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

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 3 of a three-part excerpt from the executive summary in the report.


“Chapter 6 reviews recent developments and other matters that are pertinent to the evolution of professional judgment. The focus is on the following topics:

• 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

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

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

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

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

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

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

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

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

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?

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?

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

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

“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)

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 University Connection) 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)

The KPMG monograph, Elevating Professional Judgment in Auditing: The KPMG Professional Judgment Framework (available at the KPMG University Connection) 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)

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 University Connection) 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 90-91) at the University of Waterloo. The course covers a variety of topics, such as: Introduction to Professionalism and Professional Judgment; Being a Trusted Adviser; Methods of Studying Professional Judgment; Bounded Rationality; Heuristics, Framing and Biases; Knowledge, Expertise, Specialization; Ethics, Skepticism and Rules of Professional Conduct; 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

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

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

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.