, through
their programs and priorities, that they are
doing all that can be done, and that this is
being done in the ways that society has reason
to belleve will work. This implies that the con-
trol and coordination necessary to achieve
goals are not purely technical, but instead
reflect the internalization of shared typlflca-
tlons. In this operation, structures tend to
embody programmlc action and identify pat-
tern departure ln a way that establishes social
position (Bourdleu, 1977) and locate actors in a
world made meaningful through its linkages to
the ideologies of the society (Scott, 1991).
Spectfi c tmpl ementattons
The public accounting profession has appar-
ently adopted structures that are responsive to
the public interest in audit work. The main
structure achieved in the movement toward
peer review has been the linkage between
trade association membership and acquies-
cence to the technology of peer review. In a
domain of inarticulatable quality differentials
and essential client trust, altering the social
meaning of this membership to that which
communicates that the external review pro-
cess has been conducted, is important. Exter-
nal parties are asked to accept that, through
trade associations, a more systematic and
rational approach to the delivery of a higher
level of auditing performance will result, than
what would be delivered by individual fums.
This can be partly attributed to the trade asso-
ciation structures that announce that they work
in the name of the interests of these external
parties. The mere existence of the program as a
systematic method, brought about by a mature
partnership of accounting entities, speaks for
itself in a way that similar claims by a profit-
seeking single flrm would not. These claims
are deepened and furthered by others that war-
rant that the structures are kept current
through a dynamic system of checks and bal-
ances (e.g., AICPA, 1993) that also would not
exist in a more monolithic organizational con-
text.
The structures of peer review accomplish
much beyond that which is formally acknowl-
edged. By embedding values into the actions
the structures make possible, the profession
seeks the coherence and meaning that precon-
dition heightened legitimacy. By channelllng
the pressures exerted by others and by lncreas-
ing the flow of information throughout, the
profession achieves a taken-for-grantedness
for a collective definition of the self-regulation
solution to the social problems that called it
into existence.
I nsufJ ctent structures
The structures of peer review detailed ln the
first section are not completely responsive to
the institutional environment. For example,
the shrouding of peer review in secrecy tends
to diminish the genuineness of the selflessness
of the profession’s motives. Contrasted to the
“due process” and “sunshine” of other quasi-
delegations of public responsibilities in the
accounting arena (see Miller & Redding, 1988)
the peer review program is not consistent with
250 T. J. FOGARTY
typical expectations for procedure (see J. Tho-
mas, 1983). Characteristically, external parties
see this discrepancy more clearly than do
accountants (Kreiser, 1977). Although the
structures of peer review seem to challenge
prior organizational structures, intervention
power invested in new roles was actually
highly constrained. The freedom of accounting
firms to resist peer review may be inconsistent
with the public’s interest in the matter. While
complex and overlapping regulatory jurisdic-
tions may create the appearance of a compre-
hensive mechanism of oversight and
enforcement, it may also disguise inefficiency
and the inability to reach definitional agree-
ment (Olson, 19130; Chatov, 1985). Contradic-
tions in the auditing production process itself
may hinder the conditions for the emergence
of an organizational form that provides the
business and investing communities with the
assurance that they seek.
Although the structures adopted by the
accounting profession may not be optimal,
they represent a credible response to society.
Peer review is new, formulated around the
public interest and located outside of the enti-
ties that supply the demand for these services.
DECOUPLING CORE PROCESSES FROM
SYMBOLIC STRUCTURES
The essence of institutional theory lies in the
demonstration that what an organization actu-
ally accomplishes and what its structures sug-
gest it should accomplish, are often quite
distinct. The latter, often referred to as core
processes, are said to be loosely coupled from
the former. Structures, indirectly created by
and maintained for, external constituents,
might not signIIicantly contribute to organiza-
tional output. The work that is done usually
operates according to its own technological
or bureaucratic logic that, for the most part,
remains Invisible to outsiders.
Although core processes cannot broadly con-
travene or compromise symbolic structures,
they may change the nature of the organiza-
tion’s output through the adoption of produc-
tion criteria other than those that are socially
approved. As long as output remains difficult to
calibrate, insiders are free to adopt novel and
self-serving problematizations of their domain.
Organizational convenience often Intervenes
between the problems posed externally and
the “solutions” proffered. Often, loose cou-
pling enables organizations to survive by claim-
ing victory in the face of impossible tasks and
turbulent environments. If tight coupling
existed, the organization would be more
affected by the uncertainty that exists in the
promises that are extended to constituents
(Meyer & Rowan, 1977). However, the specitic
pattern of loose coupling, rather than its very
existence, is what matters for organizational
results (see Weick, 1976; Orton & Weick,
1990).
Res i psa l oqui tur?
Although the entire prospect of professional
membership and continuance has institutional
aspects (Fogarty, 1994) the peer review pro-
cess suggests a new apogee of ceremonial
logic. The mere fact that proactive policing of
professional work occurs through peer review
suggests enough of a externally consumable
structure for some. For example, statements
like “We have demonstrated the principle of
strength in numbers, through that strength
we have accomplished meaningful things
(AICPA, 1993),” demand credit for the mere
organization of these programs. Exactly what
has been accomplished is obscured by the
multi-tier, multi-organizational approach that
was outlined in the first section.
Another theme that frames the official under-
standing of peer review is that it has not been
imposed upon the profession. Instead, one is
led to believe that these structures sponta-
neously emerged from the profession. That
accounting fums want to improve quality and
are helped to discover quality by peer review
has become axiomatic (e.g., Larson, 1983). For
these purposes, the extraordinary receptive-
ness of the larger firms, sometimes evidenced
by their acceleration of review schedules,
PEER REVIEW IN THE U.S. -IMAGERY AND REALITY 251
suggests the lack of reasonable opposition (see
AICPA, 1990). If these entities, with much
invested in their own production technolo-
gies, can view criticism as constructive, who
could resist the appeal of peer review? A very
low rate of unfavorable reaction among practi-
tioners (McCabe & Brennan, 1992) is trans
m&ted into evidence of effectiveness. Even
those whose practices come in for particular
scrutiny, acquiesce readily and routinely
(Wallace & Cravens, 1994). In fact, some have
suggested that the value of peer review resides
in its creation of self-awareness (Bremser &
GramIlng, 1992). Apparently, the peer review
structures have been successful in establishing
categorizing principles that provide parties
with an acceptable interpretation of events.
