Integrated Reporting: the challenge of assurance

A recent news article on the website of the Institute of Chartered Accountants of Scotland (ICAS) observes that: “Integrated reporting (IR) continues to move forward.  There are now 83 pilot companies across the world which are testing out the integrated thinking processes necessary to deliver integrated reports and experimenting with how best to communicate the resulting information.” It also states that: “A prototype IR Framework was released at the end of November, which shows the direction of travel, and a 3 month consultation on a proposed framework will be published in April 2013.  It is hoped that a final version of the Framework will be published in early 2014.”

 

According to this article, the integrated report is likely to replace today's annual report as the main communication to the company’s stakeholders.  It is likely to contain a varied mix of different types of information - past, present and forward looking, financial and non financial. Some of the information may be extracted from the financial statements, CSR report, Governance report, etc. But, how will users know whether the report contains all the most important information or whether it is so slanted towards the positive that it is not really giving a realistic view?

 

In this regard, auditors could express a “balanced and reasonable” opinion on an integrated report. This would provide slightly less assurance than the opinion on the financial statements, reflecting the more judgmental basis of the information in the integrated report, the mix of different types of information, and the fact that less of the information will be objectively verifiable, thereby relying much more on the auditor’s judgment.  Also, with a greater degree of forward looking information, the inherent inability of anyone to predict the future means that a lower level of assurance is inherent.

“... it is important, though, that a positive opinion is clearly expressed, so that users can understand the nature of assurance being given, and that this will underlie the credibility of integrated reports...negative assurance and reporting by exception are too confusing to users. The auditing profession is perfectly capable of making the necessary judgments to express a positive opinion in this way, although greater judgment will be involved, and the auditor liability regime in some countries may make the auditors slightly reluctant.”

Learn more by reading the online article “Integrated Reporting: the challenge of assurance” by David Wood, ICAS Executive Director of Technical Policy and Services. In addition, see the related articles “A Template for Integrated Reporting” and “A professional judgment framework for financial reporting.”

A Template for Integrated Reporting

In an era in which news spreads as it happens over the Internet and social media networks, investors, society and governments are increasingly demanding that organizations be accountable to stakeholders, not merely shareholders, and be transparent about their activities. A forthcoming research paper outlines the concept of integrated reporting and proposes a template for integrated reporting. The model is based on the concepts in the King Report on Governance for South Africa (King III), and the International Integrated Reporting Council in the United Kingdom.

According to the author, an integrated report should explain the story of reaching the organization’s vision, underpinned by its values, enacted by management, monitored by governance and using facets of resources relating to financial capital, intellectual capital, social capital and environmental capital. The paper proposes an integrated reporting framework and provides an example of a template to use. Apparently, this is the first academic paper that provides a coherent framework on integrated reporting, along with a template.

The author supports a concise report that informs significant performance implications on the organizational vision during the reporting period. The paper does not define significance as it is an outcome of inquiry into reporting, rather than a rule, and instead leaves it up to preparers to use their professional judgment. Learn more by reading the online 48-page research article “A template for integrated reporting” by I. Abeysekera to be published in the Journal of Intellectual Capital, 14 (2), in May 2013.

Practice-Based Education – Perspectives and Strategies

There are many challenges facing researchers, educators, practitioners and students in today’s practice worlds. Published in 2012, the 37-page Australian book Practice-Based Education- Perspectives and Strategies is part of a series that examines research, theory and practice in the context of university education, professional practice, work and society. The series examines places where two or more of these areas come together.

Themes explored in the series include university education of professions, society expectations of professional practice, professional practice workplaces and strategies for investigating each of these areas. The authors bring a wealth of practice wisdom and experience to examine these issues, share their practice knowledge, report research into strategies that address these challenges, share approaches to working and learning and raise yet more questions. The conversations in the series contribute to expanding the discourse around the way people encounter and experience practice, education, work and society.

This book explores the principles, context, practices and strategies of practice-based education from multiple perspectives. It examines the place and nature of practice-based university education, that is, education that prepares graduates for practice. This seems initially to be a straightforward goal. However, practice-based education is, in reality, a complex of ideas, pedagogies, opportunities and possible experiences. In this complexity of realisation and simplicity of concept lies its strength and potential for rich and productive higher education.

The book is written by leading academics in higher education and is aimed at a broad audience including university educators, as well as researchers and those in the professions. The book examines goals, trends, perspectives and strategies of practice-based education in international, professional education programs. There are three sections: 1. Contesting and Contextualising Practice-Based Education; 2. Practice-Based Education Pedagogy and Strategies; and 3. The Future of Practice-Based Education.

PCAOB - Professional Skepticism by Auditors

A December 4, 2012 article in the Journal of Accountancy notes that a “PCAOB alert says audits must be conducted with skeptical eye.” According to that article, the US Public Company Accounting Oversight Board (PCAOB) is reminding auditors to maintain their professional skepticism when they conduct audits.

