The Role of Auditors’ Emotions and Moods on Audit Judgment

CPA Vision 2011 and Beyond: Focus on the Horizon, published by the American Institute of Certified Public Accountants (AICPA), states that emotional skills are extremely important and interpersonal skills are crucial for success as professional accountants. During the audit process, auditors may experience emotional reactions, such as liking or disliking toward client personnel, or anxiety about components of tasks. Auditors also may also experience different moods while conducting audits. Research reveals that an important consequence of auditors experiencing emotions and moods is that these reactions can influence their decision making and audit judgments.

A recently-published research article summarizes the results and practice implications associated with several studies in a stream of research that has examined the role of emotions and moods in auditing. Research illustrates that auditors can experience emotional reactions toward a client (e.g., likability) or an element of a task environment (e.g., anxiety from dealing with certain types of people or about being held accountable) or general moods unrelated to the judgment context (e.g., bad mood related to the weather), which can result in judgment errors.

The research summarized in this paper reveals the potential for auditors’ judgments to be susceptible to emotional reactions toward client personnel and components of a task, as well as general negative and positive moods. Given the fact that auditors’ emotional reactions and moods are pervasive in the audit environment, such effects appear to be somewhat inevitable. There is a potential for these effects to have significant negative consequences. Therefore, a critical first step is to make auditors aware of the potential for emotions and moods to inadvertently impact their judgments, and how the reactions could impact audit effectiveness and efficiency.

For more information, read the 17-page research paper “The Role of Auditors’ Emotions and Moods on Audit Judgment: A Research Summary with Suggested Practice Implications” by Sudip Bhattacharjee (Virginia Tech) and Kimberly K. Moreno (Northeastern University). A manuscript has been accepted for publication in an American Accounting Association (AAA) journal. This preliminary version of the manuscript was posted in the interest of making the information available for distribution and citation as quickly as possible following acceptance.

Applying IFRS - Online guidance and resource materials

The Chartered Professional Accountants of Canada (CPA Canada) maintain an IFRS web section to provide guidance and support for understanding and applying International Financial Reporting Standards (IFRS). Whether applying an existing standard, searching for information on new standards, preparing financial statements or communicating with clients or lenders about IFRS, check out these free online resources. The Reporting Alerts series summarizes new and revised standards.

In addition, the Viewpoint series discusses circumstances unique to the mining and the oil and gas sectors. CPA Canada and the Prospectors and Developers Association of Canada (PDAC) created the Mining Industry Task Force to share views on IFRS application issues of relevance to junior mining companies. CPA Canada, the Canadian Association of Petroleum Producers (CAPP) and the Explorers and Producers Association of Canada (EPAC) created the Oil and Gas Industry Task Force to share views on IFRS application issues of relevance to junior oil and gas companies. In addition, learn more about the importance of applying professional judgment when preparing or auditing IFRS-based financial reporting.

IASB Discussion Paper - A Review of the Conceptual Framework for Financial Reporting

In July 2013, the International Accounting Standards Board (IASB) issued a Discussion Paper called “A Review of the Conceptual Framework for Financial Reporting.” The Paper sets out the principles underpinning the International Financial Reporting Standards (IFRS). It provides stakeholders with an opportunity to shape the future of financial reporting. The 239-page Discussion Paper, providing 26 questions for respondents to consider, is available for public comment until January 14, 2014.

In 2011, the IASB carried out a public consultation on its agenda. Most respondents to that consultation identified the Conceptual Framework as a priority project for the IASB. Consequently, the IASB decided to restart its Conceptual Framework project, which had been suspended in 2010.

This Discussion Paper is the first step towards issuing a revised Conceptual Framework. It is designed to obtain initial views and comments on a number of matters, and focuses on areas that have caused the IASB problems in practice. Consequently, this Discussion Paper does not cover all the issues that the IASB would expect to cover in an Exposure Draft of the Conceptual Framework. The Discussion Paper sets out the IASB’s preliminary views on some of the topics discussed. However, the IASB has not reached preliminary views on all of the issues discussed in this Discussion Paper.

