Professional Judgment Matters

Ethical Dilemmas: Case Studies for Professional Accountants – Part 2 of 4

2012-02-29T09:15:00.004-05:00

As previously noted (see Part 1), the Consultative Committee of Accountancy Bodies (CCAB) comprises the ICAEW, ACCA, ICAS and CIPFA in the UK and the Chartered Accountants Ireland. In December 2011, the CCAB published case studies on ethical issues encountered by professional accountants in business, professional accountants in public practice, professional accountants working as non-executive directors and professional accountants working in the voluntary sector. The purpose of these case studies is to provide guidance for resolving ethical problems and to encourage debate in these areas. CCAB welcomes feedback on the case studies and other ethics related issues.

The CCAB guidance on Ethical Dilemmas Case Studies for Professional Accountants in Public Practice illustrates how the ethical codes of the CCAB bodies can be applied by professional accountants working in public practice. These scenarios are not intended to cover every possible circumstance, but instead to outline key principles and processes that could be considered when attempting to identify, assess and resolve ethical problems in line with the ethical codes. Six case studies address the following matters:

· Case Study 1 - Dealing with staff performance issues;

· Case Study 2 - Improper accounting for sales;

· Case Study 3 - Conflicting clients’ interests;

· Case Study 4 - How much to disclose to the finance director;

· Case Study 5 - Placing unreasonable expectations on a student;

· Case Study 6 - Financial interest.

According to the guidance, a professional accountant in public practice “will want to act in the best interests of his or her clients. However, he or she also has a responsibility to act in the public interest, which will require objectivity to be exercised at all times (not only when providing assurances to third parties). The duties of the accountant in public practice who faces an ethical dilemma cannot be easily reconciled. On the one hand, it is good business practice to work closely with your clients; on the other hand, you will sometimes be expected to challenge their decisions, and even distance yourself from them.”

Ethical Dilemmas: Case Studies for Professional Accountants – Part 1 of 4

2012-02-26T13:18:00.000-05:00

The Consultative Committee of Accountancy Bodies (CCAB) comprises the ICAEW, ACCA, ICAS and CIPFA in the UK and the Chartered Accountants Ireland. The Board of CCAB Ltd consists of five directors, senior members of the five member bodies. CCAB provides a forum whereby its member bodies can meet and act collectively on behalf of the accountancy profession in the UK to promote the public interest on matters within the sphere of the accountancy profession and its members.

In December 2011, the CCAB published case studies on ethical issues encountered by professional accountants in business, professional accountants in public practice, professional accountants working as non-executive directors and professional accountants working in the voluntary sector. The purpose of these case studies is to provide guidance for resolving ethical problems and to encourage debate in these areas. CCAB welcomes feedback on the case studies and other ethics related issues.

The case studies are compatible with the ethical codes of the CCAB member bodies, which are derived from the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants (IESBA). They illustrate the application of the “conceptual framework” approach to resolving ethical dilemmas. This approach focuses on safeguarding the fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

The CCAB guidance on Ethical Dilemmas Case Studies for Professional Accountants in Business outlines key principles and processes that could be considered when attempting to identify, assess and resolve ethical problems in line with the ethical codes. Six case studies address the following matters:

· Case Study 1 - Pressure to overstate stock valuation;

· Case Study 2 - Pressure to participate in fraudulent activity;

· Case Study 3 - Suspicion of false accounting;

· Case Study 4 - Company restructure – working with limited resources;

· Case Study 5 - Confidentiality when bidding for a contract; and

· Case Study 6 - Non-disclosure to auditors.

Enhancing Professional Skepticism in Auditing

2012-02-19T09:16:00.010-05:00

In February 2012, the Canadian Institute of Chartered Accountants (CICA) issued an Auditing and Assurance Bulletin on Enhancing Professional Skepticism. The Bulletin addresses how certain specific audit procedures required by Canadian Auditing Standards (CASs) can enhance professional skepticism. It is intended to help raise practitioners’ awareness in a timely manner of significant new or emerging issues or other noteworthy circumstances related to engagements addressed by the pronouncements of the Auditing and Assurance Standards Board (AASB). It is also meant to direct practitioners to relevant requirements, application and other explanatory material in the CICA Handbook – Assurance.

This Bulletin was issued in response to certain matters identified by practice inspectors and questions received by provincial practice advisors. In particular, this Bulletin addresses how to apply professional skepticism in accordance with CASs. It notes that: “CASs define professional skepticism as an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence (paragraph 13(I) of CAS 200).”

The Bulletin further states that: “Paragraph A19 of CAS 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Canadian Auditing Standards, calls for the auditor to plan and perform the audit with professional skepticism in order to reduce the risks of:

overlooking unusual circumstances;
over generalizing when drawing conclusions from audit observations; and
using inappropriate assumptions in determining the nature, timing and extent of the audit procedures and evaluating the results thereof.”

The topics covered by the Bulletin include the following: Overall auditor alertness; Risk assessment; Related parties; Accounting estimates; Inquiries of others; Accounting policies; External confirmations; Analytical procedures; Testing of journal entries; Evaluation of misstatements; Written representations; and Forming an opinion. After discussing these matters, it concludes that: “Auditors are encouraged to consider the matters discussed in this Bulletin, and continue to improve the application of professional skepticism in the audits they perform.”

For additional insight on professional skepticism, refer to Professional Judgment – Education Continued and the three-part series on Learning about Professional Skepticism (November 23, November 29 and November 30, 2011).

Using frameworks for the application and evaluation of auditors’ professional judgments

2012-02-12T13:07:00.000-05:00

In response to concerns that a transition towards less precise accounting standards in the United States will increase auditor litigation exposure, regulators and accounting firms have developed and implemented frameworks for the application and evaluation of auditors’ professional judgments. Regulatory frameworks include, for example, the 2008 US Securities and Exchange Commission (SEC) Committee on Improvements to Financial Reporting (see previous posts on August 17, August 24 and August 30). Accounting firm frameworks include, for example, the 2011 KPMG monograph, Elevating Professional Judgment in Auditing: The KPMG Professional Judgment Framework (see previous posts on September 7, September 14 and September 20).

Recent research predicts and provides experimental evidence that such frameworks provide clarity to evaluators about the quality of auditors’ judgments. The research found that, when no direct signals of judgment quality are available, only auditors with recognized technical expertise in specific judgment tasks (an indirect signal of judgment quality) are insulated from the increase in litigation exposure arising from less precise standards.

When a direct signal of judgment quality is available (e.g., the auditor used a judgment framework when making specific judgments), there is no longer a relative increase in litigation exposure for auditors with general expertise compared to technical expertise. Nonetheless, when accounting standards are precise, the research found that the use of judgment frameworks may result in dysfunctional outcomes by reducing litigation exposure more for auditors with general expertise, not by improving the perceived quality of their judgments relative to auditors with technical expertise, but by signaling their lack of control over the events leading to the alleged material misstatement.

It is important to note that this research examines the signaling aspects of auditors’ use of a judgment framework, not whether and how professional judgment frameworks actually improve the quality of auditors’ professional judgments. Future research could examine auditors’ willingness and ability to use judgment frameworks and the downstream effects on their professional judgments, which preliminary evidence finds to be positive but to also depend on the economic substance of the transactions.

To learn more, read the April 2011 research article “Signaling the Quality of Auditors’ Professional Judgments: The Joint Effects of Accounting Standard Precision and Auditor Task Expertise” by Jonathan H. Grenier, PhD (Miami University), Bradley Pomeroy, PhD and Matthew Stern (both at University of Illinois at Urbana-Champaign). The paper is also available online at the Social Sciences Research Network.

Professional Judgment and Canadian Generally Accepted Auditing Standards – 1975

2012-02-08T10:52:00.003-05:00

Thirty-seven years ago, in February 1975, the CICA’s Auditing Standards Committee proposed, subject to comments received following exposure, to publish the contents of an Exposure Draft as CICA Handbook: Section 5100 - Generally Accepted Auditing Standards. This Exposure Draft was a re-exposure of material previously included in a November 1973 Exposure Draft. At that time the Committee used wording closely following and, in most places, identical to that used in the AICPA Statement on Auditing Standards No. 1, Codification of Auditing Standards and Procedures.

The Introduction to the Exposure Draft stated: “Although the Committee’s intention remains, as a general principle, to use words closely following AICPA Statements (or other professional pronouncements) in cases where this is appropriate, consideration of responses received to the 1973 Exposure Draft indicated that several significant changes were desirable in this particular case. The November 1973 Exposure Draft contained two other Sections of background material, which have been eliminated. "Responsibilities and Functions of the Independent Auditor" required extensive changes and will be dealt with at a later date. The discussion previously included under the heading "The General Standards" related to ethical matters [emphasis added], which are within the jurisdiction of the provincial Institutes and Order. Accordingly, it is the Committee’s intention not to deal further with this topic in the Auditing Recommendations Section of the CICA Handbook, other than including the substance of the three November 1973 general standards as one general standard in paragraph 5100.02 in the interest of completeness.”

It is noteworthy that the Introduction also stated that concurrent with the issuance of this Exposure Draft as an Auditing Recommendation, the Committee would intend to amend the Introduction to Auditing Recommendations by inserting the following as a new paragraph in the "Application" section:

"Among the Recommendations issued, GENERALLY ACCEPTED AUDITING STANDARDS, Section 5100, constitute the basic professional standards with which, in the Committee’s view, the auditor should comply when reporting upon financial statements. In adhering to such basic standards the auditor should have regard to the specific Auditing Recommendations in the Handbook while exercising his professional judgment [emphasis added] as to what procedures are required for such adherence. In addition, the Handbook provides Recommendations with respect to unaudited financial statements, to which Generally Accepted Auditing Standards do not apply.”