Although they have involved a certain deploy-
ment of force across the entities that provide
accounting services, peer review structures
have been successful in establishing a stylized
version of their genesis.
Audi t qual i ty
Al though peer review programs address qual-
ity in auditing, the degree to which they actu-
ally produce quality is problematic. However, a
merger of interests between regulators and
regulated over the preferred meaning of quality
may have muted the contentiousness of varia-
tions. Peer review privileges a future-looking,
systems-oriented version of quality. The pro-
cess of the program suggests that it can be
detected, measured and compared in a highly
structured and precisely defined way. That the
process itself is under constant revision and
aimed toward continuous improvement is
offered as evidence of its ongoing relevance
(see AICPA, 1993). These modifications usually
amount to pressures for even higher degrees of
uniformity in the application of standards (e.g.,
Schmutte, 1993; Olson, 1980).
The uniqueness of these views on quality is
most visible in the reactions they inspire among
regulated firms. The development of a specia-
lized peer review consultant who can be hired
to orient the firm toward the “quality” that will
be examined, suggests that documentation can
increase the level of quality in short order.
Campbell (1978) argues for the importance of
a free-standing quality document that embraces
the language of peer review and mimics the
flowcharting logic of the audit itself. This sug-
gests that, in the hands of peer review, quality is
reified. The lack of substance in the sanctioned
version of quality also can be found in the infre-
quency with which reviewed firms express sur-
prise in reviewer fmdings (Wallace & Cravens,
1994) and the small quality Improvement pay-
offs found by smaller fums (Bcrton, 1986).
The future orientation of the peer review
version of audit quality makes it unnecessary
for it to be concerned with the difficult issues
about quality that reside in the present. A pre-
sent orientation on quality would require more
detection of Ilaws in audit work and would
make visible miscreants more essential to cred-
ibility. In the future, all work is theoretically
perfectible. Therefore, peer review need only
concern itself with the attitude of the reviewed
toward their quality education. Academic
inquires have cooperated in the furtherance
of these selected meanings by asking indirect
questions such as the moral hazard in the selec-
tion process and the timing of review releases
(e.g., Wallace, 1991). The larger question, that
has not been raised, pertains to the entire pro-
spect of a knowable quality in a turbulent prac-
tice environment.
Peer review has established a discourse of
“quality review” through the use of the nine
basic elements that organize the review pro-
cess. By colonizing a term more typically asso-
ciated with the manufacturing process, the
profession implicitly asserts that the dissimila-
rities between the production of an audit and a
widget are unimportant. While the platitudes
that serve as quality control standards for these
purposes are difficult to dispute, the dispropor-
tionate attention focused on them has contrib-
uted to their reification.
Program resul ts
The program of peer review in the U.S. has
resulted in the documentation of a very high
“quality” auditing service. Many estimates of
252 T. J. FOGAR’l3’
the percentage of unqualified peer reports have
been made over varying time frames. The usual
estimation approximates 98% unqualified afflr-
mation of quality control (see AICPA, 1990;
Alam et al ., 1991; Wallace, 1991; Hudson,
1982; Public Opinion Board, 1984). When
uncertainty exceptions are then discounted,
the rate of substandard auditing performance
is still lower according to official statistics (see
Wallace 1991; Public Opinion Board, 1984).
Accordingly, a high percentage of all correspon-
dence from the regulatory bodies is boiler plate.
In instances where departures from the routine
are present, they detail very few problem areas.
Wallace & Cravens (1994) report that the modal
number of errors, where errors exist, is one.
Success rates this high should question the
need for peer review as a use of the profes-
sion’s scarce resources. Other evidence sug-
gests that the initially low level of quality
problems is still further reduced by the time a
second round of peer review measurement
occurs (McConnell & Taylor, 1993; Evers &
Pearson, 1989). This information, however,
has not been seen as a suggestion that the struc-
tures were either initially off the quality mark or
easily rigidined into canned solutions. Contrari-
wise, the evidence of a high-level of quality (as
it has come to be known) has been strength-
ened by the initlation of research that showed
the results were not affected by selection
effects (Wallace, 1991), misclassification
(Wallace, 1991) or other types of bias
(McCabe, 1993), and therefore worthy of belief.
The proclamations of quality from the peer
review program have been scarcely affected by
the minute coverage the program has had
across the population of all auditing engage-
ments. This doubt is not possible by virtue of
conceiving of quality as a system rather than an
output. By reviewing systems, we can assume
a linkage to a broad set of outcomes, without a
systematic verification.
The success rates discovered by peer review
furthers the project of peer review by reprodu-
cing the standard expectation that no crisis of
quality exists. This finding continues the viabi-
lity of the myth that all practitioners possess
equal competence and that externally imposed
regulation has nothing (or very little) to achieve.
But perhaps more importantly, the subjection of
practice to the empirical reductionism of peer
review legitimates and furthers the symbolic
commitment to further information gathering
ln the name of the interest of the profession.
Sancti ons
Peer review is purposefully non-punitive.
The focus on positive improvement and educa-
tional direction is said to be jeopardized by
structures whose aim was to penalize substan-
dard professional practice. This is justified by a
rather unsubstantiated belief that punitive
actions are very likely to be brought by exter-
nal groups (see Larson, 1983), and therefore
are unnecessary to be duplicated within the
profession. Discipline even as a theoretical pos-
sibility, was not part of the initial program.
Even after its post facto incorporation, it has
not materialized in actual operation (Berton,
1986; AICPA, 1990). By creating a separate
body for the imposition of the occasional
“corrective action”, the main bodies that pro-
vide peer review further distance themselves
from sanctions. This divide allows the dlsci-
pllne process to be mostly beyond that which
must be officially recognized and wlthln the
reach of negotiation by the patties involved.
