It’s Time for Principles-Based Accounting Ethics

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 It is now out of date and needs to be replaced with a code of ethics.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

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

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

The e-professional embracing learning technologies

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

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

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

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

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

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

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

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

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

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

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

Professional Judgment - Education Continued

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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