The Discussion Paper addresses the definitions of assets and liabilities, recognition and de-recognition, the distinction between equity and liabilities, measurement, presentation and disclosure, and other comprehensive income. For an overview, see the July 23, 2013 article “IASB seeks feedback on conceptual framework revision” in the Journal of Accountancy online.

Promoting Judgment through Objectives-Oriented Accounting Standards

A recently-published study analyzes how the International Accounting Standards Board (IASB) promotes professional judgment by issuing objectives-oriented accounting standards and exposure drafts. The authors focus on the role of judgment as outlined in Phase I of the IASB Conceptual Framework, Chapter 1, “Objective of General Purpose Financial Statements” and Chapter 3, “Qualitative Characteristics of Useful Financial Information” (IASB 2010).

This study discusses how the Conceptual Framework encourages professional judgment, when viewed through the prism of objectives-oriented accounting standards. Such an approach was recommended by the United States Securities and Exchange Commission (SEC) Report in its “Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System” (July 2003).

The study also analyzes International Financial Reporting Standards (IFRS) and Exposure Drafts issued by the IASB since its inception in 2002 to determine if those documents are consistent with objectives-oriented accounting standards. This analysis is useful for gaining insights into how the IASB integrates the Conceptual Framework with the SEC’s recommended objectives-oriented accounting approach to promote judgment in the interest of IASB/FASB convergence of accounting standards.

According to the study, “An increasingly complex financial environment demands accounting standards that narrow the range of professional judgments in accounting decisions. Although new accounting principles and approaches do not eliminate the necessity of judgments entirely, the IASB’s process of improving transparency and comparability of financial reporting hinges on its ability to promote professional judgment. Its ability depends on the standard setter and the practitioners. The IASB is issuing more objectives-based standards that provide a framework for judgment. Professional accountants, auditors and managers need to be cognizant of the IASB's efforts so they can cooperate in the pursuit to judgment.”

For more information, refer to the 15-page research article “The International Accounting Standards Board’s Progress in Promoting Judgement through Objectives-Oriented Accounting Standards” by Tanja Lakovic and Jayne Fuglister at the University of Montenegro. The article was published in the International Journal of Business and Social Research, Volume 3, No. 7, July, 2013.

Professional Judgment: Perspectives on the Professions

An informative article on “Professional Judgment” was published in the periodical Perspectives on the Professions in 1992. According to the article: “Professionals offer (and, we hope, deliver) honest and competent judgment. Perspectives has devoted many issues to the first of these, honesty, what we tend to call “professional ethics:” We have had little to say about the second, technical competence, what makes honest judgment professional. We have, it seems, simply taken it for granted. Yet, an engineer without engineering judgment, a lawyer without a lawyer's judgment, or any other professional without the particular form of judgment distinguishing his or her profession from all others, would be an incompetent “layman” who could not honestly practice the profession in question.”

 

“What is professional judgment? It is, of course, good judgment-good enough at least to make us want it instead of lay judgment. But what makes judgment good (in the way professional judgment is supposed to be)? One witty answer is: Good judgment comes from experience; experience, from bad judgment.” “The pieces that follow suggest that we may not yet have a better answer. That, of course, is not all bad-if it leads us to think more about professional judgment. While we cannot walk well if we think about walking as we walk, we cannot learn to walk better if we do not think about walking at all. If good judgment comes from bad judgment, only through reflection can the transformation be accomplished.”

 

This article provides perspectives that address the following four professions: (1) Judgment in Police Work; (2) Professional Judgment in Engineering; (3) Balancing Risks and Benefits in Clinical Decision Making; and (4) How Do Judges Think?