The typical sanction that extends beyond
mere compliance (and suggests the “teeth” of
the program) has been partner reassignment.
This, however, is reminiscent of the wrlst-slap-
ping typical ln many white-collar crime areas,
since it imposes little consequence on the
accounting iirm. Nonetheless, that a few reas
signments have occurred has been heralded
(e.g. Mautz, 1984). Whereas the worst case
sanction of possible AICPA expulsion has not
been used, if used it would still fall short of the
same consequence in other arenas.3 Based on
’ Stock brokers and dealers expelled by the New York Stock Exchange lose access to trading. Accountants expelled by the
AICPA can still offer the same services as before.
PEER REVIEW IN THE U.S. -IMAGERY AND REALITY 253
the rhetoric of peer review, expulsion seems
much more likely for the failure to cooperate
with peer review than for the substantive
issues that peer review was established to
redress.
Although the accounting profession cannot
be singled out for its reluctance to punish
themselves (see Hogan, 1983), the lack of con-
sequential sanctions reduces the seriousness of
self-regulation (Olson, 1980). Some have
argued that an “appropriate” corrective
response is itself a sufficient sanction (see
Mautz, 1984). This however, is inconsistent
with the general cost/benefit rational underly-
ing regulation. Larger potential losses, includ-
ing punitive possibilities, are typically
associated with the creation of the motivation
for more consequential behavioral change.
The lack of sanctions in peer review is pos-
sible only through the avoidance of the audit
failure issue. The official position has been that
the program cannot deal with audit failures due
to the difficulty involved, the expense of such
work, and the potential redundancy created
(Public Oversight Board, 1993). As a result,
even the QCIC is not empowered to perform
fact linding when an audit failure is alleged.
Although the existence of audit failures trig-
gered the need for proper review, the analyti-
cal separation is nearly total, with a near
complete lack of discipline for the lirms and
individuals involved (Berton, 1986).
Peer reviews also lack linkage to the factors
that trigger audit failures. No indication exists
that the literature for empirical similarities and
antecedents (i.e., Palmrose, 1987; Kaplan,
1987; St. Pierre & Anderson, 1982) has been
studied. The prospect that an unqualified peer
review and an audit failure can simultaneously
occur parallels the continued suggestion that
unqualifled audit opinions and bankruptcy are
not mutually exclusive. This decoupling may
be purposeful as an attempt to avoid the dis-
crediting of peer review that would occur in
the event that a recently reviewed Iirm experi-
enced such a catastrophe (Bremser, 1976). In
fact, most audit failures do involve peer
reviewed auditors, and did so even before
peer review became mandatory (B. Thomas,
1983).
The apparent incongruity between the
observation that audit failures initiated the
peer review process, but cannot be remedied
by it, has caused some to suggest that peer
review is “preventive” in ambition (Mautz,
1983). Conveniently, this approach relieves
the necessity of the demonstration that there
is a link to actual audit failures, and replaces it
with a etherial nexus to the audit failures that
could have happened. To further suggest that
audit failure is a “people problem” that cannot
be addressed by a program aimed at quality
systems (Haley, 1987) also gainsays the fact
that systems are comprised of and for people.
The paper chase
The primary evidence used in peer review is
the work papers from selected engagements
(Schmutte, 1993). In the off-site review, this
is limited to those submitted by the reviewee.
Even in its broadest sense of the on-site review,
the peer review process is predicated on the
rather dubious presumption that the quality of
the audit can be understood by an examination
of the audit’s work papers. The audit is a living,
transactional process that can only be vaguely
transferred to static tangible forms. Peer
reviews can assess the adequacy of these forms
but, given their temporal and spatial removal
from the audit itself, their relevance is proble-
matic. Since reviewers are forced to assume
that all facts documented in the work papers
are correct, they can only really verify the gen-
eral organization and condition of the work
papers (Loscalzo, 1979). For example, the audi-
tors decision to accept a client’s explanation is
highly judgmental but tends to be transferred
to the work papers as a documented fact. The
cost/benefit constraints that limit the work
paper’s initial production are more pro-
nounced in their review. Compared with the
original work, any type of review is capable
of producing only an inferior type of assurance
(see Mautz & Matusiah, 1988) that tends to be
more unrelated to audit risk factors than its
predecessor (Luchlfing et al., 1992). Thus
254 T. J. FOGARTY
understood, peer review necessarily loses
touch with the audit.
Peer review requires not just quality in prac-
tices, but also the existence of quality control
documentation and an explicit plan for the
achievement and maintenance of quality con-
trol. This has produced a market for check-lists,
questio nnaires, flow charts and for those
skilled in their deployment (e.g., R&l, 1989;
Campbell, 1978). Whether these artifacts alter
audit practice is another matter. Majorities of
surveyed lirms indicated that many key prac-
tices would not be changed by quality review
(Austin & Langston, 1981). Since the market for
audits does not seem capable of rewarding dif-
ferentiated quality levels (Francis et al , 1990),
firms have an economic incentive to have less
actual quality than they can convincingly sell.
This mitigates against efforts to understand and
improve quality, except as it is necessary to
signal quality through the peer review pro
cess. Therefore, reasons exist to suggest that
the resulting changes may be cosmetic in nat-
ure. Furthermore, since quality cannot be
understood except in the context of firm size,
the nature of clientele needs and office auton-
omy (Public Oversight Board, 1993) it loses
the magic it seems to possess in more con-
text-free applications. The conclusion that qual-
ity exists or that quality can be increased
through slight policy alterations imposes some-
what arbitrary models without sufficient ratio-
nales.
Peer review has exacerbated concern over
documentation. The failure to document the
existence of quality control elements is the
most consistent finding from this regulatory
program (Wallace 81 Wallace, 1990). The belief
that written statements pertaining to indepen-
dence and competence will make the auditor
more independent or more competent
stretches credibility, except insofar as it
strengthens the ideological adherence of the
profession to these beliefs. Creating additional
loyalty to a formal guide to practice manage-
ment also provides firms with more consulting
products to sell to clients. Simultaneously,
good quality documentation is seen as a means
of decreasing the expense of peer review itself
(McCabe, 1993).