The Staff Audit Practice Alert states that: “Observations from the PCAOB’s oversight activities continue to raise concerns about whether auditors consistently and diligently apply professional skepticism.” Therefore, Staff Audit Practice Alert No. 10: Maintaining and Applying Professional Skepticism in Audits is intended to assist audit firms in their application of professional skepticism in upcoming calendar year-end audits.

The 16-page Alert further states that the failure to appropriately apply professional skepticism may prevent auditors from obtaining appropriate evidence to support their opinions. Skepticism failures also may prevent auditors from identifying material misstatements in financial statements. Although professional skepticism is important in all aspects of the audit, it is particularly important in areas that include significant management judgment, for example, measurement uncertainty.

Learn more by reading other guidance materials on professional skepticism.

Enhancing Audit Quality: Canadian Perspectives - Auditor Independence

The discussion paper Enhancing Audit Quality: Canadian Perspectives - Auditor Independence was issued in September 2012. It is the result of a collaborative initiative by the Canadian Institute of Chartered Accountants (CICA) and the Canadian Public Accountability Board (CPAB). The initiative focuses on three interrelated key areas in enhancing audit quality – the independence of auditors, the role of audit committees and auditor reporting. This 31-page paper was prepared by the Independence Working Group (IWG) in response to global proposals to modify auditor independence rules.

As discussed in the August 2012 publication Enhancing Audit Quality: Canadian Perspectives - Initiative Overview (see Appendix A thereof), audit quality is affected by many factors other than auditor independence. Indeed, many of the factors affecting audit quality involve parties other than auditors, their firms or the audit committees of companies they audit. Accordingly, considerations of the broader issues are outside the scope of this paper.

Following introductory and background chapters, this paper considers the meaning of “independence” (Chapter 3), and describes the current Canadian independence framework (Chapter 4) and the role of professional skepticism (Chapter 5). Next, the paper identifies and describes those global proposals in response to the financial crisis that are relevant to independence (Chapter 6). Guiding principles for evaluation of these global proposals adopted by the IWG are noted (Chapter 7). The paper concludes with an evaluation of the relevant global proposals and the consensus reached by the IWG on each of the proposals (Chapter 8).

To learn more about this joint CICA-CPAB initiative, see “Enhancing Audit Quality: Canadian Perspectives.”

Towards a global Code of Ethics for a global internal auditing profession

A recent article notes that the rapid pace of globalization requires internal audit professionals to possess a more sophisticated global mindset. This mindset includes not only the traditional technical dimensions of internal audit practice, but also its ethical foundations which can vary from country to country, from culture to culture and from language to language. Furthermore, language, culture and local laws and regulations can significantly impact how the ethical behavior of internal auditing professionals is analyzed, understood and, when necessary, investigated for propriety.

In this regard, the cultural anthropology concepts of emics (the insider’s perspective) and etics (the outsider’s perspective) of a culture influencing an individual’s ethical stance, and corresponding behavior, are discussed in detail. The article suggests that internal auditors working in global contexts might usefully adopt the “participant-observer” technique. Utilizing the constructs of the “three levels of culture” could be extremely useful in appreciating the surface features and deeper, unconscious bases where basic assumptions and values reside, and are correspondingly quite difficult to discern.

While appealing in theory, applying the participant-observer technique in practice could present a serious challenge to internal audit practitioners. In the 21st century, the Institute of Internal Auditors (IIA) constitutes one of the truly global professional organizations featuring representation from all major continents. So, there is an opportunity to evaluate the existing IIA Code of Ethics from different angles using the perspectives mentioned in this article, as well as others. The task seems endless, and the complexity is immense, but there is every promise that the efforts of many dedicated professionals around the world will make this evolving process exciting and worthwhile for future generations.

For more information, read the article “Towards a global Code of Ethics for a global internal auditing profession” by SridharRamamoorti, PhD, Associate Professor of Accounting and Director, Center for Corporate Governance, Kennesaw State University, Kennesaw , Georgia, USA.

Using a conceptual framework in setting accounting standards

A current research paper examines the nature and role of a conceptual framework for financial reporting. Although much has been written about such frameworks and their purported role, there are still questions about what it is and how it is used in setting accounting standards. It is noteworthy that the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are currently revising and converging their frameworks.

Using insights from the philosophical literature, this paper considers the nature of the statements that appear in the chapters of the conceptual framework on objectives and qualitative characteristics. It then considers how these statements are used by standard setters in reasoning towards accounting standards. The kind of reasoning involved and the type of statements that are used in such reasoning is examined.

The idea that some of the statements in the conceptual framework express desires that are to be fulfilled by financial reporting, regulated by accounting standards, is explored. These should be conceived as expressing general desires that are used in practical or instrumental reasoning towards accounting standards, rather than as universal desires that enable the deduction of such standards. The need for the exercise of judgment in such reasoning is explored.

