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]