Peer review has induced new opportunities
to expand the audit work papers (Bremser,
1983; Evers 81 Pearson, 1989). The identifica-
tion of areas where documentation is slight
has been seen as a necessary elaboration of
audit technology. However, the case for such
a mechanistic audit continues to be contested
(see Dirsmith & McAJlister, 1982a; Sullivan,
1984). The subjectivity that escapes quantifica-
tion, put on the defensive by peer review, is
not necessarily improved by an inconsistent
and imperfect objectification. More evidence
and documents may in fact lead to worse deci-
sions (Feldman & March, 1981). Accounting
academics, not to be left out, have produced
a literature aimed at improving the quality
document trail (e.g., Campbell, 1978). This
focus on explicitness has all the appearances
of rigor. However, whether documentation
contributes to quality or merely entails dead
weight loses of productivity remains an unex-
plored question. Maher (1981) shows how
firms can be pushed from what they consider
optimal control points by regulatory demands
for more proof.
Rhetori c and the audi t technol ogy
The massive investment by accounting prac-
titioners in peer review can only be justified by
the improvement in audit quality. Official esti-
mations have attempted to put this beyond dis-
pute,
calling the contribution “profound”
(Public Oversight Board, 1993) and “no ques-
tion” (Mautz, 1983). However, no factual basis
that this objective has been, or is about to be,
attained. Clearly, quality is more often dis-
cussed and there has been exchanges of ideas
between review teams and firms reviewed.
However, the crucial but unrealistic assump-
tion that input measures are not diferent from
output measures reveals the essence of the
continuing tension. That practitioners now
more diligently attend to quality control pro-
vides little in the way of actual proof of audit
improvement. Attestations about quality actu-
ally may reduce substantive quality if tacit
PEER REVIEW IN THE U.S. -IMAGERY AND REALITY 255
achievement masks underlying variation on
more important dimensions. The effort neces-
sary to detail a conformity to a rigid standard
may Interfere with the flexible, collaborative
diagnosis and solution of audit problems
(Dirsmith & McAllister, 1982b). Meeting stan-
dards detracts from random tests of the in-
action contribution of these standards to
exemplars of practice as a focus of peer
review. The feeling of professionalism
imparted by peer review (see Hanson, 1976)
does not compensate for poor linkage with the
shortfalls of practice, even as the latter are
imperfectly mirrored in governmental enforce-
ment (i.e., Campbell & Parker, 1992).
Peer review has contributed to the avoid-
ance of many central dilemmas about audit-
ing. Questions about the reliability of audit
evidence and the limitations of audit judgment
are apparently beyond the scope of quality con-
trol. Peer review has not addressed manage-
ment fraud and auditor insensitivity to its
indications. Peer review evades the questions
about what is audited and how assurance is
obtained, in favor of a belief that the currently
employed methods, if religiously followed, are
sufficient. Important and fundamental matters
such as materiality, decision aggregation, resol-
ving client disagreements and tailoring the
audit to the context have been untouched by
peer review. The “people problem” is circum-
navigated with the close inspection of staff hir-
ing,
training attendance, and promotion
practices, but with no concern for the situa-
tional pressures that attend accounting careers
(see Ponemon, 1992; McNair, 1991) or the
proper extent of authority and autonomy in
the field. The harsh business realities of the
audit become transmuted into matters of client
acceptance documentation. Budget-induced
actions such as premature signoffs and the
unsubstantiated acceptance of client rationales
have not been put Into issue. The many sys-
temic problems with the audit (see Humphrey
et al ., 1992; Mills & Bettner, 1992) are
addressed as the inevitable mistakes of fragile
humans (see Mautz, 1983) that themselves can
be overcome with sufficient educational cre-
dentials and continuing education hours.
While it might be argued that peer review can-
not solve all problems, such modesty resides
uncomfortably with the overblown rhetoric
of quality that tends to create an unqualified
sense of well-being.
Professi onal agendas
The decoupling of peer review structures
and its operating core can also be understood
as tension between the macro and micro levels
of professional relations with society. Peer
review has roots in the societal level decline
of unqualified trust in the accounting profes-
sion and the audit. The construction of a uni-
fied front, bolstered by specific inter-fum
procedures and fortified by a recognizable dis-
course, allows the emergence of a collective
worldview rebutting the erosion of the profes-
sion’s monopoly and its litigation situation.
These macro-level achievements can only be
approached by appearing to constrain freedom
at the microlevel of individual auditor and
employing Iirm. In this light, that the technol-
ogy of peer review fails to deliver its substan-
tive practice improvements becomes
understandable. The superstructure it imposed
upon firm ability to do what has to be done
should be seen as a necessary sacrifice for
macro-level benefits, rather than that which
was primarily intended for the problems of
the microlevel.
The operation of peer review at the macro-
level occurs primarily through the organiza-
tions developed to operate and monitor it.
Interposed between society and the constitu-
ent elements of the accounting profession,
these entities buffer coercive institutional influ-
ence and attempt to reconceptualize account-
ing for society. This takes the generalized form
of defining the public interest in matters such
as litigation against auditors, independence and
recruitment (i.e., Public Oversight Board, 1993,
1992; AICPA, 1990, 1993). For example, exter-
nal constituents are to believe that in order to
have a viable accounting profession, litigation
must be abated. This, however, becomes part
of the exchange for the discipline that peer
256 T. J. FOGARTY
review has effected. The forum thus created
also is used to demonstrate demands for
greater professional accountability in areas
such as standard setting, internal firm review
practices and adherence to practice section
rules (Public Oversight Board, 1992, 1993;
AICPA, 1993). A ceremonial production func-
tion of membership gains, coverage increases
and case closings is routinely recited in demon-
stration that the problem of individual devia-
tion is under control and declining over time,
through the efforts of an administration that is
effective and fair-minded (see Public Oversight
Board, 1992, 1993; AICPA, 1990). Peer review
is hence commodilied in a manner that sup
presses its many ambiguities in operation.