Principles-based standards and the consequent role of professional judgment enhance the quality of Canadian financial reporting

2012-02-02T11:54:00.004-05:00

The academic research provides preliminary confirmation of Ross Skinner’s (1995) hypothesis that Canada’s relatively principles-based GAAP yield higher accrual quality than the US’s relatively rules-based GAAP. These results stem from a comparison of the Dechow-Dichev (2002) measure of accrual quality for cross-listed Canadian firms reporting under both Canadian and US GAAP. However, the research documents lower accrual quality for Canadian firms reporting under US GAAP than for US firms, which are subject to stronger US oversight and greater litigation risk, reporting under US GAAP.

The latter results are consistent with stronger US oversight compensating for inferior accrual quality associated with rules-based GAAP. Consistent with the positive effect of Canada’s principles-based GAAP and the offsetting negative effect of Canada’s weaker oversight, the research found no overall difference in accrual quality between Canadian firms reporting under Canadian GAAP and US firms reporting under US GAAP.

Consistent with Skinner’s writings, the results imply that it is fallacious to attribute perceived deficiencies in Canadian financial reporting to the leeway allowed by principles-based GAAP without allowing for Canada’s oversight, which is relatively weak due largely to the absence of a national securities regulator. If anything, over the 1990-2002 sample period, principles-based standards and the consequent role of professional judgment enhance the quality of Canadian firms’ financial reporting.

To learn more, read the June 2004 article “Earnings Quality under Rules- vs. Principles-Based Accounting Standards: A Test of the Skinner Hypothesis” by Erin Webster and Daniel B. Thornton, Ph.D, FCA, (pictured here). Both are at Queen’s University School of Business in Kingston, Ontario, Canada.

It’s Time for Principles-Based Accounting Ethics

2012-01-31T09:03:00.024-05:00

The American Institute of Certified Public Accountants (AICPA) has promulgated a Code of Professional Conduct, which has served as the primary ethical standard for public accountants in the United States for more than 20 years. It is now out of date and needs to be replaced with a code of ethics. It suggests, for example, that accountants should "exercise sensitive professional and moral judgments in all their activities" and should seek to "continually demonstrate their dedication to professional excellence." Just as US generally accepted accounting principles are being migrated toward "principles-based accounting" as part of a convergence with International Financial Reporting Standards (IFRS), a similar process needs to occur with ethics.

The primary rules of the AICPA Code around five essential virtues: objectivity, integrity, inquisitiveness, loyalty and trustworthiness. These virtues correspond to the general principles set forth in the Code of Ethics for Professional Accountants of the International Federation of Accountants (IFAC). The IFAC code establishes a conceptual framework that requires a professional accountant to identify, evaluate and address threats to compliance with the fundamental principles. The conceptual framework approach assists professional accountants in complying with the ethical requirements of the code and meeting their responsibility to act in the public interest.

From this virtue ethics perspective, various rules of the AICPA Code are seen as being inadequate, at best, and poorly crafted, at worst. Principles-based ethics serve the profession and the financial reporting process better than the current rules-based approach. To learn more, read the article “It’s Time for Principles-Based Accounting Ethics” by Albert D. Spalding Jr. and Alfonso Oddo, published online January 6, 2012 in the Journal of Business Ethics.

The e-professional embracing learning technologies

2012-01-26T09:04:00.041-05:00

According to the Association of Chartered Certified Accountants (ACCA), technology is now embedded in the workplace: nearly all numerical and written work is done via computers, and the way research, analysis and assurance is carried out has been transformed by technology and access to the Internet. As more and more activity goes online, finance professionals are keeping up with regulation, filing reports, accessing data and so on, remotely in cyberspace. They are becoming e-professionals.

The ACCA recently issued The eProfessional Embracing Learning Technologies. The report shares the views of a panel of experts from multinational corporations, global professional services firms, learning providers and other professional bodies, on current and future trends in online learning and assessment.

It explores the world of the accountant, focusing on three areas:

· how online approaches to learning and assessment are affecting professional development at an individual level;

· the impact these learning technologies are having on employers of finance professionals; and

· what the future of online learning and assessment may look like.

The conclusion (on page 5 of the report) notes that: “The panellists point to two key reasons for the shift in attitudes and the dramatic rise in uptake of learning technologies during the first decade of the 21st century:

· First, e-learning provides more sophisticated options for knowledge acquisition and application, largely thanks to the increased capabilities of mobile devices, technologies such as Skype, learning apps and game-based learning.

· Second, technological developments are driving new learning approaches which are considered to be more flexible and fit for purpose. Learning programmes now fit around work, rather than work being accommodated around study leave.”

Furthermore, it states that: “This sophisticated blend of learning approaches is facilitating a much more strategic approach to professional development. Organisations are integrating learning technologies into their growth plans to ensure that they capture the advantages of flexibility, innovation and sophistication that can be realised through a technology-enabled people strategy. The panellists are in no doubt that the developments we have seen so far are merely the tip of the iceberg, and that further shifts will follow, driven not just by technology, but also by global factors, strategic change and professional endeavour.”

In addition to this report (also available as The eProfessional – Five Minutes On), the ACCA website presents video interviews with PwC’s global development leader - Richard Pollard, CEO of BPP Business Schools - Martin Taylor and managing director of Towards Maturity - Laura Overton.

Professional Judgment - Education Continued

2012-01-24T09:06:00.000-05:00

A recent article in CAmagazine states "Professional development isn’t what it used to be. Like the information it imparts, continuing education for CAs — and the type of knowledge that’s in demand — is changing." The article quotes from Jeffrey Gandz, a professor and managing director of program design for the executive development division of the Richard Ivey School of Business at the University of Western Ontario in London, Ontario.

Gandz notes that: "On the one side is upgrading of knowledge and skills via shorter, more compressed, efficient delivery systems. On the other, there is a growing focus on developing judgment and much more recognition that context and effective developmental experiences are critical."

Beyond talent management, increasingly professional development is focused on what goes into decision-making. "We spend a lot of time talking about operational, reputational and quantitative risk and the impact of rapid change and turbulent environments on the kinds of business decisions being made in our executive programs," says Gandz. "The time from 2008 to today has seen a lot of uncertainty, so we talk much more about strategic options rather than strategies cast in stone. Certainly there is more humility about being right and greater focus on making good decisions but recognizing that circumstances vary greatly." In other words, he says, judgment is used.

PricewaterhouseCoopers (PwC) is using a structured, team-based approach to learning on the job. "It’s a way to capture teachable moments as they arise and in the process help accelerate the development of our junior people and reinforce learning on the job," says Kate Hand, learning and development director for national assurance practice at PwC Canada. "Rather than stop and have someone attend a seminar or e-learn session, we now have a structure and specific techniques we can use when an opportunity arises. So we’ve addressed the learning gap and provided feedback and support. As a result, our junior team members have more opportunities to take on more rewarding work. As well, it improves communication across the team because you are coming together to address issues in a real-time, real-life, relevant way."

For example, this fall PwC launched a program dealing with professional skepticism that blends a formal learning component with the team-based learning approach. "How do you teach judgment? By sharing war stories of near misses," says Hand. "Our senior team members have these stories but they might not always think to share them with junior team members. Now, they can come together to talk about what professional skepticism means for the client, how to address it and assess it and what to do when something is unusual. Junior team members might not otherwise have the confidence to question a client."

(The article "Education CONTINUED" on pages 24-31 in the December 2011 CAmagazine is also available online.)

The Role of Professional Judgment in Standard Setting (Part 4 of 4)

2012-01-19T09:12:00.018-05:00

As previously mentioned (see Part 1, Part 2 and Part 3), the CICA Special Committee on Standard-Setting (SCOSS) presented its Report to the CICA Board of Governors in 1980. The report (pages 11-14) discussed the need for professional judgment in standard-setting, taking a principles-based approach, using principles rather than detailed rules, and clearly stating the role of professional judgment in the CICA Handbook.

The following excerpt from that report discusses the need to clearly stating the role of professional judgment in the CICA Handbook: “In paragraph A.202 of the foregoing discussion [see Part 1] we pointed out that the role of professional judgment has not, in our view, been adequately spelled out by the profession. Section 1500.06 of the Handbook contains the words “No rule of general application can be phrased to suit all circumstances or combinations of circumstances that may arise and the determination of what constitutes fair presentation or good practice in the particular case requires the exercise of professional judgment.” These words, however, are not italicized and hence they constitute explanation rather than a “Recommendation” or standard. Their implications are not further developed in the Handbook and are certainly not completely clear. In fact, another Section of the Handbook that related to the interaction of professional judgment and accounting standards (Section 5500.20) has recently been removed from the Handbook and not replaced. [Paragraph A.301]

We believe that the lack of an explanation of the role of professional judgment in the Handbook is a serious defect. In the foregoing discussion, we presented a view of the role of professional judgment that would, if adopted by the profession, give it much greater importance. We acknowledge, as we also stated in paragraph A.203 [see Part 1], that this view might not reflect a consensus in the profession, even though it does reflect our view as a committee. [Paragraph A.302]

However, regardless of whether our view on professional judgment is accepted, we remain convinced that the role of professional judgment should be stated clearly in the Handbook. Therefore, we present as our first recommendation:

Recommendation 1. The Role of Professional Judgment
THE ROLE OF PROFESSIONAL JUDGMENT IN THE INTERPRETATION AND APPLICATION OF ACCOUNTING AND AUDITING STANDARDS SHOULD BE EXPLAINED CLEARLY IN THE HANDBOOK.” [Paragraph A.303]

The Role of Professional Judgment in Standard Setting (Part 3 of 4)

2012-01-17T09:04:00.006-05:00

As previously mentioned (see Part 1 and Part 2), the CICA Special Committee on Standard-Setting (SCOSS) presented its Report to the CICA Board of Governors in 1980. The report (pages 11-14) discussed the need for professional judgment in standard-setting, taking a principles-based approach, using principles rather than detailed rules, and clearly stating the role of professional judgment in the CICA Handbook.