 

To learn more, read the article on “Professional Judgement” by Michael Davis, Editor, Perspectives on the Professions, (Vol. 11, No.2, 1992). Perspectives is a periodical of the Center for the Study of Ethics in the Professions (CSEP), Illinois Institute of Technology, Chicago. CSEP was established in 1976 for the purpose of promoting education and scholarship relating to ethical and policy issues of the professions.

 

Enhancing Audit Quality: Canadian Perspectives - Conclusions and Recommendations 2013

The Enhancing Audit Quality (EAQ) initiative, headed by the Chartered Professional Accountants of Canada (CPA Canada) and the Canadian Public Accountability Board (CPAB), has been completed. This initiative arose following the audit symposium organized by CPAB in December 2011. Work commenced in February 2012 and the final report, Enhancing Audit Quality: Canadian Perspectives - Conclusions and Recommendations, was published in May 2013.

The conclusions in the report will be reviewed and appropriate action will be taken by the pertinent competent bodies in Canada. Reforms introduced in other jurisdictions, such as Europe and the United States, will have to be carefully monitored to ensure that Canadian reforms are not in direct conflict with those proposed elsewhere, frustrating attempts to harmonize the solutions ultimately implemented. Recommendations on how best to maintain auditor independence and support professional skepticism are among the key findings aimed at adding value to financial reporting.

The EAQ initiative gained stakeholder input on developments taking place in jurisdictions  hardest hit by the financial crisis, such as Europe and the United States, where  regulators have suggested a number of remedies such as subjecting  audit firms to term limits and calling for mandatory re-tendering of audits. The EAQ initiative concluded that the preferred approach is having audit committees perform a periodic review of their audit firm at least every five years, resulting in a recommendation to retain or replace the audit firm. A report summarizing the results of the comprehensive review should then be included in an entity’s public disclosures, which would strengthen transparency.

CPAB is Canada’s audit regulator, dedicated to protecting the investing public’s interests and to delivering value to its various stakeholders through world class audit regulation. It regulates the auditors of Canadian public companies through its national inspection program. CPAB delivers value by promoting high-quality, independent auditing. As a champion of audit quality, CPAB contributes to public confidence in the integrity of financial reporting, which supports Canada’s capital markets.

CPA Canada is the national organization representing the Chartered Professional Accountants (CPA) profession in Canada. The Canadian Institute of Chartered Accountants (CICA) and The Society of Management Accountants of Canada (CMA Canada) created the organization on January 1, 2013, to support unification of the Canadian accounting profession under the CPA banner.

Practical guidance for exercising professional skepticism

A high-quality audit requires the exercise of professional judgment by the auditor and a mindset of professional skepticism. Because it is part of the auditor’s mindset, professional skepticism depends on the personal behavioural traits of those involved in the audit and is influenced by such things as the motivation, competencies, education, training and experience of each auditor.

The International Standards on Auditing (ISA) note that professional skepticism is necessary to the critical assessment of audit evidence. This includes questioning contradictory audit evidence and the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance. It also includes consideration of the sufficiency and appropriateness of audit evidence obtained in light of the circumstances.

A recently-issued paper proposes practical ways in which the exercise of professional skepticism can be enhanced in an audit of financial statements and reflected in audit documentation by setting out a series of questions for different phases of the engagement. Using the questions may help identify the best means of demonstrating the exercise of professional skepticism in an effective manner.

Read the May 2013 paper on Practical Ways to Improve the Exercise and Documentation of Professional Skepticism in an ISA Audit. This 18-page paper was prepared by the Canadian Institute of Chartered Accountants (CICA) and the Institute of Chartered Accountants in Australia (ICAA). Learn more by reviewing other guidance materials on Professional Skepticism.

Elevating Professional Judgment in Auditing and Accounting: The KPMG Professional Judgment Framework

 

The KPMG University Connection website states: “With the move toward a more principles-based financial reporting framework and increased emphasis on fair value measurement, the ability to consistently make high quality professional judgments is increasingly important. KPMG has produced a monograph intended for use as a supplement in college-level auditing and accounting courses to help students understand the components of and threats to good professional judgment.”