Areas of insuf$cient closure
Independence is a dominant structure of the
accounting profession that creates societal
assurance in audit work (Mautz & Sharaf,
1961). Despite the salience of this vis-ci-vki its
clientele, no real independence is achieved by
the peer review entities from the accounting
profession. The lessons learned about the
non-viability of part-time unprotected bodies
in U.S. standard setting (Miller & Redding,
1988) have not diffused to the peer review
effort. A more sign&ant violation of indepen-
dence occurs at the lowest level of the process.
Since peer reviewers are not centrally assigned,
but instead are individually negotiated, nothing
prevents the continuation of a reviewer from a
preengagement appointment as a peer review
consultant. This very likely shades what ulti-
mately becomes an official program record
and partially explains the high unqualified
review rate (Wallace, 1991; Oliverio & New-
man, 1993).
The openness of quasi-official process in U.S.
accounting regulation is a key component of its
acceptability (Van Riper, 1987). Peer review
files however, remains secret to all except the
participants. The fear of an open process, in
which firm reputation could be impaired, was
evident throughout the emergence of the pro-
gram. Disregarding any public right to know,
the secret process approved by the profession
has been critiqued for lacking true deterrence
value (Berton, 1986) and for denying consumer
information to clients (McCabe, 1993). Secrecy
renders both the correctness of the peer
review conclusion and the rigor of the process
unreviewable. The self-insight made possible
through academic study is also prevented, as
researchers substitute examination of the small
exposed tips of the process (e.g., Wallace &
Cravens, 1994). To summarize, secrecy facili-
tates the loose coupling of macro and micro
operations.
At the micro plane, peer review is a sociali-
zation Initiative by the accounting profession.
In recent years, accounting firms have achieved
dominance over the accounting profession as a
source of influence for staff socialization
(Fogarty, 1992). To the extent that peer review
preempts firm autonomy, the profession
attempts to reassert its normative influence.
Although success has been limited to a rheto-
rical level, peer review heightens the salience
of work within the profession’s core monopoly
area. However, at the same time that quality
systems are being perfected, responsibility for
errors are being passed on to some individuals,
who apparently were socialization failures.
Therefore, the profession takes no responsibil-
ity for the development of some people but all
the credit for others.
Summary
Significant decoupling between peer review
as espoused and peer review as achieved
exists. That which is achieved by peer review
is important to the accounting profession but it
is not well described by official accounts.
THE LOGIC OF CONFIDENCE
The pursuit of trust is particularly important
to the economic exchanges that involve audit-
ing lirms. Since auditing has value only as an
enhancer of trust in business enterprises, it
itself must be beyond reproach. Increasingly,
formal means of trust production are replacing
traditional ones (Zucker, 1986; Neu, 1991).
PEER REVIEW IN THE U.S.--IMAGERY AND REALITY 257
Personal integrity and morality now must be
vouched by demonstrations that the central
technological myths work.
Institutional theory predicts that organlza-
tions that have adopted the correct structures
will avoid any detailed inspection by external
parties. Signalling symbolic conform&y to the
values and expectations of critical constituents
is rewarded with the bestowal of the “logic of
confidence” since organizational insiders are
presumed to be most qualified to make impor-
tant decisions. The inherent uncertainty sur-
rounding the operation of the organization
can thus be absorbed, as long as its leaders
consistently demonstrate good faith. External
inspection is not abandoned, but it is ceremo
niallzed in ways that maintain existing catego-
rid relationships and reproduce the
appropriateness of the prior delegation of sub
stantive responsibility.
Erosion and restoration
Environmental conditions surrounding the
audit have made the bestowal of this con&
dence problematic. Rapid firm growth and
increased oligopollstic competition have
increased the managerial responsibilities of
lower level staff in audit firms (Evers & Pear-
son, 1989). Increased transactional complexity
and heightened corporate awareness of
accounting flexibility have made auditing
more challenging. Compounded by increased
budget pressures for the production of assur-
ance (McNair, 1987) many reasons exist to
question audit quality. Although parties con-
tinue to have a joint interest in masking con-
flict and normalizing relations through the
denial of problems, this result is increasingly
difficult to bring about.
Regulatory initiatives by the U.S. government
concerning the accounting profession have
questioned the value of the audit. Direct regu-
lation has not resulted for a variety of reasons
including the belief that accountants have put
their own “house” in order (see Moran & Pre-
vits, 1984). Despite the role of public accoun-
tants in the integrity and accuracy of financial
reports to the capital markets, Congress and
the SEC have left accountants in charge of
admission, good standing, and professional
work standards decisions. Direct sanctioning
by the federal government, while legally possi-
ble when publicly traded companies are
involved, remains quite rare (see Campbell &
Parker, 1992). Congressional inquiry, which
has occurred about once every decade, seems
to be the particular province of only one or
two elected officials (see Turner & Jensen,
1987). These circumstances suggest the conti-
nuing operation of the logic of confidence over
the highly dynamic accounting profession
through the essential maintenance of well
known spheres of responsibilities.
The necessary forms
Society rewards organizations ln institutiona-
lized environments with freedom from rigor-
ous and substantive investigation. Despite the
operation by these entities in matters pertain-
ing to the public interest, deference to the cri-
teria and conclusions generated within these
organizations is the result of satisfactory insti-
tutionalized performance. The logic of confi-
dence is extended to organizations that have
appeared to embrace the external expecta-
tions of constituents, not through the promises
of their leaders but through the actions sug-
gested by their forms.
Converting the problem that gave rise to
peer review into the problem that peer review
has addressed lies at the heart of the logic of
confidence. How a problem is defined privi-
leges certain assessment criteria over others
and tends to obscure scrutiny on other dimen-
sions (Brim & Karabel, 1989). Continuously,
peer review entities have focused attention
on their quality control standards, their enact-
ment of these standards, and the positive gui-
dance they provide to firms in the achievement
of these standards. When all centers around
these standards, success can be claimed and
failures denied in an asymmetrical manner.