The following excerpt from that report discusses the use of principles rather than detailed rules: “Failure to recognize the role of judgment can lead to odd results, of which one example may suffice. Securities legislation in a number of provinces requires compliance with generally accepted accounting principles -- i.e. published standards -- but permits deviation with approval of the relevant Securities Commission. This power of exemption is obviously appropriate to deal with cases when compliance with published standards might result in undue detriment to a reporting enterprise. However, it seems anomalous that this exempting power of a Securities Commission might have to be invoked to relieve an enterprise from the requirements of published accounting standards even though the result of compliance would be an unfair or misleading presentation. [Paragraph A.210]

Yet, we are informed that this power would be used for such a purpose. We cannot see why it should be necessary for a group composed largely of non-accountants to give permission for non-compliance with a standard on the grounds that the result of compliance (determined perhaps largely on the evidence of expert accountants) is unfair and misleading. [Paragraph A.211]

In applying professional judgment, objectivity and intellectual integrity are just as, or even more, important than skill and experience. Occasional instances of poor or dishonestly applied judgment will not undermine good financial reporting as long as the profession as a whole approaches problems with objectivity and integrity. However, if any significant number of auditors are prepared to accept these instances as precedents or to claim “judgment” as the rationalization for inappropriate presentations by their clients, the pressure on other auditors to accept similar presentations by their clients can become intense. Detailed and inflexible rules may then be seen as the only defence against accounting practices being set at the lowest level that any auditor can be found to accept. [Paragraph A.212]

In addition to these pressures, the profession may be concerned with legal liability and may perceive compliance with strict rules as a defence. Bureaucracies will demand detailed rules for essentially the same reason, i.e. to shield themselves from criticism. The cumulative weight of these pressures for detailed rules may prove unbearable and it might seem prudent to simply give in now. We urge that an attempt to resist be made and we believe the profession can meet the challenge. If we are proven wrong, detailed rules can be drafted and adopted: but, once we abandon principles for detailed rules, it may be impossible to turn back.” [Paragraph A.213]

The Role of Professional Judgment in Standard Setting (Part 2 of 4)

2012-01-11T09:05:00.005-05:00

As previously mentioned (see Part 1), the CICA Special Committee on Standard-Setting (SCOSS) presented its Report to the CICA Board of Governors in 1980. The report (pages 11-14) discussed the need for professional judgment in standard-setting, taking a principles-based approach, using principles rather than detailed rules, and clearly stating the role of professional judgment in the CICA Handbook.

The following excerpt from that report discusses the importance of taking a principles-based approach: “Although most standards contain descriptions of the circumstances to which they are intended to apply, these descriptions are necessarily general rather than highly detailed. If a standard covers, as is usually the case, a range of circumstances that, while not identical, are sufficiently similar to be treated uniformly, there will inevitably be situations on the edge of the range whose intended treatment is uncertain. Thus, an accountant may not be able to determine precisely and directly what circumstances were or were not intended by the standard-setting body to be covered in a standard. He must reach such a conclusion indirectly. If, in his professional judgment, the application of a standard to his particular circumstances produces an unfair or misleading result, he would usually infer that the circumstances were not contemplated when the standard was set. [Paragraph A.207]

This conclusion is valid only if the misleading result is the consequence of the particular circumstances and not of the accountant’s personal opinion of the standard itself. He may, for example, disagree generally with a particular standard and believe that it would produce an unfair result in all cases -- but this view of the standard does not put him at liberty to ignore it, since his view has been over-ruled by the standard-setters. It is only when the accountant can reasonably infer that it is the particular circumstances that result in a misleading presentation that deviation from the standard becomes not only permitted but necessary. [Paragraph A.208]

In dealing with situations where no standard apparently applies, it is important that the accountant consider the spirit and apparent intent of the published standards. If strict compliance with a published standard gives an apparently inappropriate result, the accountant should consider what the standard was trying to achieve and why it fails in his case. He may thus identify those changes in treatment necessary to bring the presentation of his particular circumstances within the spirit and principles of the standard. This may be difficult and more than one possible treatment may seem to comply with the spirit of published standards. These problems are both the price and reward of being a professional. The important thing is that the professional not seize on the non-applicability of a standard to adopt solutions completely at variance with the principles on which published standards are based.” [Paragraph A.209]

The Role of Professional Judgment in Standard Setting (Part 1 of 4)

2012-01-09T09:03:00.012-05:00

On December 19, 1980, the CICA Special Committee on Standard-Setting (SCOSS) presented its Report to the CICA Board of Governors. The report (pages 11-14) discussed the need for professional judgment in standard-setting, taking a principles-based approach, using principles rather than detailed rules, and clearly stating the role of professional judgment in the CICA Handbook. Although that report was issued more than 30 years ago, the observations and views of the Special Committee appear to be equally valid today and are, therefore, reproduced in this four-part series.

The SCOSS report begins with a general overview of professionalism and professional judgment as follows: “Professionalism in accounting and auditing involves more than just knowledge and skill. A professional accountant is distinguished from a bookkeeper by his ability to analyze and organize financial information so as to draw from it conclusions about economic realities. The professional accountant then presents this information in a way that enables others to make use of it. To be effective the process of analysis, organization and communication of relevant data requires professional judgment because of the variety of circumstances (or “economic realities”) and user needs that are encountered by a professional accountant while carrying out this function. [Paragraph A.201]

The need for judgment in carrying out a task would seem, by definition, to preclude the use of standard answers or methods. An understanding of the relationship between standards and professional judgment thus appears to lie at the very heart of the profession’s function. Yet this relationship has not, in our view, been adequately spelled out by the profession, nor does there seem to be a consensus as to what that relationship is or should be. [Paragraph A.202]

The following discussion presents a view of the role of professional judgment. In presenting it, we are aware that it might not reflect a majority view in the profession, but it does reflect this committee’s concerns and it will also illuminate the general approach to standards, and to standard-setting, that we take in this report. We also note that this matter has been addressed in the recently published Research Study “Corporate Reporting: Its Future Evolution.” [Paragraph A.203]

No individual chartered accountant can possess the wisdom and experience of the profession in the aggregate. Also, although the number of different factual circumstances the professional accountant may encounter in practice may seem limitless, the vast majority of cases fall into a manageable number of categories. It is in the public interest that it have the benefit, whenever possible, of the wisdom and experience of more than the individual practitioner when it comes to circumstances that occur sufficiently often that a consensus as to their proper treatment can be developed. Setting out such consensus is one role of accounting standards. [Paragraph A.204]

Another goal is comparability of financial information from enterprise to enterprise and from situation to situation when the circumstances involved are similar. If similar circumstances are not presented in similar ways, the user of the information loses one of the benefits of the professional accountant’s function. Thus, the function of accounting standards is to guide the judgment of the professional accountant so that the highest quality of measurement and presentation is consistently produced in any particular commonly-encountered set of circumstances. [Paragraph A.205]

On the other hand, every chartered accountant must from time to time encounter circumstances that differ, or at least appear to differ, from those contemplated by published standards. In these cases the accountant must decide, with little guidance from standards, what is appropriate presentation in the circumstances. The aggregate wisdom of the profession offered by standards is no longer directly relevant because it has not been applied to the circumstances. The apparent comparability offered by simple compliance with the most nearly applicable standard is a potential trap -- to present different circumstances as if they were similar is just as bad as to present similar circumstances as if they were different. Blind compliance with standards is both unprofessional and contrary to the public interest.” [Paragraph A.206]

Collaboration on Professional Judgment Matters for CAs – Part 3 of 3

2011-12-23T09:00:00.044-05:00

Using a Professional Judgment Framework;
The Art of Critical Decision Making; and
The e-Professional Embracing Learning Technologies.

With regard to using a professional judgment framework, KPMG has observed that the mindset, skills and techniques behind good judgment begin to form at a young age and can be taught and improved with experience and practice. It is critical that accounting and auditing students receive a strong foundation in the fundamentals of professional judgment. Furthermore, research in the areas of judgment and decision making over the last few decades indicates that additional knowledge about common threats to good judgment, together with processes and tools for making good judgments, can improve the professional judgment abilities of both new and seasoned professionals.

According to the Harvard Business School course, “Art of Critical Decision Making,” bad decisions are usually made because of a poorly thought-out decision-making process. If decision makers put more emphasis on how to make a decision, ensure that they remove personal biases, collect information beforehand, glean the diverse perspectives of others and perform other constructive activities, they can vastly improve the strength and success of the process.

Finally, it is time to acknowledge that technology is now embedded in the workplace. Nearly all research and analysis has been transformed by technology and access to the Internet. As more and more activity goes online, accounting professionals are keeping up with regulation, filing reports, accessing data and so on, remotely in cyberspace. They are truly becoming e-professionals.

In summary, the seven-step approach to this initiative had a single purpose. The goal was to answer the research question posed in the project proposal: “With regard to professional judgment matters, is there a need for enhanced communication and collaboration by Chartered Accountants?”

Based on the results of the academic and professional literature review, the interest shown in the communications blog, and the collective views expressed by CAs in face-to-face meetings and by an online survey, the answer is clear. It’s time to collaborate! Accordingly, Chapter 7 completes the research report by setting out practical ways to move forward. It offers a number of suggestions regarding the nature and extent of the content that would be appropriate for an Internet-based resource centre. In addition, it suggests who would be appropriate to host this centre, both initially and ongoing.”

Additional excerpts from the executive summary are provided in Part 1 and Part 2 of this series of posts.

Collaboration on Professional Judgment Matters for CAs – Part 2 of 3

2011-12-22T09:00:00.016-05:00

As previously noted, a new research report has just been completed on Professional Judgment Matters: Assessing the Merits of Enhanced Communication and Collaboration.

The following discussion is Part 2 of a three-part excerpt from the executive summary in the report.

“Chapter 2 reviews the current academic and professional research literature on professional judgment. A number of important observations can be drawn from that review, with respect to the CA profession, decision making in financial reporting and auditing (including the role of professional scepticism) and the exercise of professional judgment.