The nature of the other statements in the conceptual framework is ambiguous. They are sometimes taken to be empirical statements about how the desires are to be fulfilled and sometimes taken as statements about the meaning of expressions used to express these desires. The paper suggests that the development of the conceptual framework would be easier and the final product would have more credibility if its nature and role was more clearly understood.


Dr Ian Dennis

This paper makes reference to the research study Professional Judgment in Financial Reporting by Michael Gibbins, PhD, FCA and Alister K. Mason, PhD, FCA, published in 1988 by the Canadian Institute of Chartered Accountants (CICA). It also makes reference to the Ross Skinner article Judgment in Jeopardy, first published in CA Magazine in November 1995 and reprinted in Canadian Accounting Perspectives in 2005. For more information, read the 33-page article “Using a conceptual framework in setting accounting standards” by Dr Ian Dennis, Senior Lecturer in Accounting and Finance, Oxford Brookes University Business School.

 

International Financial Reporting Standards and Aggressive Reporting: An Investigation of Proposed Auditor Judgment Guidance

In a recent research paper, the authors investigate auditors’ judgments under accounting standards that differ in their precision. After establishing conditions under which auditors accept managements’ aggressive financial reporting, the paper examines the effectiveness of alternative judgment frameworks in helping auditors curb this aggressive reporting under less precise International Financial Reporting Standards (IFRS) and more precise US GAAP.

 

One of the frameworks is based on the Securities and Exchange Commission’s (SEC) Advisory Committee on Improvements to Financial Reporting’s (CIFiR) recommendation to use counterfactual reasoning. Another framework based on Construal Level Theory requires auditors to think broadly about a transaction, while the last framework is based on both counterfactual reasoning and Construal Level Theory.

 

The research paper finds that auditors’ ability to restrain managers’ opportunistic judgments under less precise IFRS depends on the economic substance of the transaction. It also finds that a judgment framework helps auditors curb managements’ aggressive accounting under IFRS. Additionally, the judgment frameworks based on Construal Level Theory are more effective than the framework based on CIFiR’s proposed judgment guidance when the transaction’s economic substance is clear, while the framework based on CIFiR’s proposed guidance is just as effective when the economic substance is unclear. These results inform regulators, standard-setters and auditors on the effectiveness of different judgment guidance in improving auditors’ judgments under less precise IFRS.

 

To learn more, refer to the 45-page research article “International Financial Reporting Standards and Aggressive Reporting: An Investigation of Proposed Auditor Judgment Guidance” by Ann G. Backof (University of Virginia - McIntire School of Commerce), E. Michael Bamber (University of Georgia) and Tina Carpenter (University of Georgia) posted on January 21, 2011. Also, refer to the August 2011 postings on SEC Views on a Framework for Professional Judgment – Part 1, Part 2 and Part 3.

Toward a Convergence of Global Ethics Standards: A Model from the Professional Field of Accountancy

Given the increased globalization of business and the mandate for ethics as a component of professional orientation for accountants, recent research has focused on the need for ethics education. One research paper, “Toward a Convergence of Global Ethics Standards: A Model from the Professional Field of Accountancy” looks at foundations for an international code of ethics.

This paper examines the International Federation of Accountants (IFAC) Code of Ethics for Professional Accountants and IFAC’s ethics education framework, as advanced in InternationalEducation Standard 4: Professional Values, Ethics and Attitudes. It includes a discussion of the harmonization of US and IFAC ethics standards for the accounting profession. The paper adopts a more holistic and developmental approach to ethics education for the professional field of accountancy worldwide.

The research was undertaken by Susan T. Sadowski, Ph.D., CPA (Shippensburg University of Pennsylvania), and Professor J.R. Thomas Daniel (Webster College, New Hampshire). It was published in the International Journal of Business and Social Science (Vol. 3 No. 9) in May 2012.

ICAEW - Acting in the public interest: a framework for analysis

According to the Institute of Chartered Accountants in England and Wales (ICAEW), the phrase “in the public interest” is used by many to justify a wide range of actions and proposals. It is often unclear what it means and there can be a natural suspicion that it may be used as a smokescreen to garner support for something that is actually in the advocate’s own interests. From a broad perspective, the ICAEW suggests that a definition would serve no useful purpose because circumstances vary widely and a definition would inevitably result in unintended consequences.

Instead, the ICAEW proposes, in the summary report Acting in the public interest: a framework for analysis that there be a framework of matters to consider when justifying an action as being in the public interest. That framework is presented in graphic form below.

The report starts by considering the issues surrounding the use and application of the concept, and how the concept has developed, including its use by professions. It then goes on to consider the key issues that would arise in each element of the framework. The elements, together with some of the key aspects and questions are also discussed. For more information, read the Full Report (81 pages) and visit the ICAEW website section on The Public Interest.