Peer review can claim victory over careless
ness and also deny its existence (Berton,
1986) without inconsistency from the perspec-
tive of these standards. The quality standards as
258 T. J. FOGARTY
a “system” also enable claims that a sense of
quality in audit work has been restored without
detailing how it was lost (see McCabe, 1993,
p. 17). The lack of precision in the meaning of
quality allows the criteria of success to be
further obscured by evidence of regulator activ-
ity, regulatee satisfaction and profession-wide
education (see Public Oversight Board, 1993;
Bremser & Gramling, 1992). Losing touch
with original purposes, the new conclusion
becomes that peer review program is function-
ing as i ntended.
Image i s everythi ng
Mautz (1983) asserts that the proposition
that peer review has improved audit quality
can be accepted without question, primarily
due to the extensive and serious work contrib
uted by a group of proud and sensitive profes
sionals. Consistently, Kaiser
(1989)
commenting upon the excellence achieved
through peer review, notes that only CPAs
are able to judge the quality that has been
enhanced in this effort. These assertions,
together with many others, contribute no evi-
dence that audit quality has increased. They do,
however, make more palatable the faith
needed by others to allow such degrees of dis-
cretion. They also lead to the conclusion that a
serious investigation of the issue by external
parties would only belabor the obvious conclu-
sion that all, if not currently well, will soon be.
Deflecting attention to that which has occurred
in the name of quality, the rhetoric deters alter-
native conceptualization of what should be
done.
A pivotal element of this logic of confidence
is the self-interest of firm reputation. Daley
(1987) suggests that firms have a need for a
reputation as a high quality service provider
in order to attract clients and to recruit and
retain the “best and brightest” personnel.
This suggests an incentive to forego short-run
advantages in the furtherance of long-run brand
capital. Accordingly, Bricker et al . (1989) argue
that firm reputation is interdependent with pro-
fession-wide quality reputation, primarily
through membership in the AICPA. This may
be true for smaller firms, but for the larger
firms that dominate the audit market, a higher
reputation is also needed. Several writers,
embracing these presumptions about reputa-
tion, suggest that peer review results can be
used as important business-obtaining evidence
of quality (e.g., Macklln, 1989). However, in an
empirical study, Francis et al . (1990) show that
such perceived quality differentials do not exist
among those demanding audit services. The
belief that the market is efficient, by perfectly
adjusting for peer review reputational impacts,
is unsubstantiated. Serious doubt has to be cast
upon such an extension of market ideology by
the nearly uniformly positive signals peer
review emits about accounting firms. The logic
of monopoly powers by professions requires
the suppression of quality differences by the
careful limitation of information, including
the veil of secrecy that shrouds peer review.
The reluctance of constituents to actually
critique peer review may be partially fueled
by the impressive public relations effort sus-
tained by the accounting profession. The pub
lit relations value of peer review has been
noted since its beginnings (e.g., Bremser,
1976). The need to communicate to the public
the nature of peer review and its accomplish-
ments has been often recognized as an essential
element of success (Larson,1983; AICPA, 1990,
1993). The mere fact that a regular discourse of
self-regulation occurs is probably the most
important fact to be conveyed. The actual
lack of belief that audit quality has been
improved (see Austin & Langston, 1981) appar-
ently is not part of this message. In fact, the
rhetoric flourish that assumes that peer review
has credibility in the absence of convincing
evidence to the contrary has been used (e.g.,
Mautz, 1983).
The costs of peer review have gained much
attention. The abdication of close societal
inspection is predicated upon the willingness
of the accounting profession to bear these
costs. The public has to believe that the profes
sion is willing and able to rise above its own
interest in this regard. However, CPA fum atti-
tude about peer review tends to be more
PEER REVIEW IN THE U.S. -IMAGERY AND REAL.ITY 259
uniform in its appreciation of the program’s
perceived benefits than with the magnitude
of program costs (McCabe & BreMan, 1992).
Mautz (1984) admits that the success of self-
regulation must be motivated by the attain-
ment of benefits for the firm. The balance of
costs and benefits appears very favorable when
intangibles are included in the assessment, and
when alternative regulatory scenarios are ima-
gined (Loscalzo, 1979). However, the much
more tangible financial costs borne by accoun-
tants are important to sustain societal confi-
dence that peer review is effective. These
costs are primarily tinancial but also included
reduced managerial discretion and more
restricted compulsory education (McCabe,
1993). The obverse of the American penchant
for throwing bushels of money at problems is
the belief that nothing good can result in the
absence of a substantial price.
I ndi vi dual s: used and abused
By focusing attention on the individuals
within accounting Iirms, the peer review pro-
cess taps into some uniquely American cultural
beliefs that persons dominate situations and
that problems can always be solved by good
people (see Mayhew, 1981). Mautz (1983)
asks for public confidence for peer review
because its leaders are excellent people devoid
of hidden agendas. Furthermore, the attention
on auditor credentials, training and supervision
(see Loscalzo, 1979) suggests that more educa-
tion and cooperation can solve anything. Jud-
ging by peer review, the prospect that
competent, well-intentioned individuals might
be helpless in the face of social contradictions
and historical change cannot be imagined.
The government i n the wi ngs
The SEC, as the most immediate element of
the polity, has the authority to direct values
and resources in support or in opposition to
peer review. It has invariably extended its sup
port through formal approval and through the
broadcast that non-peer reviewed firms are
much more likely the subject of disciplinary
actions (Wallace, 1991). The extension of this
reasoning, to suggest that SEC enforcement is
made less necessary because of peer review
(i.e., McCabe, 1993), is difficult. SEC support
may reflect conditions more diverse than peer
review performance. SEC willingness to launch
a major new initiative may be linked to its
insufficient expertise or to the lower efficiency
usually associated with government programs
(see Donadedian, 1993). The SEC support for
peer review may be the most expedient means
to achieve normalization over this portion of
the private sector. In failing to act despite its
power to do so, the SEC serves as a credible
threat with which peer review can be further
expanded and elaborated as the least of two
regulatory evils (e.g., McCabe, 1993). The exis-
tence of peer review has allowed the agency to
decrease its oversight of, and actions against,
accountants (Hudson, 1982). Although this is
not an explicit conspiracy, correct regulation
has apparently been left to accountants to dis-
cover for themselves (Kripke, 1979). Non-
adversarial relations underlies a regulatory pro-
cess that Campbell & Parker (1992) call a
“communication” between government and
the profession within which the SEC negoti-
ates the content of enforcement releases with
the accused. The SEC, itself part of an institu-
tionalized field, is more concerned with the
image that is presented to outside parties
than with the need for the detached neutrality
of applying law to fact (see also Bealing, 1994).