The most important finding is that CAs need to keep in mind, at all times, the Rules of Professional Conduct. The Rules state that: “It is a mark of a profession that there is a voluntary assumption, by those who comprise it – the professional community – of ethical principles which are aimed, first and foremost, at protection of the public and, second, at achieving orderly and courteous conduct within the profession.” Furthermore, according to IFAC, the fundamental principles of professional ethics include integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. All professional accountants must adhere to these principles regardless of the career path they may choose.

Chapter 3 is about creating a communications blog. It refers to two blogs, Migrating to IFRS and Corporate Reporting to Stakeholders, both of which emphasize Internet-based communications and the exercise of professional judgment. The number of postings to date and the significant number of pageviews for the recent period provide a measure of the success of Internet-based communications. This chapter concludes that it has been a very short time since the blog on Professional Judgment Matters: Guidance for Chartered Accountants was created on June 18, 2011. Considering the small number of posts to date (24), it is encouraging to see that the level of interest in the subject matter (research and guidance) is steadily increasing. It is also encouraging to see that the interest is becoming global in nature. This suggests that “If you build it, they will come!”

The project proposal for this research initiative calls for an open dialogue with selected CAs. The dialogue included seven face-to-face meetings on an ad hoc basis over a six-month period and an ongoing series of e-mails. In addition to a candid exchange of views, the participants provided several significant materials dealing with professional judgment matters. Those matters are discussed in Chapter 4 under four subtopics:

Professional Judgment: A Pillar of Accounting Education;
Teaching and Learning Professional Judgment;
Outline for a Course on Professional Judgment; and
Accountants’ Insecurity Relating to Work Diversity.

The dialogue also provided a strong incentive for engaging with CAs on a broader basis. This led directly to the development of an online survey to assess whether there is a need for enhanced communication and collaboration by CAs. Chapter 5 presents the results of an online survey called “Professional Judgment Matters for CAs.” The survey results reinforce the findings in the research literature and the key messages conveyed during the dialogue. Overall, there is considerable support (84%) for enhanced communication and collaboration by CAs, facilitated by an Internet-based resource centre.”

Additional excerpts from the executive summary are provided in Part 1 and Part 3 of this series of posts.

Collaboration on Professional Judgment Matters for CAs – Part 1 of 3

2011-12-21T09:00:00.038-05:00

A new research report has just been completed on Professional Judgment Matters: Assessing the Merits of Enhanced Communication and Collaboration. The aim is to stimulate dicussion and debate on the exercise of professional judgment by Chartered Accountants.

The executive summary in the report states that: “Chartered Accountants (CAs) practice in a wide variety of fields including public accounting, industry, government, education, research, consulting, regulation and standard setting. In each of these areas, CAs are recognized for their expertise and for their ability to exercise sound “professional judgment” in a multitude of different contexts.

According to the academic research, the value of professional judgment is a function of both its importance and its quality, and each depends on the other. Together, these two attributes provide the foundation for this research initiative, which assesses whether there is a need for enhanced communication and collaboration by CAs on professional judgment matters. In other words, can an Internet-based professional judgment resource centre help to improve the quality of professional judgment? This is in the public interest, as well as the interests of policy developers and the business community. Clearly, it is also in the best interests of the profession.

This research initiative takes a seven-step approach, as follows:

Step 1 – Review the definitions of professional judgment (see Chapter 1);
Step 2 – Review the current research literature (see Chapter 2);
Step 3 – Create a communications blog (see Chapter 3);
Step 4 – Open a dialogue with CAs (see Chapter 4);
Step 5 – Undertake an Internet-based survey (see Chapter 5);
Step 6 – Review recent developments and other matters (see Chapter 6);
Step 7 – Suggest practical ways to move forward (see Chapter 7).

Chapter 1 explains the purpose, methodology and anticipated outcomes of this research initiative. It also provides several definitions proposed in the literature and professional standards with regard to professional judgment. In addition, it concludes that Chartered Accountancy meets the criteria for a “profession” because:

there is mastery by the practitioners of a particular intellectual skill, acquired by lengthy training and education;
there is a specialized code of ethical conduct, laid down and enforced by that society or institute, designed principally for the protection of the public; and
there is a belief, on the part of those engaged in the calling, in the virtue of interchange of views, and in a duty to contribute to the development of their calling, adding to its knowledge and sharing advances in knowledge and technique with their fellow members.

In light of these criteria and others, it is apparent that sound “professional judgment” should be based on ethical behaviour together with an appropriate foundation of technical skills and critical thought processes, sustained and enhanced by professional development. In addition, it requires the application of relevant knowledge, expertise and practical experience in selecting a rational course of action.”

Additional excerpts from the executive summary are provided in Part 2 and Part 3 of this series of posts.

Accountants’ Insecurity Relating to Work Diversity

2011-12-13T14:06:00.000-05:00

Chartered Accountants (CAs) practice in a wide variety of fields. This requires different competencies and implies the application of professional judgment in a multitude of different contexts. However, academic research provides evidence that, shortly before the collapse of Enron, experienced CAs were appreciably insecure about their professional identity and the appropriateness of the basic principles of their system of expertise. According to the research findings: “Interviewees were uncomfortable with the realities of auditor independence, were doubtful of the future of the profession, and had difficulties in describing the key features of a typical professional accountant in a context where accounting firms and individual accountants become involved in domains conceptually far removed from accountancy’s core domains.”

The research paper reported that: “...expert accountants did not trust to a high degree their system of expertise. Furthermore, our interviews suggest that through their reflexive abilities, accountants interpreted a number of their daily working experiences as being inconsistent with the routine and procedural application of accounting/auditing knowledge, thereby generating doubts about several of the key premises that underlie accounting expertise. As a result, interviewees had inconsistencies in the biographies of their professional lives; they saw the role of the firms and that of the professional institutes to be antagonistic. However, although doubts about the profession’s system of expertise regularly emerged from interviewees’ daily experiences, interviewees were not affected by these doubts to the point of being incapable of continuing their working lives as CAs or of engaging in radical reform initiatives.”

The research paper concludes that: “...All of this leads us to suggest that professional institutes establish channels for rank and file members to communicate concerns emerging from reflexive interpretations of daily experiences, and adopt mechanisms to examine these concerns and formulate, if necessary, proposals for institutional change. Like most modern institutions, professions seek to exclude from their members’ lives fundamental issues that cast doubt on the premises of their systems of expertise.”

The paper further concludes that: “Although suspicious and dissenting voices may be costly to deal with in the short term, it seems to us that providing conduits for members’ concerns and adopting a process to examine them might translate into professions having standards that better respond to the needs of society. These changes might also result in practitioners being better equipped to deal with situations in which they feel insecure, and perhaps avoid the occurrence of corporate scandals where auditors are blamed for not having issued qualified reports. Unfortunately, it seems that it takes a crisis of legitimacy on the scale of Enron to enact change.”

To learn more about this research, refer to the research paper “Professional Insecurity and the Erosion of Accountancy’s Jurisdictional Boundaries” by Yves Gendron, Ph.D, CA, University of Alberta and Roy Suddaby, Ph.D, University of Iowa, Canadian Accounting Perspectives, Vol. 3 No. 1 (2004) pp. 85–115.

Learning about Professional Skepticism – Part 3 of 3

2011-11-30T11:09:00.000-05:00

What does it mean to be sceptical? What does it mean to cast doubt on something you feel is not right, despite popular consensus? Scepticism may be generally defined as a personal disposition toward doubt or incredulity of facts, persons, or institutions.

For a general overview of sketicism, watch the YouTube video "What is Skepticism? A primer for understanding reality."

For an indepth analysis, refer to the research paper "A Model and Literature Review of Professional Skepticism in Auditing" by Mark W. Nelson, Auditing: A Journal of Practice & Theory, Vol. 28, No. 2, November 2009, pp. 1–34. This paper reviews research that examines professional skepticism in auditing. Consistent with much research and with recent regulatory concerns, the paper defines professional skepticism as "indicated by auditor judgments and decisions that reflect a heightened assessment of the risk that an assertion is incorrect, conditional on the information available to the auditor."

In many circumstances the assertion in question will be a client’s assertion that the financial statements are free of material misstatement, but the definition could apply to other assertions as well (e.g., attesting to the effectiveness of a client’s internal controls). This definition reflects more of a "presumptive doubt" than a "neutral" view of professional skepticism, implying that auditors who exhibit high professional skepticism are auditors who need relatively more persuasive evidence (in terms of quality and/or quantity) to be convinced that an assertion is correct. Depending on how an auditor's decisions are evaluated, it is possible under this definition for an auditor to exhibit too much professional skepticism, in that they could design overly inefficient and expensive audits.

The paper provides a model that describes how audit evidence combines with auditor knowledge, traits, and incentives to produce judgments that reflect professional skepticism. The model also describes how, given a judgment that reflects some level of professional skepticism, the judgment combines with auditor knowledge, traits and incentives to produce actions that reflect relatively more or less professional skepticism. The model highlights that auditors’ pre-existing knowledge, traits and incentives all combine (and potentially trade off or interact) to affect the amount of professional skepticism in audit judgment and audit actions. This perspective also facilitates understanding how audit firms can influence professional skepticism in practice via hiring, training, performance appraisal, review, decision aids, incentives and changes in tasks and institutions.

Learning about Professional Skepticism – Part 2 of 3

2011-11-29T12:19:00.000-05:00

In January 2007, the US Public Company Accounting Oversight Board (PCAOB) sponsored a Forum on Auditing in the Small Business Environment. Kayla J. Gillan, Board Member, gave a presentation on Unconscious Human Nature Affecting “Professional Skepticism.” During that presentation, she observed that: “Because we are human, we are not perfect. Because we are not perfect, we will make errors. But, because the cost of auditor error is so significant, we must try (within the limits of reasonable human capacity) to minimize the frequency, size and severity of errors. To put an even finer point to it: I am speaking of those characteristics of human behaviour that affect “professional skepticism” – not because we want them to, but because we are usually not even aware of them.”

