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).