Jepperson & Meyer (199 1) argue that institu-
tionalized environments are marked by the
guise of private rights and authority within a
discourse of the common good. Peer review
and quality assurance programs have translated
a public interest problem that lies squarely at
the center of what the audit is, into a normal-
ized discourse that serves to justify the current
status and activities of the profession and their
relationships with clients and government. The
limitations of the audit disappear, leaving the
minute details of the quality control solution to
be endlessly dissected. Within this, a little con-
fessed evil (i.e., a not yet perfected system of
quality) goes a long way toward the prevention
of the revelation of more monstrous problems
260 T. J. FOGARTY
that might challenge the continued viability of
auditing. What peer review communicates
about the audit, in the name of the public inter-
est, is that although high expectations of assur-
ance are unrealistic (AICPA, 1990) we must
preserve access to it, even if society must
forego the right to full malpractice liability
recoveries against accountants (Public Over-
sight Board, 1993).
Summary
In a dynamic sense, peer review strengthens
the logic of confidence by unifying the
accounting profession around the symbols of
peer review. Symbols such as in-place quality
systems restore the image of consistent profes-
sional performance across the ever-broadening
jurisdictional claims of accountants. The per-
ceptual basis of the profession must be Iirst
believed internally, if it is to make sense exter-
nally.
CONCLUSION
Institutional theory is grounded in social and
cultural rationales for behavior that include,
but are not limited to, more technical explana-
tions. It attempts to show that organizational
change cannot be understood except in these
larger contexts. Institutional theory allows a
more finely textured perspective on accoun-
tant self-regulation by relaxing the assumption
that what external parties are led to believe is
paralleled by a corresponding operational rea-
lity. It does this by connecting organizations to
their environments in a way that allows the
organization to influence, but not coopt, the
environment. The orientations and ideologies
used in this process induce a degree of stability
and help explain how things become as they
are. Institutional theory charts how the organi-
zations charged with this domain can simulta-
neously serve the public interest and privilege
member interests. Thus, institutional theory
embraces, but is not defined by, party interests
and power. This balancing act highlights the
objective of organizational survival through
the keen sensitivity to institutionalized expec-
tations. In this article, the emergence of new
organizational forms, responding to a crisis
within old ones, created a new accountability
for the suppliers of auditing services.
Bui l di ng and teari ng down
Al though institutional theory might create
appearances to the contrary, social expecta-
tions and the crystallization of responses
thereto present a constantly eroding and recon-
structing process (Zucker, 1977, 1988). Institu-
tional changes tend to be slow since extant
arrangements supply the criteria by which pea-
ple discover their interests (DiMaggio &
Powell, 1991). However, forms that adopt to
institutionalized environments also create new
contingencies, opportunities and transition
costs. Therefore, different conditions make cur-
rent “solutions” either resistant to change or
particularly fragile.
The continuation of the current peer review
structures depends upon no major transitions
in the struggle over central meanings. As long
as quality can be defined in terms of systems,
the logic of peer review is likely to expand
beyond its current domain. The peer review
entities must continue to ground their pro-
grams in the dominant values of management
science, tempered by the residual claims of
professional character. Peer review also Seems
very consistent with increasing demands for
entity accountability and the capability of pro-
fessionals to legitimize new forms of their
expertise.
The institutional perspective of accountant
regulation requires the consideration of the for-
ces that could contradict its current con@ura-
tion. The legal liability of public accountants, if
not legislatively limited in the near future, pos-
sesses potential to undo peer review. Survey
evidence suggests that external parties per-
ceive audit failures to be more consequential
to the evaluation of peer review than do
accountants (Alam et aZ., 1991). If the large
international Iirms follow the recent fate of
Laventhol & Horwath (see Cowan, 1990), lnter-
nal and external forces wilI result in new social
PEER REVIEW IN THE U.S.-IMAGERY AND REALITY 261
arrangements. In these scenarios, the state
would have a revolutionary role in the lnstltu-
tlonal environment (see DiMagglo & Powell,
1991). The increased gender and ethnic diver-
sity of the U.S. work force may also play a
subtle role. Since decoupling is based on a cer-
tain form of trust (see Neu, 1991) this emer-
ging diversity may result ln greater demands for
explicit arrangements. Peer review has not
opened the essential issue of accountant socia-
lization which itself can be thought of as a
dynamic conduit of Institutional change (Gala-
shiewiez, 1991). However, complex interde-
pendencies and sequencing prevent any
predictable linear path in this development
(Powell, 1991).
Power bebi nd the scenes
Institutional theory has been critiqued for
poorly articulating the role of power and the
selfish motivations of individual participants
(Perrow, 1985). However, some treatments
within this perspective recognize that institu-
tionalized action is both shaped by, and the
definer of personal interests (see Scott, 1987;
Covaleski & Dirsmith, 1988). The organiza-
tional field includes actors and entities with
privileged positions that allow some degree of
elite intervention and dlfferentlal advantage
(Powell, 1991; Brlnt & Karabel, 1989). Conse-
quently, power becomes embedded in social
arrangements and rearrangements (Wlllmott,
1984). At the most aggregate level, the collec-
tive interests of accounting practitioners com-
bat the residual power of their corporate
clientele.
That peer review organizations cannot be
reduced to the interests that supported their
emergence is illustrated by their potential to
influence constituent elements withln the pro
fession. Peer review entails systematic surveil-
lance and the conversion of audits and auditors
into objects for observation and categorization.