Gillan further observed that: “Over two decades of psychological research has revealed at least one truism: even the most well-meaning person unintentionally allows unconscious thoughts and feelings to influence his or her seemingly objective decisions. We all have what Yale Professor David Armor calls “the illusion of objectivity.” While we obviously do not have time today to even list, in a comprehensive manner, all of the reasons for this, let me describe briefly a few that I have noted that seem most relevant to the work of an auditor in today’s world. [Implicit Prejudice; In-Group Favouritism; Bias Favouring Those Who Can Benefit You; and Bounded Awareness]”

In summary, Gillan offered the following conclusion: “What can we do to minimize risks of unconscious attitudes impairing audit quality? Clearly, we do not have time today for an exhaustive examination of that question. But, I can leave you with a few thoughts, and ask that you further consider these issues as you go back to your offices. Studies show that, when we are mindful of relevant risks, we will be more conscientious about managing them. One way to be mindful of unconscious biases that may affect the way in which we interact with audit clients is to collect data aimed at revealing how these same biases may exist in your own offices or professional relationships. Look at the internal management of your firm: Who do you hire? How do you reward good performance? How do you define “good performance”? On whom do you tend to place greater trust? With this introspection, then ask yourselves: Does any of this data indicate an unconscious bias that may also impact the way in which you relate to your client and plan and perform audits?”

On August 16, 2011, the PCAOB issued a concept release to solicit public comment on ways that auditor independence, objectivity and professional skepticism could be enhanced. One possible approach on which the Board is seeking comment is mandatory audit firm rotation, which is explored in detail in PCAOB Release No. 2011-006. However, the Board seeks advice and comment on other approaches as well. Comments should be submitted no later than December 14, 2011. The Board will also convene a public roundtable meeting in March 2012, at which interested persons will present their views. Additional details about the roundtable will be announced at a later date.

Learning about Professional Skepticism – Part 1 of 3

2011-11-23T11:43:00.000-05:00

With the move toward a more principles-based financial reporting framework and increased emphasis on fair value measurement, along with increased expectations from stakeholders and regulators, the ability to consistently make high quality professional judgments is increasingly important. In response, KPMG has launched a professional judgment initiative, which includes development of a Professional Judgment Framework and training all assurance professionals on a good judgment process, as well as common threats to good judgment. This Framework and training are intended to elevate judgment quality and professional skepticism across the firm and to provide a common vocabulary that facilitates implementation and mentoring on professional judgment.

“Professional scepticism” may be defined as an attitude that includes a questioning mind and a critical assessment of the supporting evidence. Professional skepticism helps to frame the professional accountant’s mindset. If that mindset is aligned with the objectives of the accounting profession and the duty to the public trust, professional judgments are also likely to be appropriately aligned with those objectives.

According to the KPMG monograph (on page 16): “Professional skepticism refers to the ability of the auditor to approach issues in an objective, balanced way, with a questioning mind and an appropriate level of critical evaluation. Accordingly, it is important that you learn what professional skepticism is and how to develop and improve your own sense of professional skepticism. It is important to understand that professional skepticism does not mean that auditors should adopt a cynical attitude toward client management. To the contrary, professional standards indicate that auditors should neither assume that management is dishonest nor assume unquestioned honesty.”

The accompanying exhibit sets out six characteristics of scepticism, summarized from the current research, as follows:

· Questioning Mind - A disposition to inquiry, with some sense of doubt;

· Suspension of Judgment - Withholding judgment until appropriate evidence is obtained;

· Search for Knowledge - A desire to investigate beyond the obvious, with a desire to corroborate;

· Interpersonal Understanding - Recognition that people's motivations and perceptions can lead them to provide biased or misleading information;

· Autonomy - The self-direction, moral independence and conviction to decide for oneself, rather than accepting the claims of others;

· Self-Esteem - The self-confidence to resist persuasion and to challenge assumptions or conclusions.

To learn more, read the research article “Development of a Scale to Measure Professional Skepticism” by R. Kathy Hurtt, PhD, CPA, in Auditing: A Journal of Practice &Theory, Vol. 29, No. 1, May 2010, pp. 149–171.

Survey on Professional Judgment Matters for CAs

2011-11-04T09:02:00.036-04:00

Chartered Accountants in Canada and internationally are invited to participate in an online “Survey on Professional Judgment Matters for CAs.” The objective is to assess whether there is a need for enhanced communication and collaboration by CAs with regard to professional judgment matters. This seedcorn project is sponsored by the Institute of Chartered Accountants of Scotland (ICAS).

According to the academic research, the value of “professional judgment” is a function of both its importance and its quality, and each of these depends on the other. Regardless of whether CAs work in education, public practice, industry, government or elsewhere, the quality of their professional judgment is based on ethical behaviour, together with an appropriate foundation of technical skills and critical thought processes, sustained and enhanced by professional development.

The importance and quality of professional judgment is the subject of the survey, which examines the feasibility of creating an Internet-based professional judgment resource centre. Survey questions require a simple Yes or No answer, but space is provided for participants who want to add comments. The survey results will be used in summary form only and all responses will be treated as confidential. An overall summary of the survey results will be provided by e-mail to all survey participants in December 2011 upon completion of this initial phase of the project.

The “Professional Judgment Project Proposal” and the “Support for Survey on Professional Judgment Matters” are available online at Google Docs.

Please take 5 minutes to complete the online survey by November 18, 2011 (www.surveymonkey.com/s/ProfessionalJudgmentMatters).

J. Paul-Emile Roy, CA, Researcher and Consultant

E-Mail: paul.emile.roy@gmail.com

Professional Judgment – Ethical Thinking by Chartered Accountants

2011-10-31T09:08:00.015-04:00

It is generally accepted that ethical thinking by Chartered Accountants (CAs) is based on their knowledge and the application of fair and comprehensive codes of professional conduct, such as the IFAC Handbook of the Code of Ethics for Professional Accountants. Education, training and experience, as well as professional and organizational commitment, influence a CA’s ability to utilize principled ethical thinking when exercising professional judgment.

Accounting research suggests that accountants can think about ethical issues in one of three ways that correspond to the three types of ethical thinking: pre-conventional, conventional and principled thinking. CAs use pre-conventional ethical thinking when they decide what is right or wrong based upon consequences, and often, self-interest. An example of using pre-conventional thinking is management’s decision to pad a budget because a bonus will be received if the budget is met.

CAs use conventional ethical thinking when social consensus, such as accepted practices, rules and laws, define what is right or wrong. An example of using conventional ethical thinking is management’s structuring a contract, such as a lease, solely to achieve a particular accounting result. CAs use principled ethical thinking when they use universal ethical principles of justice and the common good to determine what is right or wrong. An example of using principled ethical thinking is management’s voluntarily disclosing to shareholders the firm’s environmental and social practices, even if they are less than flattering, because it is right or justifiable to do so. Once CAs use principled ethical thinking to determine the right thing to do, they should be encouraged to do it.

For more information, read the article “Ethics and the accountant” by Linda Thorne, PhD, CA and Dawn Massey, PhD, CPA in the premier issue of CMA Magazine online.

Principles not Rules: A Question of Judgement

2011-10-24T08:59:00.019-04:00

The Institute of Chartered Accountants of Scotland (ICAS) published (in April 2006, updated July 2008) a research report called Principles not Rules: A Question of Judgement. The Introduction to this 27-page report was written by Hugh Shields, Chairman of the Working Group (Director and Head of Financial Reporting at Barclays Capital, a division of Barclays Bank). He states that: “The key to true and fair financial reporting is the balanced exercise of judgement. If standard setters, preparers, auditors and regulators could all exercise judgement on broadly equal terms, then this would provide the healthy tension which is needed for true and fair financial reporting and for communication with stakeholders.”

According to Shields, “Principles-based accounting standards are based on a conceptual framework, consist of a clear hierarchy of overriding principles and contain no ‘bright-line’ or anti-abuse provisions. Such an approach requires the use of judgement by preparers, auditors and regulators. ...With the safeguards afforded by such an approach, all parties should be more able to accept the consequences of exercising judgement in a principles-based accounting world.

“Against the above background, much greater simplicity in standard setting becomes possible. An interviewee in this project noted that: “Any accounting standard should be capable of being explained in one minute.” Yet some standards currently seem to defy any simple explanation at all. In the interests of all parties involved in financial reporting and, in particular, the broad range of users, such a situation should not be allowed to persist.”

Shields further notes that, “Einstein once said that ‘Everything should be made as simple as possible, but not simpler.’ This perfectly captures the Working Group's view that accounting standards should be firmly governed by high-level principles with only the absolute minimum additional guidance required to make the standard operational. Preparers and auditors would, therefore, need the courage to exercise and defend their judgements in this simplified accounting world. Users and regulators would need the wisdom to accept that there may be more than one answer and, over time, all parties would have to build the trust that this state of the world implies.”

A summary of 10 recommendations is presented in the report (page 3). A review of the professional, academic and regulatory literature on the principles versus rules debate in international accounting standard setting entitled Principles-Based or Rules-Based Accounting Standards? A Question of Judgement is available on the lCAS website. Also available is the output from the financial instrument workshop sessions Principles not Rules: Report on Proceedings of Financial Instrument Workshops.

Professional Judgment: Are Auditors Being Held to a Higher Standard Than Other Professionals?

2011-10-17T17:01:00.002-04:00

This discussion paper on Professional Judgment was commissioned by the Institute of Chartered Accountants in Australia and written by Professor Ken Trotman, PhD, FCA, Centre for Accounting and Assurance Services Research, University of New South Wales. The September 2006 paper forms part of the Institute’s objective to deliver effective and visionary thought leadership initiatives that profoundly and positively impact business and the accounting profession.