“Elevating Professional Judgment in Auditing and Accounting: The KPMG Professional Judgment Framework will help students understand what professional judgment is and how to develop and practice it. This Framework and training are intended to elevate judgment quality and professional skepticism, and to provide a common vocabulary that facilitates implementation and mentoring on professional judgment.”

It is noteworthy that the KPMG Framework monograph is the recipient of the 2013 AAA/Deloitte Wildman Medal Award. The Wildman award, first presented in 1979, recognizes a work published within the most recent five years that the judges view as the most significant contribution to the advancement of the practice of public accountancy including audit, tax and management services.

To learn more about the KPMG Framework monograph, refer to the three-part article titled “Can you really teach good judgment?” (Part 1, Part 2 and Part 3). In addition, read the related article on “Enhancing Board Oversight by Challenging Traps and Biases in Professional Judgment” (Part 1, Part 2 and Part 3).

Auditor Judgment Under Uncertainty: Doctoral Dissertation 2013

A recent research paper investigates how experienced auditors recognize and respond to the degree of management’s evidentiary support and the level of estimate uncertainty when assessing management estimates. Drawing on information processing research, the paper predicts that auditors can be more comfortable with management estimates, and expect a lower adjustment, when there is alignment between the degree of estimate uncertainty and management’s evidentiary support (that is, high uncertainty and more support or low uncertainty and less support). The following diagram provides a graphical representation of the theoretical predictions.

This prediction is tested using an experiment where experienced auditors evaluate an uncertain warranty estimate. The level of uncertainty is manipulated by varying the range of potential costs as either two-times or eight-times materiality. The degree of management’s evidentiary support is manipulated by management either obtaining industry information, inquiring of technicians, or doing these two plus reviewing records, and performing field inspections.

The results support the prediction. In the higher uncertainty condition, auditors were more comfortable and expected a lower adjustment when management obtained more evidential support, but in the lower uncertainty condition auditors were more comfortable and expected a lower adjustment when management obtained less evidential support. In fact, the alignment between estimate uncertainty and management’s evidentiary support can make auditors more comfortable with management estimates supported by relatively less evidence.

These findings demonstrate how audit risk factors, such as the level of uncertainty and degree of management’s support can interact and cause auditors to more readily accept less supported financial statement estimates. More broadly, these findings reveal how providing more information can actually make recipients more uncomfortable with a proposition.

For more information, refer to the 93-page Dissertation, “Auditor Judgment Under Uncertainty” by Stephen P. Rowe, submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Accountancy in the Graduate College of the University of Illinois at Urbana-Champaign, 2013. The Doctoral Committee included: Professor Mark Peecher, Chair; Assistant Professor Bradley Pomeroy; Professor Ken Trotman, University of New South Wales; and Professor Michel Regenwetter.

Ethical leadership: Doing what is right for the long-term benefit of all stakeholders

A Special Feature article in Accountancy SA states that: “Ethics can be defined as the body of knowledge that deals with the study of universal principles that determine right from wrong. Ethics concerns itself with the moral principles that govern behaviour... Leadership can be defined as the art of helping, guiding and influencing people to act toward achieving a common goal. By combining the two definitions, one quickly derives a simple definition for ethical leadership: the art of helping, guiding and influencing people to achieve a common goal in a morally acceptable way.”

According to the article, “Ethical leadership is about doing what is right for the long-term benefit of all stakeholders. It is about balancing the organization's short-term goals and longer-term aspirations in a way that achieves a positive result for all those who could be affected by the organization and the decisions of its leader. It is not only about ensuring that others are not adversely affected by the leader's decisions and actions, but also actively looking for ways to make sure that others benefit from these decisions. It goes without saying that the more senior the leadership role, the more influence and impact that leader's decisions will have on a broader group of stakeholders.”