Professional Judgment Guidance

The American Institute of Certified Public Accountants (AICPA) has created a section of its website that addresses Professional Judgment. It states that: “With the increasingly complex nature of global business, the need for reliable, transparent financial information is more pronounced today than ever before. The accounting profession has been and will continue to be on the front lines of the challenge to provide investors, managers, directors, regulators, and others with up-to-date, reliable, and comparable financial reporting information... We expect financial statement preparers to apply judgment in the preparation and auditors to apply judgment in the audit of financial statements in a professional manner. This involves applying relevant training, knowledge, and experience within the context provided by relevant professional and technical standards, as applicable, in making informed decisions about courses of action that are appropriate in the circumstances.”

A number of organizations have developed guidance discussing the need for professional judgment and professional judgment frameworks. For example, the Institute of Chartered Accountants of Scotland (ICAS) has prepared a report entitled A Professional Judgement Framework for Financial Reporting: An international guide for preparers, auditors, regulators and standard setters which discusses the importance of professional judgment in a principles-based accounting standards model, provides guidance for preparers, auditors and regulators, and provides recommendations for standard setters. In addition, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) has prepared a document entitled Enhancing Board Oversight: Avoiding Judgment Traps and Biases, which details a five-step judgment process that board members and others can use to overcome common pitfalls and mitigate the effects of judgment bias.

Ethical Professionalism (Trans)Formation: Themes from Interviews About Professionalism with Exemplary Lawyers

A recent study published in the Santa Clara Law Review defines the educational goal of fostering an ethical professional identity by reporting on an empirical study of the concept of professionalism involving in-depth interviews with peer-honored exemplary lawyers. The purpose is to empirically explore how attorneys define the elements of professional identity and how the exemplar of professionalism differ in their understanding of professionalism compared to early career lawyers or law students.

 

The reason for the second focus is to determine whether there are differences between experts and novices. The existence of a difference is an indicator of developmental capacity or competence, drawing on a methodology in character development research and industrial-organizational psychology. The overarching research question was: How do peer-honored exemplary lawyers understand the meaning of professionalism?

 

This study provides an overview of theoretical perspectives, then reports on the methodological approach and the results of the analysis and interpretation of in-depth interviews, focused around salient themes and issues of relevance to the legal profession. It also discusses interpretations and implications for legal education.

 

The study concludes that: “Empirical evidence over three decades of research shows that ethical professional identity can grow across the lifespan. The exemplars we interviewed represent a benchmark for a high level of competence in professionalism; the finding that this expert group differed from novices supports the contention that growth occurs across the lifespan. With a clear definition, educators can design educational programs, curricula and assessments to foster students’ ethical professional formation. This paradigm shift toward fostering students’ potential for ethical professional formation and transformation is one that will ultimately better meet the needs of the changing nature of the legal job market and law firms because it promotes dynamic change and transformation in a variety of capacities and skills that contribute to effectiveness in the practice of law. The students on this path realize both internal and external benefits.”

 

For more information, refer to the 51-page article by Neil W. Hamilton and Verna E. Monson, Ethical Professionalism (Trans)Formation: Themes from Interviews About Professionalism with Exemplary Lawyers, in the Santa Clara Law Review (Vol. 52, 9-21-2012).

The Future of Ethics

In light of the financial crisis and the ongoing turbulence in the world economies, there has never been a more important time to address the issues concerning ethics and ethical behaviour within organizations around the world. To discuss the pressures faced by organizations and the subsequent CGMA report Managing Responsible Business – A global survey on business ethics, CIMA and AICPA held a webcast debate in association with The Accountant.

In the Video: The Future of Ethics, hosted by Nicola Maher, Editor, The Accountant, the panel of experts discuss ethical culture, accounting for ethics, dilemmas, pressures and business issues. The panel includes: Jeff Kaye, FCMA, CGMA, Chief Executive, Willow Foundation; Simon Webley, Research Director, Institute of Business Ethics; Brian Walsh, FCMA, CGMA, Deputy-chair, IESBA; Nina Barakzai, FCMA, CGMA, EMEA Privacy & Ethics Counsel, Dell Corporation Ltd; Margaret Fowler, CIMA Adv Dip MA, Assistant Manager, Transport Advisory Team, KPMG; Professor Colin Fisher, Professor of Managerial Ethics and Values, Nottingham Trent University; and Tanya Barman, Head of Ethics, CIMA.

For guidance and additional resources, refer to previous postings about ethics.

Seeing What You Want to See: Perceptual Biases of Auditors

A recent research paper notes that “Auditing will always be a process of acquiring and evaluating evidence. Relevant evidence that is accurately perceived should serve as the foundation of quality audit opinions, and in turn, contribute to financial statements that correspond to economic reality. One of the largest threats to the realization of the above objective is the self-fulfilling prophecy. Auditors that have strong expectations about what they will find, tend to perceive confirmation of these expectations, even when the evidence is mixed.”