According to the Executive Summary of this paper, “Auditors today are subject to increased expectations from regulators and the investing public. At the same time, corporations are expanding, transactions have become more complex and there are requirements on auditors to provide much greater levels of assurance related to financial fraud.”

The paper further notes that “judgment is the ‘cornerstone’ of auditing and describes some of the 40 years of research that has considered judgment and expertise. While the literature recognises that ‘of course experts make mistakes’, there appears to be a growing presumption that this should not be the case for auditors.”

“In many professions, the difficulty of making judgments is recognised. This paper discusses the role of judgment in medicine, the legal system, police investigations and marketing. It is recognised that errors of judgment do sometimes occur in these professions. The question that arises is whether auditors are being held to a higher level of accountability than other professions. This is particularly important where the scope of audits is constrained by the price society is willing to pay for such services. It is suggested that even a well-conducted audit, following all appropriate audit standards, can fail to detect a material fraud in the financial statements, particularly where management has gone to great lengths to cover up the fraud. These considerations are important in an environment where audit standards have the force of law.”

“The concept of cumulative evidence is discussed by reference to the Public Company Accounting Oversight Board (PCAOB) reviews of the Big 4 in the US. It is concluded that any inspection process should be concerned with whether sufficient cumulative evidence has been obtained rather than specific aspects of particular audit tests. The paper suggests that Australian inspection agencies have an opportunity to more fully inform investors than has been the case with the PCAOB, by providing a more even-handed assessment that describes both the good and the bad. The market needs to be aware of not only problems but also enhancements in independence procedures and quality controls and whether the enhanced policies are continuing to work effectively.”

(Read the discussion paper Professional judgment: are auditors being held to a higher standard than other professionals?)

Should Professional Judgment be a Pillar of Accounting Education?

2011-10-11T09:08:00.033-04:00

Chartered Accountants (CAs) practice in a wide variety of fields. For example, they may be auditors of publicly-traded corporations, advisers to privately-held organisations, CFOs (overseeing treasury, financing and strategic investment decisions), IT consultants, corporate finance advisers, tax specialists, forensic accountants, accounting professors, controllers (managing performance measurement and control systems), internal audit directors, government financial officers and insolvency practitioners. Each of these careers requires different competencies and implies the application of professional judgment in a multitude of different contexts.

The diversity that one encounters within the accounting profession raises several questions for which answers are not necessarily forthcoming. For example, do these different career streams require different sets or portfolios of cognitive skills? Do these career streams demand similar or distinct levels of cognitive skills? Moreover, does the optimal configuration between specific expertise and cognitive skills differ across these career streams? In that regard, the advent of articling within business organizations as an alternative to accounting firms is likely to bring further broadening in the range of careers and experiences of professional accountants.

Judgment and expertise in professional accounting have been topics of interest for many decades. Both concepts share many commonalities as judgment is the most evident outcome from expertise, while expertise is required to exercise judgment. However, both concepts can also be considered to be multi-dimensional. Two key aspects that underlie professional judgment in accounting are 1) relevant knowledge and experience so that 2) a choice must be made between alternatives.

In summary, we have learned a lot over the past two decades about professional judgment and expertise, but there remains some uncertainty as to what they are, as well as how and when to develop them. It appears that the development of professional expertise and judgment through generic learning processes may not be optimal. The literature also raises questions as to whether university education is necessarily the best time to provide such professional judgment and expertise abilities.

The preceding views are adapted from the discussant’s comments “Further Developing Professional Attributes in CAs: An Impossible Challenge?” by Michel Magnan, PhD, FCA, Concordia University, in response to the presentation “Teaching the Fine Arts of Being a Professional Accountant” by Susan Wolcott, PhD, CPA. Both the presentation and the discussant’s comments were part of the November 22, 2010 symposium Leveraging Change - The New Pillars of Accounting Education which was held in Toronto, Canada. The pillars of accounting education include: professional judgment; professional and personal attributes; accounting principles and concepts; ethical decision making; and integration.

(For more information on this symposium, contact Irene Wiecek, FCA, at the University of Toronto and/or Tim Forristal, CA, or Gord Beal, CA, at the Canadian Institute of Chartered Accountants (CICA). Refer to the CICA website for more information on What Do CAs Do?)

Professional Judgment – The Mark of a Profession

2011-10-05T09:18:00.000-04:00

The Rules of Professional Conduct are part of the Member’s Handbook of the Institute of Chartered Accountants of Ontario. The Foreword states that the Rules are comprehensive in their scope, practical in application and addressed to high moral standards. They serve not only as a guide to the profession itself, but as a source of assurance of the profession's concern for the public it serves.

According to those Rules, “It is a mark of a profession that there is a voluntary assumption, by those who comprise it -- the professional community -- of ethical principles which are aimed, first and foremost, at protection of the public and, second, at achieving orderly and courteous conduct within the profession.”

The rules of professional conduct presume the existence of a profession. Since the word "profession" has lost some of its earlier precision, through widespread application, it is worthwhile reviewing the characteristics which mark a calling as professional in the traditional sense.

Much has been written on the subject and court cases have revolved around it. The weight of the authorities, however, identifies the following distinguishing elements:

· there is mastery by the practitioners of a particular intellectual skill, acquired by lengthy training and education;

· the traditional foundation of the calling rests in public practice -- the application of the acquired skill to the affairs of others for a fee;

· the calling centres on the provision of personal services rather than entrepreneurial dealing in goods;

· there is an outlook, in the practice of the calling, which is essentially objective;

· there is acceptance by the practitioners of a responsibility to subordinate personal interests to those of the public good;

· there exists a developed and independent society or institute, comprising the members of the calling, which sets and maintains standards of qualification, attests to the competence of the individual practitioner and safeguards and develops the skills and standards of the calling;

· there is a specialized code of ethical conduct, laid down and enforced by that society or institute, designed principally for the protection of the public;

· there is a belief, on the part of those engaged in the calling, in the virtue of interchange of views, and in a duty to contribute to the development of their calling, adding to its knowledge and sharing advances in knowledge and technique with their fellow members.

By these criteria, chartered accountancy is a profession. It is essential to recognize that a profession does not cease to be a profession because a proportion of its members enter salaried private employment. These members continue to belong to the profession and to be subject to the rules of professional conduct. It should be recognized that some members of the profession might acquire the required skills outside of public practice.

Comparing Thoughts on Professional Judgment - 1937 and 1988

2011-09-28T09:13:00.022-04:00

“Proficiency in accounting work is largely a matter of experience and judgment; the underlying theory of the science is not particularly profound. The test comes when we attempt to apply the general fundamentals to the infinitely varied and complex situations found in the world of commerce. Factual information and accuracy in its procurement are essential, but its value is submerged unless with it is synchronized the development and training of the judgment...the solution of business problems not only calls for an orderly marshalling of facts, but, what is equally important, careful analysis and logical reasoning from such facts, the formation and establishing of effective conclusions and the exercise of sound judgment.” (This quote is drawn from the article by Kris A. Mapp, FCA, "Educating Our Students - What Is Our Responsibility?" Canadian Chartered Accountant, October 1937, page 258.)

“According to the academic research literature, the exercise of professional judgment by those preparing and auditing financial accounting information is at the core of financial reporting. Without the flexibility and the intelligence provided by professional judgment, the complex system of financial accounting procedures, standards and rules would be ponderous, unresponsive, insensitive: in short, unworkable. Financial reporting, as it operates in Canada and elsewhere, requires professional judgment at many levels, in a host of circumstances, and by a variety of skilled and experienced professionals. In fact, professional judgment is an essential part of financial reporting.” (This quote is drawn from the CICA Research Study, Professional Judgment in Financial Reporting, Michael Gibbins and Alister K. Mason, 1988, page 1.)

Can you really teach good judgment? (Part 3 of 3)

2011-09-20T09:06:00.004-04:00

Research in the areas of judgment and decision making over the last few decades indicates that additional knowledge about common threats to good judgment, together with processes and tools for making good judgments, can improve the professional judgment abilities of both new and seasoned professionals. The research also confirms that professional judgment in the context of teams or groups is crucial because many important judgments are made in groups.

In learning about group judgments and decisions, three key themes should be kept in mind. First, the same judgment process, such as that illustrated in the KPMG Professional Judgment Framework (available at the KPMG Faculty Portal) applies to both individual and group judgments. Second, it is important to be aware of the judgment traps and biases, and to take steps to mitigate them in group settings. Third, successful group leaders manage group judgment processes by properly structuring the group’s interaction and by effectively managing conflict.

With the movement in financial reporting toward more principles-based standards and more fair value measurements, exercising good professional judgment is increasingly important. It is clear that professionals will be required to apply more and better professional judgment on a consistent basis. As the accompanying exhibit shows, the more critical the judgment, the more rigorous the process and the more time it will take to make good judgments.

Can you really teach good judgment? (Part 2 of 3)

2011-09-14T14:30:00.000-04:00

The KPMG monograph, Elevating Professional Judgment in Auditing: The KPMG Professional Judgment Framework (available at the KPMG Faculty Portal) offers a judgment framework. That framework depicts constraints, influences and biases that threaten good judgment, with the box on the outer rim of the framework labeled “Environment” and the triangle at the top labeled “Influences/Biases.” At the bottom are Knowledge and Professional Standards, as these factors provide the foundation for quality judgments. The framework includes a number of components, such as mindset, consultation, reflection and coaching. At the core, there is a five-step judgment process.

The monograph presents simple, but powerful, principles that help overcome common threats to good judgment and that enhance professional skepticism. In addition, it covers several common judgment tendencies and how they can lead to biased judgments, and offers techniques to overcome or reduce the potential impact of these biases. After laying a foundation for individual judgments, the monograph discusses common threats to good judgment in groups, and the techniques that can improve the quality of group judgments.

According to KPMG, the mindset, skills and techniques behind good judgment begin to form at a young age and can be taught and improved with experience and practice. It is critical that accounting and auditing students receive a strong foundation in the fundamentals of professional judgment. KPMG is committed to sustaining an ongoing dialogue about professional judgment. Therefore, it is now taking the important step of sharing and leveraging the content with the key stakeholder groups, including the academic community.