Therefore, the more senior the leader, the more careful and circumspect they should be in reaching decisions. This is the very essence of establishing sound oversight and governance. Structures should be in place to provide the leader with a sounding board and advisory conscience. This will help to prevent them from taking ill-advised decisions and actions which may ultimately cause harm.

The research suggests that there are several levels of behaviour, from the unethical through to the highly ethical, as follows:

Level 1: Rejection. Exploit, use and abuse others, and especially their relative disadvantages, for your own gain, without any regard for consequence.

Level 2: Non-responsiveness. Operate from a position that measures success only in terms of one’s own gain; exploit others where there is a power or monetary gain to be had; little real concern for the law of regulation.

Level 3: Compliance. Do the minimum required by the relevant law of the land, and continue to exploit others, but minimize consequential risk. In other words, don’t get caught.

Level 4: Efficiency. Regard yourself as a good citizen (individual or corporate) and act in a manner that respects and upholds the morals, values, regulations, customs and styles of wider society; act in a holistic, integrated way across all areas of activity.

Level 5: Proactivity. Be a proactive agent for values-led leadership in the context of wider society in all areas of activity, recognizing this as a point of personal or corporate distinction. Or, be a role model by going “above and beyond.”

Level 6: Sustaining. Recognize one’s place in the grander scheme of things, and the inter-connectedness of everyone and everything; act as a co-evolutionary element to foster greater effectiveness for the whole.

The article observes that: “They are mindsets, attitudes or ways of being. And this goes to the heart of the matter. An ethical leader operates from Level 4, 5 or 6. They have a sense of mission in life. They operate according to their identity, and the values and morals they clearly possess. They are marked out by the perspectives they bring to problem-solving, the capabilities they develop in themselves and others, the choices they make and how this is all expressed in their behaviour...a leader operating from Levels 1, 2 or 3 is not an ethical leader.”

Learn more by reading the full article “Instilling ethical leadership” in the June 2013 issue of Accountancy SA, the premier stakeholder communication vehicle of the South African Institute of Chartered Accountants (SAICA). Also, see the article on “The Art of Ethical Leadership” and refer to other guidance materials about “ethics and integrity.”

The Art of Ethical Leadership (2013)

In October 2012, Praesta Ireland and Chartered Accountants Ireland (CAI) surveyed leading business executives on their ethical approaches, as well as their organization’s ethical codes and attitudes. The survey results provide encouraging news that many organizations are responding to the emerging and increasing risks that arise from unethical behaviour and the consequent adverse impact on an organization’s reputation.

The survey demonstrates that those charged with governance within organizations are expected to play a key role in establishing expectations relating to ethical behaviour. The example needs to be set by senior management by the way in which they behave and by ongoing monitoring of the effectiveness of their ethics policies and programs. An appropriate code of ethics remains the primary tool for guiding staff on corporate standards of behaviour and on how to respond to ethical dilemmas which they may encounter in their day-to-day work.

Having confidence that businesses, directors and professionals adhere to the highest ethical standards is critical to ensuring public trust in financial reporting and business practices and even to ensuring the future sustainability of businesses themselves. Those organizations that have developed ethics programs which include training about their values and how these are implemented, as well as ‘speak up’ policies, demonstrate they are actively trying to decrease their integrity risk. Business ethics are under the spotlight as never before. Therefore, it is anticipated that this 44-page report, The Art of Ethical Leadership, released in 2013, will stimulate further informed debate about the role of ethics and ethical decision-making in business.

Praesta Ireland is a member of Praesta International, the global leader in senior executive coaching, working in more than 20 countries. Since its foundation in 2001, Praesta Ireland has established a track record of professional, discreet and confidential service to major companies and organizations in support of the leadership development of their Chairs, CEOs, Senior Executives and Non-Executive Directors. Chartered Accountants Ireland is the largest and longest established accountancy body in Ireland. It has over 21,000 members and 6,000 students, and it is the leading voice of the accountancy profession in Ireland. Chartered Accountants Ireland was established as the Institute of Chartered Accountants in Ireland by Royal Charter in 1888. Its activities and those of its members are governed by its Bylaws and by Rules relating to professional and ethical conduct.

