ACCOUNTING: A Jury of Its Peers

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Long regarded as an exacting and prestigious calling, the accounting profession has smarted in recent years under charges of sloppy or illegal practices that contributed to some of the biggest scandals in U.S. business history. As the world's largest accounting firm (annual revenues: $500 million), New York-based Peat, Marwick, Mitchell & Co. took a heavy share of the blame. To help restore its image, Peat, Marwick about six months ago took the unprecedented step of hiring a competitor —Arthur Young & Co., one of the smaller among accounting's Big Eight —to scrutinize its practices. For a $500,000 fee, more than 150 Young accountants put in 12,000 hours of labor, studying the way Peat, Marwick audits its clients' books and interviewing 50 Peat, Marwick partners.

Dramatic Losses. Last week the results of the accounting profession's first "peer review" were in, and, to no one's surprise, they were generally complimentary. Young found some weaknesses in Peat, Marwick procedures; in a few cases, it said the firm had not kept adequate records. But in general Young concluded that Peat, Marwick complied with accounting principles laid down by the Financial Accounting Standards Board. "We did not find perfection," Young Managing Partner William S. Kanaga said in a letter to Peat, Marwick Senior Partner Walter E. Hanson. "But no professional auditor who is knowledgeable of the problems of auditing and reporting would expect to find perfection."

Young's findings came too late to save Peat, Marwick from being the target of a Government suit concerning its auditing several years ago of Penn Central, National Student Marketing, Talley Industries and Republic National Life Insurance—all of which have either gone bankrupt or suffered dramatic losses. The Government accused Peat, Marwick of such practices as counting sales before they were made or blithely taking management's word for certain figures without independent verification. The suit was settled by a consent decree under which Peat, Marwick was forbidden with some exceptions to take on new clients for six months this year. The Securities and Exchange Commission has ordered three other reviews of Peat, Marwick practices as part of the consent decree —but it applauds the idea of auditors studying each other as well.

The Young review could thus accelerate self-policing of the accounting profession. The American Institute of Certified Public Accountants has urged "peer review" on member firms, but it wanted the results kept confidential.

Peat, Marwick not only volunteered to subject itself to the first review but insisted that the findings be made public. Partner Hanson cautions that Young's scrutiny of his firm technically was not an audit; Young studied only how Peat, Marwick peruses its clients' books, not how it keeps its own. Nonetheless, Hanson believes the study shows the profession is determined to regulate itself before the Government does so. Whatever happens, he says, Peat, Marwick intends to submit itself again to judgment by its peers every two or three years.