“To the extent that the self-fulfilling prophecy limits auditor ability to objectivity assess evidence, the quality of professional work may be compromised. Similar to the self-fulfilling prophecy, cognitive dissonance limits the integrity of evidence evaluation. Decision making proceeds best when multiple data points align in their importance and consequence. When data is internally inconsistent, cognitive functioning can be thought of as in disequilibrium. Auditing does not have strong and multiple cause-effect chains, but rather depends upon the totality of the evidence. When this data refuses to be properly aligned, a loss of confidence about decisions might result.”

“Although these topics have been part of a larger inquiry into audit judgment over the last quarter century, they have not been specifically considered together. The present research studies the self-fulfilling prophecy and cognitive dissonance as part of an accounts payable confirmation task. Using a broad sample of auditors from many firms, this paper reports on the extent auditors can neutrally evaluate evidence. The balance of the paper is organized into four sections. The first provides a brief literature review that grounds the statement of the hypotheses. The means by which the hypotheses were tested is described in a second section that provides ample detail about measures and design. The results of these tests and a discussion of them are contained in the third and fourth section.”

Timothy J. Fogarty, Ph.D.

According to this paper, the results show that internal control predispositions are highly consequential for accounts payable judgments. Statistical analysis of the data suggests that auditors seek to avoid cognitive dissonance. They also fall prey to the self-fulfilling prophecy. To learn more, read the 15-page research paper “Seeing What You Want to See: Perceptual Biases of Auditors” by Larry M. Parker, Ph.D. and Timothy J. Fogarty, Ph.D. (Case Western Reserve University) published in the Journal of Management Policy and Practice (Vol. 13(2) 2012).

Should Accounting Standards be Principles or Rules?

In a recently-published article, Sir David Tweedie notes that: “Forty-odd years ago, as a CA apprentice, I didn't have to study accounting standards because there weren’t any! There was one major standard – the true and fair view – augmented by accepted practice.” According to Tweedie, two disputed takeover bids soon changed that. The President of the Institute of Chartered Accountants in England and Wales (ICAEW), Sir Ronald Leach, senior partner of Peat Marwick & Co., and Professor Edward Stamp of Edinburgh University became embroiled in a public argument in the pages of The Times over the state of British financial reporting.

 

“Professor Stamp argued that for any major company, there would be a million ways which you could show a true and fair view, and that this was totally unacceptable. Sir Ronald reacted with alacrity, and together with the other Institutes (including a rather reluctant ICAS), agreed to form the Accounting Standards Steering Committee in 1969. Pressured by the Government, the Committee looked for a quick win and came upon a research paper of the ICAEW dealing with Associated Companies. This was rapidly turned into the Statement of Standard Accounting Practice 1. While to accountants such a topic would be a bizarre choice for the first standard, rather than what became SSAP2 – Accounting Policies – the profession needed to show it.”

 

“The argument continues over whether standards in financial reporting can best be governed by clear and detailed rules, or by principles and judgement could act quickly in a time of crisis. Since then, we have seen the SSAPs gradually replaced with Financial Reporting Standards and latterly by International Financial Reporting Standards (IFRS). These standards have become more and more complex.”

 

“Accounting is not rocket science. Writing a standard to deal with 80 per cent of the problems takes only a few pages, yet if our profession requires every avenue to be explored, then it can run into hundreds. ICAS is just completing a judgement framework to assist professionals who are unsure what exactly judgement involves. If you have been trained in what I term ‘search-engine’ accounting – looking up the answer in a massive book of rules –judgement can be scary.”

 

“The profession is at a crossroads, and the more we head down the rules route the harder it will be to pull back to simpler, more clearly expressed principle-based standards.” Read the article “Should Accounting Standards be Principles or Rules?” by Sir David Tweedie, President of the Institute of Chartered Accountants of Scotland (ICAS), as well as previous postings regarding the Principles versus Rules debate.

Are checklists killing the CA profession?

A recent article in CAmagazine notes that, when faced with the 570-plus requirements in the Canadian auditing and quality control standards, generic checklists may be a great way to start an audit, but they can lead to a lessened focus on judgment. It states that “...ours is a thinking profession, not one that relies on a mechanical approach to deliver a product. Every audit is unique so reliance on a common set of checklists is unlikely to be efficient, nor will it result in an effective audit.”

The relatively new Canadian auditing standards (CAS) clock in at 800-plus pages. Many experienced auditors rely on generic checklists developed in-house or by third parties to cope with the volume, with reliance on generic checklists appearing easier than crafting their own. However, “Research shows that reliance on systems designed to do your thinking for you can reduce your ability to make good judgments. Professional judgment is the crux of our profession. It is what the public expects and what clients pay for.”