Additional information on ethics, including case studies, is available at the Chartered Accountants Regulatory Board (CARB). The case studies provide practical guidance for resolving ethical dilemmas on topics such as conflicts of interest, confidentiality and questionable accounting and business practices.

REAL INTEGRITY: Practical Solutions for Organizations Seeking to Promote and Encourage Integrity

Research carried out by the Institute of Chartered Accountants of England and Wales (ICAEW) notes that: “Integrity is a much-desired but little-understood feature of organizations and of the individuals they employ. It features widely in codes of conduct and lists of ethical principles. A lack of integrity is frequently cited as a cause of crises and scandals in business and public life. On the other hand few people have a clear idea of what integrity means or how it should be understood separately from ethical behaviour more generally.”

According to this research, the responsibility for promoting integrity in organizations ultimately falls to their leaders. Therefore, the aim of the research was to provide practical solutions for organizational leaders to help them achieve this. In addition, there is a clear need to involve human resources in activities, since they have access to many of the organizational levers that can make a difference. The research was conducted in three stages: a desk-based review of academic literature, a large-scale online survey of Chartered Accountants and a series of 94 semi-structured one-on-one interviews with people working in a variety of organizations.

Four major themes arise in the philosophical literature on integrity which can be synthesized into an account of integrity. People of integrity partly define themselves by, and act consistently on the basis of, principles and commitments, at least some of which are ethical in nature and which include honesty, openness and fairness. They will also stand up for their principles and thereby attempt to influence the culture of their organization or society.

Professional integrity involves commitment to the founding values of a profession and may involve attempting to influence the culture of that profession. As well as having employees with greater or lesser degrees of integrity, organizations can exhibit integrity by achieving consistency between their expressed values and what is genuinely valued within the organization by valuing ethical behaviour and by taking a wider view of the social context in which they operate.

To learn more, read the 2012 ICAEW Briefing and related publication REAL INTEGRITY: Practical Solutions for Organisations Seeking to Promote and Encourage Integrity by Jim Baxter, James Dempsey, Chris Megone and Jongseok Lee at the University of Leeds. Also, refer to other guidance on “integrity” matters.

A Definition of the Public Interest: IFAC Policy Position Paper #5

In November 2010, the International Federation of Accountants (IFAC) published a consultation paper setting out its perspective of the public interest. According to IFAC, “A hallmark of the accountancy profession is its obligation to act in the public interest. But, it is not always apparent what this means and how accountants can determine whether they are meeting this expectation. IFAC, by developing this position paper, is seeking to advance its understanding of this important issue.”

IFAC defines the “public interest” as the net benefits derived for, and procedural rigor employed on behalf of, all society in relation to any action, decision or policy. This practical definition of the public interest enables one to assess the extent to which actions, decisions or policies are made in the public interest.

IFAC considers that the “public” is inclusive of all individuals and groups because the responsibilities of the accountancy profession affect (directly or indirectly) every aspect of society: investors, consumers, suppliers, citizens and taxpayers, as well as those seeking sustainable living standards and environmental quality, for themselves and future generations. The extent to which any particular group is impacted can vary according to the action, decision or policy taken.

The paper was developed in the context of IFAC’s mission, to enable IFAC to assess the extent to which its actions and decisions are made in the public interest. IFAC is of the view that the benefits for society noted in the public interest definition may include the soundness of financial and non-financial reporting, the comparability of financial and non-financial information across borders, fiscal prudence in public expenditures, and the contributions that accountants make to corporate governance, efficient resource management and organizational performance.

For an overview of IFAC’s work, see A Definition of the Public Interest: At a Glance. Also, review the related materials: A Definition of the Public Interest: Policy Position Paper #5 and Appendices referred to in the paper which was published in June 2012. In addition, consider the guidance issued by the Institute of Chartered Accountants in England and Wales (ICAEW) in the paper Acting in the public interest: a framework for analysis.

