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]