“Systems with built-in decision-making capabilities may be easy to use, but they don’t encourage the thought required for difficult decision-making. A point-and-click operation is not the same as thinking through a process. In an effort to make application software easy, designers often bury the underlying logic in the application so users can focus on moving or clicking through the program to reach their goal quickly. While this is an admirable design goal for many computer applications, it is the antithesis of a quality audit process. Removing the decision-making process could impair a user’s ability to think deeply — and deep thinking is essential in making sound judgments.”

“This situation is more than relevant to the audit profession. Auditors must think their way through every aspect of an audit to decide what evidence needs to be obtained, evaluate the quality of that evidence and then use this information to make a myriad of professional judgments. Just because an auditor understands the individual steps suggested by the expert system does not mean he or she grasps the bigger picture of how the steps fit together. Bottom line: a successful audit is not built on a system that encourages superficial thought.”

“Generic checklists can lead to a lessened focus on professional judgment, which is the antithesis of the intent of CAS. However, customizing checklists for each audit can heighten professional judgment. Once customized, audit automation provides the ability to carry your unique approach forward annually — tailoring changes as appropriate, improving recoveries and reducing engagement risk.”

To learn more, read the article “Are checklists killing our profession?” by Phil Cowperthwaite, FCA in the September 2012 issue of CAmagazine online.

A professional judgment framework for financial reporting

The Institute of Chartered Accountants of Scotland (ICAS) has been pursuing a campaign in support of principles-based financial reporting standards since the publication of Principles not Rules: A Question of Judgement in 2006. According to the ICAS, principles-based standards provide a framework within which the economic substance of transactions can be faithfully presented and better serve the needs of business and markets, and the public interest.

 

 

The key to the effective functioning of a principles-based framework is the ability of preparers and auditors to exercise professional judgment in the application of principles to the circumstances of a particular transaction or accounting issue. The basis of such judgments needs to be properly documented, so that regulators (who also need to have the experience and expertise to consider and challenge such judgments) can assess the reasonableness of the judgments based on the facts and knowledge available at the time of the judgments.

 

In an effective principles-based environment, each party plays a key role in making their own judgments and challenging others’ judgments, building up trust that all the parties have sufficient experience and expertise and that they approach their different roles in a proportionate and sensible manner. In the light of comments received on earlier work and involvement in similar work undertaken by the Global Accounting Alliance (GAA), there is a need for guidance on how to make judgments, especially in jurisdictions which are first time adopters of International Financial Reporting Standards (IFRS) or which are used to operating in a prescriptive or rules-based environment.

 

The ICAS has therefore developed A Professional Judgement Framework for Financial Reporting: An international guide for preparers, auditors, regulators and standard setters which offers guidance that may be useful around the globe. Other postings regarding a “professional judgment framework” may also be useful.

Finding Integrity in the Auditor

 

A recent article by the Institute of Chartered Accountants of Scotland notes that “Amid global uncertainty, the search for professionalism and assurance has never been more important...” It also notes that the work the International Auditing and Assurance Standards Board (IAASB) is doing in relation to ongoing development of auditing standards and auditor reporting will be vital to providing assurance to investors, and clarity and confidence to a world sorely lacking both.

The article expresses the view that: “Confidence in an audit comes from confidence in the auditor; there's something wonderfully personal about the title ‘Auditor's Report’. It places an emphasis on the individual woman or man, on her or his expertise, evaluations and integrity. And where do you go for this integrity? Where do you go for men and women who have an innate understanding of what it means to be a professional? Where do you go for people who know their professional responsibilities and who act, not because of fear of regulators or because they’re blindly following rules, but because of who they are?”

According to the article, “It comes from the training they receive and the role models they look up. It comes from ethics declarations such as the one the newest CAs made at the recent Institute of Chartered Accountants in Scotland admissions ceremony in Edinburgh. And it comes from advice and discussion, between a community of peers and from senior to junior, about the professional issues of the days.”

Read the article “Finding Integrity in the Auditor” by Anton Colella in the August 2012 issue of GAA Accounting online (also available in the Digital Edition, page 53). To learn more, see other resources dealing with “integrity.”

Centre for Accounting Ethics: 2013 Symposium on “Tone at the Top”

The Centre for Accounting Ethics at the University of Waterloo was established in 1991 through a grant from the Auditing and Accounting Development Fund. In supporting projects designed to enhance the teaching of ethics to accounting students and the research of ethical issues in accounting, the Centre aims to help prepare future accountants and financial managers to exercise professional judgment within an ethical framework and to promote high ethical standards.

The Centre has announced its first biennial Symposium to be held on April 18–20, 2013 in Toronto, Canada. The theme is Accounting Ethics and Tone at the Top. Papers are invited from academe and practice addressing this theme. Possible questions include the role of boards of directors in shaping ethics policy, the audit committee’s oversight role in setting the ethical environment of an organization, the intersection of risk management, control systems and ethical practices and its impact on tone at the top. The papers from this Symposium will be considered for a Special Issue of the Journal of Business Ethics. Submission deadline is January 15, 2013. For more information, see the Call for papers and register online.