Can you really teach good judgment? (Part 1 of 3)

2011-09-07T11:43:00.005-04:00

According to a recent publication, Elevating Professional Judgment in Auditing: The KPMG Professional Judgment Framework, a common question people have is, “Can you really teach good judgment?” Many believe that it is a gift; either you have it or you do not. Others would say you cannot teach good judgment; rather, it must be developed through the “school of hard knocks” after many years of experience. There is no question that talent and experience are important components of effective professional judgment, but it is possible to enhance your professional judgment skills through learning and applying some key concepts. As with other important skills, the sooner you start learning how to make good professional judgments, the better.

The KPMG monograph and related training materials (available at the KPMG Faculty Portal) were developed with the help of two professors from Brigham Young University, Steven Glover and Douglas Prawitt. Their research focuses on the judgment and decision making of accounting and auditing professionals. They have taught graduate (MBA) courses on effective judgment and decision making for many years.

Graduate courses in professional judgment are also being offered at selected Canadian universities, For example, Professor Efrim Boritz teaches a course on Professional Judgment (ACC 690 on pages 91-92) at the University of Waterloo. The course covers a variety of topics, such as: Introduction to Professionalism and Professional Judgment; Bounded Rationality; Heuristics, Framing and Biases; Knowledge, Expertise, Specialization; Being a Trusted Adviser; Ethics, Skepticism and Rules of Professional Conduct; Methods of Studying Professional Judgment; Multi-person Tasks and Professional Judgment; Role of Decision Aids in Professional Judgment; and, Conflicts and Negotiations.

SEC Views on a Framework for Professional Judgment – Part 3 of 3

2011-08-30T09:15:00.017-04:00

According to the US Securities and Exchange Commission (SEC) Committee on Improvements to Financial Reporting (“CiFR”) accounting judgments should be based on a critical and reasoned evaluation made in good faith and in a rigorous, thoughtful and deliberate manner. Preparers should have appropriate controls in place to ensure adequate consideration of all relevant factors (see Final Report, pages 88-96).

Factors applicable to the making of an accounting judgment include the following:

· the preparer’s analysis of the transaction, including the substance and business purpose of the transaction;

· the material facts reasonably available at the time that the financial statements are issued;

· the preparer’s review and analysis of relevant literature, including the relevant underlying principles;

· the preparer’s analysis of alternative views or estimates, including pros and cons for reasonable alternatives;

· the preparer’s rationale for the choice selected, including reasons for the alternative or estimate selected and linkage of the rationale to investors’ information needs and the judgments of competent external parties;

· linkage of the alternative or estimate selected to the substance and business purpose of the transaction or issue being evaluated;

· the level of input from people with an appropriate level of professional expertise;

· the preparer’s consideration of known diversity in practice regarding the alternatives or estimate;

· the preparer’s consistency of application of alternatives or estimates to similar transactions;

· the appropriateness and reliability of the assumptions and data used;

· the adequacy of the amount of time and effort spent to consider the judgment.

When considering these factors, it would be expected that the amount of documentation, disclosure, input from professional experts, and level of effort in making a judgment would vary based on the complexity, nature (routine versus non-routine), and materiality of a transaction or issue requiring judgment. Material issues or transactions should be disclosed appropriately. Existing disclosure requirements should be sufficient to generate transparent disclosure that enables an investor to understand the transaction and assumptions that were critical to the judgment. In addition, when evaluating the reasonableness of a judgment, regulators should take into account the disclosure relevant to the judgment.

It is imperative that the alternatives considered and the conclusions reached should be documented contemporaneously. This will ensure that the evaluation of the judgment is based on the same facts that were reasonably available at the time the judgment was made. The lack of contemporaneous documentation may not mean that a judgment was incorrect, but would complicate an explanation of the nature and propriety of a judgment made at the time of the release of the financial statements.

SEC Views on a Framework for Professional Judgment – Part 2 of 3

2011-08-24T09:03:00.007-04:00

According to the US Securities and Exchange Commission (SEC) Committee on Improvements to Financial Reporting (“CiFR”), there are many categories of accounting and auditing judgments that are made in preparing financial statements. Any guidance should encompass all of these categories, if practicable (see Final Report, pages 88-96).

Some of the categories of accounting judgment are as follows:

· selection of accounting standard;

· implementation of an accounting standard;

· lack of applicable accounting standards;

· financial statement presentation;

· estimating the actual amount to record; and

· evaluating the sufficiency of evidence.

In addition, there are many levels of professional judgment that occur related to accounting matters. Preparers must make initial judgments about uncertain accounting issues; the preparer’s judgment may then be evaluated or challenged by auditors, investors, regulators, legal claimants and even others, such as the media. Guidance should not suggest that those who evaluate a judgment must re-perform the judgment according to the guidance. Instead, guidance should provide clarity to those who would make a judgment on factors that those who would evaluate the judgment would consider while making that evaluation.

Judgment, with respect to accounting matters, should be exercised by a person or persons who have the appropriate level of knowledge, experience, and objectivity to form an opinion based on the relevant facts and circumstances within the context provided by applicable accounting standards. Judgments could differ between knowledgeable, experienced, and objective persons. Such differences between reasonable judgments do not, in themselves, suggest that one judgment is wrong and the other is correct.

SEC Views on a Framework for Professional Judgment – Part 1 of 3

2011-08-17T14:19:00.003-04:00

According to the US Securities and Exchange Commission (SEC) Committee on Improvements to Financial Reporting (“CiFR”), professional judgment is not new to the areas of accounting, auditing or securities regulation. The criteria for making and evaluating judgment have been a topic of discussion for many years. The recent increased focus, however, comes from several different developments, including changes in the regulation of auditors, more use of fair value estimates, and a focus on more principles-based standards (see Final Report, pages 88-96).

Investors are likely to benefit from more emphasis on principles-based standards, since rules-based standards may provide a method, such as through exceptions and bright-line tests, to avoid the accounting objectives underlying the standards. In other words, without the exercise of professional judgment, rules in the form of bright lines may result in a false consistency – that is, ostensibly uniform accounting for differing fact patterns. If properly implemented, principles-based standards should improve the information provided to investors while reducing investor concerns about “financial engineering” by companies using the rules to avoid accounting for the substance of a transaction.

While preparers appear supportive of a move to less prescriptive guidance, they have expressed concern regarding the perception that current practice by regulators in evaluating judgments does not provide an environment in which such judgments may be generally respected. This, in turn, can lead to repeated calls for more rules, so that the standards can be comfortably implemented.

Guidance on the exercise of professional judgment may help address the following issues:
(1) Investors’ lack of confidence in the use of judgment – Guidance may provide investors with greater comfort that there is an acceptable rigor that companies follow in exercising reasonable judgment. (2) Preparers’ concern regarding whether reasonable judgments are respected – In the current environment, preparers may be afraid to exercise professional judgment for fear of having their judgment overruled, after the fact, by regulators. (3) Lack of agreement in principle on the criteria for evaluating professional judgment – Identification of the criteria for evaluating reasonable judgments, including the appropriate role of hindsight in the evaluation, may not be clearly defined, which may lead to increased uncertainty. (4) Concern over increased use of principles-based standards – Companies may be less comfortable with their ability to implement more principles-based standards if they are concerned about how reasonable judgments are reached and how they will be assessed.

There are many different ways that potential guidance on professional judgment could be provided. To be successful, however, that guidance should not eliminate debate, nor be inflexible or mechanical in application. Rather, the guidance should encourage preparers to organize their analysis and focus preparers and others on areas to be addressed, thereby improving the quality of the judgment and likelihood that regulators will accept the judgment. Any guidance issued should be designed to stimulate a rigorous, thoughtful and deliberate process rather than a checklist-based approach for making and evaluating professional judgment.

Judgment Sustained

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The preparation and audit of financial statements have always required the exercise of judgment. The trend entails a move away from prescriptive guidance toward greater use of judgment – for example, fair value involves estimates that may be less objectively determined than historical cost measures. Similarly, auditing standards on internal control over financial reporting emphasize the need for professional judgment in taking a risk-based approach to internal control audits. Moreover, International Financial Reporting Standards (IFRS) rely on general principles.

Poor judgment in accounting can be costly. Despite the use of rules-based standards, poor judgment is one of the leading reasons for failed financial reporting. A 2006 study suggests that poor judgment is the second-leading contributing factor for restatements (refer to Stephen Taub, “Study Points Restatement Blame Back at Cos.,” Compliance Week, March 25, 2008). Flawed financial reporting is a serious outcome in itself, but many other aspects of business performance, such as financial planning, brand and reputation, are also exposed to significant risk through poor judgment.

Broadly speaking, there are two ways of reasoning (Stanovich and West, “Individual differences in reasoning: Implications for the rationality debate,” Behavioral & Brain Sciences, 23, 2000, 645–665). The first is an intuitive “gut feeling” about situations. This method of decision processing works quickly and instinctively, but it is sometimes an emotional reaction. The second is a more analytic, holistic, thoughtful approach to making decisions, perhaps using a framework. Clearly, a judgment framework is not a silver bullet, but research shows that it can work in various contexts, particularly ethics. While everyone has biases, there are some explicit strategies that can ameliorate some of the most common ones.

According to the US Securities and Exchange Commission (SEC) Committee on the Improvement of Financial Reporting (“CiFR”), a judgment framework is a critical and good faith thought process (see Final Report, pages 88-96). It is important to remember, however, that professional judgment is not formulaic. No judgment framework will result in consistently correct and effective decisions, but using a judgment framework could lead to greater consistency in decision making and practice.