Discipline brought to bear on some to shape
the reputation and profitability of others can-
not be ignored as a force capable of indepen-
dence. Powers exist within the decoupling
process that are most effective when subtly
cloaked ln the appearance of objectivity (Cov-
aleski et al ., 1993). The imagery of rational
action cannot be ignored by the internal opera-
tions of auditing over the longer term. This
realization requires the consideration of
resource dependency, financial incentives and
power in the process of institutional subver-
sion of purer versions of public interest pursuit
(see Tolbert, 1985; Mezias, 1990; Neu, 1991).
Although this represents a frontier beyond the
scope of this paper, Meyer’s (1978) expecta-
tion that status outside the peer review organi-
zations translates into power within the
organization provides some direction for this
inquiry.
The more compelling aspects of power per-
tain to its use in furthering the internal stratill-
cation of accounting practice. The division of
the audit market indicated that a large number
of audit firms, each with a very small client
base, collectively held a significant market
share (White et al ., 1988). Peer review
imposes a semi-fixed charge on audit suppli-
ers. Since the immediate costs of peer review
represent a disproportionate burden on smaller
accounting firms (Berton, 1986) it is not hard
to imagine that large firm power and interests
align in support of the process. The equity
owners of large public accounting firms have
more to lose (incomes, prlvllege, status) follow-
lng the erosion of public confidence and are
more likely to design solutions that invest in
reputation through costly imagery. These orga-
nizations also can least tolerate a substantive
Investigation of their technologies and their
financial dependency upon their clientele.
Peer review enforcement has also occurred dis
proportionately against smaller auditors (Wal-
lace & Cravens, 1994; AICPA, 1990). The
mlcrotechniques of power have been brought
to bear in support of the new definition of
social acceptability. By solidifying the division
of labor wherein only large firms extract the
economic rents from the audit monopoly,
peer review organizations further the agenda
of these firms.
The role of the state is also central in the
conception of power within institutional
262 T. J. FOGARTY
theory. Through action or inaction, the polity
embeds authority into organizational fields
(Iepperson & Meyer, 1991). The SEC, in its
coordination with the peer review effort, con-
tinues to provide auditors with a guaranteed
market. In its failure to intervene more directly
with a more detailed autopsy of audit failures
than peer review provides, the SEC plays a
covert role that leaves the public confidence
in the audit technology undisturbed. The colla-
boration of government in the illusion of pro-
fessional solidarity should also be noted (see
also Richardson, 1989). By accepting peer
review as a solution to the regulation issues,
and by pushing for its expansion, government
extracts a de facto tax that tends to be dispro-
portionately borne by smaller audit providers.
Contri buti on
The unique professionalization project
reported in this paper promises to elaborate
institutional theory. Peer review became neces-
sary partly because of the weak culture of the
profession and its unstable knowledge base.
Against the background of an apparently well-
elaborated technical component, a centraliza-
tion that offered a coordination within the pro-
fession sufficient to manipulate the
environment, emerged.
Unlike other applications of institutional the-
ory, the one considered in this paper involves a
technical core that acts less zealously and vig-
orously than would be predicted from the
observation of organizational structure. This
may be due to the unique nature of the organi-
zational objectives. Since the safest terrain is
the assumption that professionals are skilled
and competent, goal attainment should be mea-
sured by Inaction rather than by the extent of
activity. When ideal results are tantamount to
no need for correction, each non-routine action
processed by the operational core creates a
larger discrepancy from that condition. Since
the oversight of accountants is not competi-
tive, more danger exists in overreacting than
in no acting at all. Although social expecta-
tions require a technology of enforcement,
the logic of confidence delegates it to the
peer review board to problematize the specitic
evil and its redress. In a strategic sense, the
observed program, safely rendered quite dis-
tant from the audit, represents the epitome of
rationality.
Future research
Several ideas are implied by this paper as an
agenda for further research on the institutional
perspective on accounting regulation. The
exchange processes that construct the transac-
tional reality of regulation need further ethno-
graphic treatment. The actual conduct of a
peer review needs to be examined, perhaps
using the conceptual apparatus of symbolic
interactionism, to see how reviewers incorpo-
rate personal and firm experience in the pro-
cess of managing the meaning of quality. A
cultural history of how peer review was trans
formed from a custom made process to a boiler
plate edifice is needed. The role of peer
review consultants would seem especially
interesting for research along these lines. Vir-
tually unexplored are interfaces of peer review
with the media, legislative bodies and the acad-
emy. Key in this exchange is the means by
which discrepancies are ignored and ceremo-
nialized (see Bitti & Silver, 1986; Neu, 1991).
More attention is also necessary for the blend
of economic forces with cultural ones in the
sociology of the profession (Abbott, 1988; Oli-
ver, 1991). Through culture, the meaning of
peer review is not static. Likewise, its influ-
ence on the accounting profession needs to
be examined. Peer review has likely changed
the benchmark of what constitutes the accep
table in auditing. This, in turn, bears upon the
conception of the socialization project facing
the firm. Since the large public accounting
firms face demands for accountability outside
the U.S., the means by which they have varied
their response from nation to nation may allow
cultural and symbolic forms to be separated
from those of power and money. Comparative
work on different professional groups in the
U.S. and on accountants in different countries
may help reveal the extent that vested interests
successfully compete against less concentrated
PEER REVIEW IN THE U.S. -IMAGERY AND REALITY 263
and selective notions of social welfare. This malleable. The coupling between macro- and
may provide a means to detect the emergence
microlevels of peer review portends possible
of the coalitions that would expand the scope
contradiction since both have outcome rele-
of peer review. Recent movements toward
peer review in the European community
vance. Conceptualizing systems of quality may
would serve as an interesting comparison.
have consequences for internal firm decision
Several dialectics remain to be fully under-
making Systems, invested with a life of their
stood. Quality in auditing can only be under-
own, can search for new areas of human vital-
stood against the environment of practice but
ity to codify. Accountants create their work but
would have us believe that the environment is are also created by it.
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