Additional resources are available at the Centre, including Members of the Centre, Ethics Teaching Cases, Published Articles,  Ethics Links and an Ethics Bibliography which can be searched by 59 subjects, such as “Ethical/Professional Values,” “Integrity” and “Professional Judgment.”

IAESB - Revised standard on professional values, ethics and attitudes

The International Accounting Education Standards Board (IAESB) of the International Federation of Accountants (IFAC) has released for public exposure a proposed revision of International Education Standard (IES) 4, Initial Professional Development-Professional Values, Ethics and Attitudes. IES 4, part of the IAESB’s project to improve the clarity of its standards, is aimed at educational organizations, employers, regulators, government authorities and other stakeholders who support the development of professional accountants.

Drafted in 2004, IES 4 prescribes the values, ethics and attitudes that professional accountants should acquire during the education program leading to qualification. A revised draft of IES 4 was exposed for public comment in May 2011 and, although respondents’ comments were generally supportive, further clarification was requested to explain the requirements on learning outcomes, assessment and reflective activity (the recurring process of reviewing experiences with a view to improve future actions). As a result, the IAESB has made substantial changes to the content of IES 4.

In addition to addressing these issues, the proposed revised IES 4 requires IFAC member bodies to regularly review and update their professional accounting education programs, including formal education and workplace training. Updating the knowledge content of professional accounting education programs and the content of workplace training on a regular basis improves the likelihood of learning outcomes being relevant and developing appropriate competence.

In a continuing effort to improve the clarity of its standards, the IAESB has undertaken a project to redraft all eight of its IESs in accordance with its new clarity drafting conventions. IES 7, Continuing Professional Development, is the first clarified standard to be released since the project began in December 2010. Under the current timetable, the IAESB anticipates that all IESs will have been revised and redrafted, or redrafted only, by the third quarter of 2013. The IAESB invites all stakeholders to comment on its proposals at www.iaesb.org. Comments are requested by October 11, 2012.

Promoting Professionalism: Lessons from the Medical and Legal Professions

Recent research has observed that: “The accounting, medical and legal professions share characteristics common to peer-reviewed professions. These professions also share challenges to professionalism. All three have been criticized for declining professionalism and for choosing commercial success over serving the public interest. Although the medical and legal professions have taken steps to promote a higher level of professional conduct by their members, the accounting profession has not launched initiatives to promote professionalism.”

 

That research discusses the initiatives instigated by the legal and medical professions using the five elements of a professionalism framework. Specifically, the framework highlights the importance of growth in personal conscience, demands compliance with the ethics of duty, inspires realization of aspirational goals, requires accountability of peer professionals, and emphasizes devotion to serving the public good. It recommends that members of the accounting profession use the five elements of the professionalism framework to define, demonstrate and assess professionalism. In addition, it concludes that promoting professionalism is a means for restoring professional identity for individual accountants as well as a means for fulfilling the accounting profession's contract with society.

 

For more information, refer to Promoting Professionalism: Lessons from the Medical and Legal Professions by Laurie Swinney and Bruce Elder in Research on Professional Responsibility and Ethics in Accounting, Emerald Group Publishing Limited, Volume 16, 2012, pp. 93-128. Also, see previous postings on the accounting profession and professionalism.

Developing a framework for “Professionalism”

Australia was the first country outside of the United States to adopt the Certified Financial Planner (CFP) certification model for practitioner excellence. In 2007, the Financial Planning Association of Australia introduced a structured professionalism framework to demonstrate the profession’s commitment to best practice. The publication, A framework for financial planning professionalism, states that professionalism is based on three pillars: professional membership, professional conduct and professional accountability.

The three pillars are illustrated in the following professional framework exhibit. Professional membership is about ensuring that only the right people can become members. Professional conduct is about ensuring members adhere to the high standards set for the profession and that they are supported in following professional ideals. Professional accountability is about protecting the reputation of all members by putting in place an independent, peer-driven disciplinary mechanism.

The framework publication also states: “Our community comprises of our clients, the media, consumer groups and advocates as well as the broader community in which we all live. As a profession, we have obligations and responsibilities to build good relations with the whole community – to be productive and contributing members who make a positive difference to society.”

Furthermore, “A quality professional framework that is supported by the profession and the regulators will underpin these vital goals. Trust will flow on from a robust framework that is supported by members and regulators and shown to have ‘teeth’. The profession’s disciplinary process must be transparent, fair and deliver penalties that match the expectations of the regulators and the community and reinforce best practice behaviours within the profession.”

“The bottom line is that increased community respect will drive the profession’s ‘value proposition’ which will translate into a number of positive outcomes for your business and for you. Some of these outcomes will include increased client stability, growth and profitability.” For more information, also refer to the FPA Code of Professional Practice issued in July 2011.