To learn more, read “Judgment Sustained” in Deloitte Review online. This web article offers a view on using a judgment framework. It was prepared by: Shelley Barrows, partner, Assurance Services, Deloitte & Touche LLP and a fellow with Deloitte Idea Labs; Vikram Mahidhar, senior research manager and director of operations for Deloitte Research, Deloitte Services LP; and Ajit Kambil, global research director for the CFO Services, Deloitte Services LP.

Professional Judgment – A CPAB Perspective

2011-08-03T15:18:00.007-04:00

The Canadian Public Accountability Board (CPAB) was incorporated in 2003 under the Canada Corporations Act. Its mission is “To contribute to public confidence in the integrity of financial reporting of reporting issuers in Canada by effective regulation and promoting quality, independent auditing.”

CPAB is based in Toronto with operations in Montreal and Vancouver, and industry involvement nationally and internationally. It oversees auditors of Canadian reporting issuers, that is, companies that have raised funds from the Canadian investing public and who, for that reason, must file financial statements with one or more provincial securities commissions. Under the Canadian Securities Administrators Rule 52-108, accounting firms that audit reporting issuers must be participants in CPAB’s oversight program.

In 2008, CPAB delivered two presentations that offer a perspective on professional judgment. First was the May 30, 2008 Presentation to Canadian Academic Accounting Association (CAAA) 2008 Conference in Winnipeg, Manitoba by Keith Boocock. Titled "CPAB - Five Years On," it addressed the need for documentation of professional judgment (slide 25), the importance of developing research into professional judgment (slide 46), and a possible area for future study - how to assess and measure professional judgment (slide 49).

The second was the August 7, 2008 Presentation to CICA – SME (Professional Judgment) by Paul Lohnes. Titled "Professional Judgment - A CPAB Perspective," it explained what professional judgment is and referred to the proposed definition in ISA 200 "The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement." The presentation also explained why professional judgment is important to CPAB, and then discussed how professional judgment is applied, the importance of consultation, and CPAB's expectations for professional judgments.

Professional Judgment and Principles-based International Financial Reporting Standards

2011-07-28T09:08:00.018-04:00

In a Statement before the Subcommittee on Securities, Insurance and Investment of the United States Senate in Washington, D.C. (October 24, 2007, p. 10), Sir David Tweedie, Chairman of the International Accounting Standards Board (IASB), emphasized that a shift to less rules-based principles will increase the need for judgment. He stated: “A principle-based standard relies on judgments. Disclosure of the choices made and the rationale for these choices would be essential. If in doubt about how to deal with a particular issue, preparers and auditors should relate back to the core principles. The basis for conclusions (the rationale underlying a particular standard and published with it) should also include, in particular, the question of whether there is only a single view to tackle the economics of the situation. Often there are competing views—is one regarded as more relevant? If so, the reasons for choosing that particular view should be explained in the basis for conclusions and the reasons for rejecting the others clearly outlined.”

Because they are viewed as principles-based, International Financial Reporting Standards (IFRS) raise pervasive judgment issues (such as going concern, materiality and related disclosures) and application judgment issues (including presentation and disclosure, classification, recognition, de-recognition and measurement) for financial statement preparers, auditors and regulators. In fact, the need to exercise sound professional judgment on a continuous basis (perhaps 100,000 times a day around the world) was noted by Robert P. Garnett Chairman, International Financial Reporting Interpretations Committee (IFRIC) in a YouTube presentation called “Professional judgment gets used in the interpretation of standards” on November 29, 2008.

The Role of Ethics in Professional Judgment

2011-07-20T09:02:00.034-04:00

The International Federation of Accountants (IFAC) comprises 159 members and associates in 124 countries worldwide, representing approximately 2.5 million accountants in public practice, industry and commerce, the public sector and education. IFAC’s mission is to serve the public interest, strengthen the worldwide accountancy profession and contribute to the development of strong international economies by establishing and promoting adherence to high quality professional standards, furthering the international convergence of such standards and speaking out on public interest issues where the profession’s expertise is most relevant.

IFAC published the Handbook of the Code of Ethics for Professional Accountants (Code of Ethics) in 2010. Prepared by the International Ethics Standards Board of Accountants (IESBA), the Code of Ethics became effective on January 1, 2011. It contains three parts. Part A establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework that professional accountants shall apply. It states (on page 9): “A professional accountant shall use professional judgment in applying this conceptual framework.”

Parts B and C describe how the conceptual framework applies in certain situations. They provide examples of safeguards that may be appropriate to address threats to compliance with the fundamental principles. They also describe situations where safeguards are not available to address the threats and, consequently, the circumstance or relationship creating the threats shall be avoided. Part B applies to professional accountants in public practice. Part C applies to professional accountants in business. Professional accountants in public practice may also find Part C relevant to their particular circumstances.

According to the Code of Ethics (page 10), the fundamental principles of professional ethics include integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Each of these principles is discussed in detail, for example, objectivity is “to not allow bias, conflict of interest or undue influence of others to override professional or business judgments.” In this case, the Code of Ethics (page 16) states: “A professional accountant may be exposed to situations that may impair objectivity. It is impracticable to define and prescribe all such situations. A professional accountant shall not perform a professional service if a circumstance or relationship biases or unduly influences the accountant’s professional judgment [emphasis added] with respect to that service.”

Professional Judgment in Auditing

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The Canadian Institute of Chartered Accountants (CICA) published the research report Professional Judgment and the Auditor in 1995. The 100-page report was prepared by staff of the CICA Research Studies Department (J. Paul-Emile Roy, CA) under the direction of an 8-member study group. It establishes the importance of professional judgment to auditing standards through an examination of the prevalence of references to professional judgment in the CICA Handbook. On page 5, the report proposes a definition of professional judgment in auditing that is a more concise and condensed version of the definition proposed in the 1988 CICA research study Professional Judgment in Financial Reporting.

According to the report: “Professional judgment in auditing is the application of relevant knowledge and experience, within the context provided by auditing and accounting standards and Rules of Professional Conduct, in reaching decisions where a choice must be made between alternative possible courses of actions.” This definition is helpful in that it clarifies the situations where professional judgment is called for and emphasizes the role of professional standards in the process.

The report identifies many sources of information regarding the issues surrounding professional judgment. It develops a framework for professional judgment and identifies key factors that influence the judgment process. As well, it provides valuable guidance to practitioners regarding their professional obligations when exercising professional judgment.

Professional Judgment in Financial Reporting

2011-07-06T11:24:00.002-04:00

The Canadian Institute of Chartered Accountants (CICA) published the research study Professional Judgment in Financial Reporting in 1988. On pages 132-133 of the 225-page study, the co-authors (Michael Gibbins, PhD, FCA and Alister K. Mason, PhD, FCA) supported by a six-member advisory group, address matters regarding the exercise of professional judgment in financial reporting.

According to the authors, when professional judgment in the financial reporting context is referred to by standard-setters, securities commissions, educators, individual professionals and others, it should be defined as follows: “The process of reaching a decision on a financial reporting issue can be described as professional judgment when it is analytical, based on experience and knowledge (including knowledge of one's own limitations and of relevant standards), objective, prudent and carried out with integrity and recognition of responsibility to those affected by its consequences. Such professional judgment is likely to be most valuable in complex, ill-defined, or dynamic situations, especially where standards are incomplete, and should normally involve consultation with other knowledgeable people, identification of potential consequences and documentation of the analytical processes leading to the decision.”

In Chapters 12-14 of the study, the authors make 32 recommendations ─ about the nature of professional judgment, about standards and for those exercising professional judgment.

"Judgment in Jeopardy" by Ross Skinner

2011-06-29T10:45:00.010-04:00

Ross Skinner, FCA, had a significant impact on Canadian accounting standards. He was inducted to the Accounting Hall of Fame (see “A Rare Induction to Fame” in CAmagazine online) in 2000.

In a 1995 CAmagazine article “Judgment in Jeopardy:Why Detailed Rules Will Never Replace a CharteredAccountant’s Professional Judgment in Financial Reporting,” Ross argued that judgment in financial accounting cannot be eliminated by detailed rule making, and that sound judgment requires a thorough understanding of the objectives and theory of accounting (which theory must be complete and specific enough to provide a proper grounding for judgment). These were fundamental beliefs of his accounting philosophy.

In 2005, the “Judgment in Jeopardy” article was re-published (with permission) in Canadian Accounting Perspectives (CAP), a journal of the Canadian Academic Accounting Association. The special edition of CAP includes eight commentaries, available online. Two commentaries focus on the meaning of professional judgment and how it has evolved or will evolve. Another looks to the future of accounting practice, exploring Ross’s suggestion that the establishment of an interpretation panel could improve the application of accounting standards and professional judgment. It provides evidence to support this proposal, arguing that an interpretation panel would enhance the information environment that underlies the market’s allocation of capital.

Several commentaries focus primarily on the role of professional judgment in present-day accounting and auditing. For example, one notes that the very nature of professional judgment is changing. It argues that measurements or estimates made by people other than professional accountants, such as managers, open financial statements to potential earnings management and may undermine accountants’ professional judgment. Another discusses several critical issues raised by Ross’s article, including the difficulty of fully resolving judgment problems. It argues that ideological choices, competition and fundamental measurement problems support the conclusion that solutions will remain “forever elusive."

About this Blog

2011-06-18T12:28:00.006-04:00

Judgment defines a profession! In fact, the ability to make good judgment calls is paramount to the success of any professional. For Chartered Accountants (CAs), sound "professional judgment" is based on ethical behaviour together with an appropriate foundation of technical skills and critical thought processes, sustained and enhanced by professional development.

Professional judgment requires a commitment to gather all the pertinent facts, the discipline to examine the fact patterns in relation to a consistently-applied framework, and the willingness to consider alternative positions. In addition, it requires the application of relevant knowledge, expertise and practical experience in selecting a rational course of action.

The aim of this blog is to support CAs by:

opening a global communication channel to collaborate on professional judgment matters;
examining the theory, concepts and factors that influence the professional judgment process;
highlighting research and guidance that may help improve the quality of professional judgment.

After all, professional judgment matters!