A research perspective on “Professionalism”

The academic research literature suggests that an understanding of “profession” and “professionalism” cannot ignore a post-professionalism perspective. Professions and the notion of professionalism are undergoing rapid change in a new global information age which necessitates new theories and explanations.

Post-professionalism is characterized by loss of exclusivity, increased segmentation through specialization of knowledge and the growth of technology. As a result, the services previously delivered exclusively by members of formal professions can now be delivered by general professionals or even non-professionals. The 1980s and 1990s witnessed a proliferation of studies of professionals, professions and processes of professionalization. Professional closure is often discussed in relation to education practices and struggles between the state and professional associations about regulations over practice rights and, similarly, professional regulation is typically viewed as involving struggles over accounting and auditing laws and standards.

A recent research study offers an innovative approach to the research on “professionalism” for a specific profession, that of the Certified Financial Planner (CFP). The study uses a framework which distinguishes between the ‘what’ and ‘how’ aspects. The ‘what’ aspect of the experience is the direct object of experiencing the professionalism of financial planners; the ‘how’ aspect is the act of experiencing the phenomenon. The indirect object that is the intention behind the act is not the focus of this study (see Figure 1 below).

This study considers the CFP certification requirements in Australia, Hong Kong and the United States. These requirements establish a framework for professionalism, but they are not the only influences. CFP professionals are also influenced by their work through the behaviour and standards of their employer and by government licensing and regulation. This paper describes the variations in how CFP professionals experience professionalism in each country.

The significance of this study is that identifies the elements of professionalism that CFP’s experience as being part of the professionalism of financial planners. Much of the existing research on the professions and professionalism focuses on historical perspectives and on identifying the characteristics that distinguish a profession and a professional from a sociological viewpoint.

In summary, the purpose of this paper is to present the preliminary findings of conceptions of professionalism of CFP’s from each of the three countries independently. The major finding of the research is that CFP professionals experience professionalism in ways that reflects the factors that influence their professionalism. Professionalism is experienced as putting the client’s interest first, being knowledgeable as evidenced by professional credentials, following a planning process and being guided by regulation and standards.

For more information, see the research paper “What and how financial planners experience professionalism: a phenomenographic study (preliminary findings)” by: Associate Professor Ken Bruce (CEO/Campus Director, CQU Institute of Higher Learning); Dr Abdullahi Ahmed (Senior Lecturer in Finance, School of Commerce & Law, CQUniversity, Rockhampton, Australia); and Dr Helen Huntly (Professor, Dean, School of Education, CQUniversity, Bundaberg, Australia).

Creating a sustainable ethical operating environment

With the importance of ethics and non-financial reporting rising on the global agenda, accounting professionals are in a unique position to make an important contribution to creating a sustainable ethical operating environment. In this regard, the AICPA and CIMA have developed a number of resources to assist professional accountants in guiding their organizations to long-term sustainability and success. These resources shed light on the challenges many business clients face, and so apply to professional accountants in a firm setting as well.

The ethical resources include the following:

(1) The report Managing responsible business – a global survey on business ethics explores the importance placed on business ethics, ethical performance and ethical management within organizations, and the specific role played and challenges faced by accounting professionals. The survey findings show that there are pressure points and ethical gaps within organizations and highlights the role accountants can take in reducing those gaps.

(2) Accountants add value by supporting and driving the right decisions in all areas of a business. They help colleagues understand income, costs, risks and opportunities. Focusing on an organization’s future prospects, in addition to understanding and learning from past performance, accountants know how the different parts of a business come together. Responding to ethical dilemmas: CGMA ethics resources provides links to resources to help accounting professionals navigate ethical dilemmas and respond in a manner that upholds their career success.

(3) The CGMA case study: Navigating ethical issues highlights issues related to non-disclosure at the corporate level that come to the attention of non-executive financial managers and controllers. This case study features the role of corporate controller for a large public company, making decisions that will affect the future of the controller and many others. The facts of this hypothetical case cover integrity and objectivity, confidentiality, internal accounting controls, and procedures for investigating and reporting irregularities.

(4) The Ethical reflection checklist was designed to provide organizations and individuals with an overview of how well ethical practices are embedded in the business. Firms can leverage this checklist with their clients to open the discussion on business ethics in the workplace. Questions cover areas such as ethical statements and codes of conduct, training, collection of ethical data and reporting of ethical issues, and support when faced with ethical dilemmas.

With the backing of a strong ethical culture, all accountants can be highly effective in playing a key role—drawing on both their training and understanding of professional ethics, as well as their skills in obtaining, analyzing and acting upon management information—to guide their organizations, or those of their clients, to long-term sustainability. Explore these and the many other resources available on cgma.org. Also, read the article “Fostering a More Ethical Business Culture” at AICPA Insights online.