User-friendly AICPA ethics code on horizon

Ethical decisions often need to be reached quickly, but the AICPA’s Code of Professional Conduct (ethics code) is not structured for quick and easy navigation. A proposed reformatted ethics code is meant to change that. The current ethics code started as eight rules that fit on one sheet of paper and was adopted April 9, 1917, by the American Institute of Accountants, predecessor of the American Institute of Certified Public Accountants (AICPA). Over time, the rules evolved, and in 1973 they were codified into the current Code of Professional Conduct. Almost 100 years later, the ethics code and related guidance are ripe for reorganization.

The AICPA’s Professional Ethics Executive Committee (PEEC) has restructured the Institute’s ethics standards to improve the AICPA Code of Professional Conduct (Code) so that members and others can apply the rules and reach correct conclusions more easily and intuitively. To achieve this, the PEEC restructured the Code into several parts each organized by topic, edited the Code using consistent drafting and style conventions, incorporated a conceptual framework for members in public practice and in business, revised certain Code provisions to reflect the "conceptual framework" approach (also known as the "threats and safeguard" approach) and, where applicable, referenced existing non-authoritative guidance to the relevant topic.

The Proposed Revised AICPA Code of Professional Conduct was exposed for comment on April 15, 2013. Comments on the 237-page Exposure Draft will be accepted until August 15, 2013.  The April 17, 2013 Journal of Accountancy article “User-friendly AICPA ethics code on horizon” explains the new format and the substantive changes to the existing ethics standards.

Chartered Accountants Worldwide: business leaders, decision-makers and trusted advisers

Chartered Accountants (CAs) were the founders of the accountancy profession and have led its global development. Today, they hold influential positions around the world as business leaders, decision-makers and trusted advisers. In over 180 countries, CAs have attained and maintained the top professional standard that this status demands.

CAs have been a mark of excellence across all aspects of business and financial life for over 150 years. They advise organizations, lead major companies, shape economic policy and deliver effective financial management and reporting. Talented, ethical and committed professionals have never been more highly valued. By combining unrivalled knowledge, skill and commitment, CAs enable businesses, organizations, individuals and communities to achieve their financial and strategic goals with rigour, integrity and vision.

The leading institutes of Chartered Accountants from around the world have come together to support, develop and promote the vital role that Chartered Accountants play throughout the complex global economy. They include the Institute of Chartered Accountants in England and Wales (ICAEW), the Institute of Chartered Accountants of Scotland (ICAS), the Institute of Chartered Accountants Australia (ICAA), Chartered Accountants Ireland (CAI), the New Zealand Institute of Chartered Accountants (NZICA) and the South African Institute of Chartered Accountants (SAICA).

To learn more about this initiative, browse the new website “Chartered Accountants Worldwide.” In addition, review the 87-page publication Chartered Accountants Worldwide: No ordinary business minds. For further information, contact: info@charteredaccountantsworldwide.com.

Do Auditing Standards Matter?

Understanding the economic role of auditing standards is essential for improving audit effectiveness and efficiency. In fact, auditing standards are most important when an auditor may have an incentive to under-audit. However, the conditions under which standards may, or may not, have a desirable effect on audit quality are less obvious.

 

A recently-completed research paper discusses what standards can do: (1) compensate for the lack of observability of the audit outcome by focusing on the audit process; (2) partially mitigate the information advantage possessed by the auditor as a professional expert that might motivate the auditor to under-audit; (3) counterbalance the diversity of demand across multiple stakeholders that might drive the audit to the lowest common denominator and create a market based on adverse selection; and (4) provide a benchmark that facilitates the calibration of an auditor’s legal liability in the event of a substandard audit.

 

The paper also presents a number of observations about what standards should not do: (1) discourage the use of judgment by auditors; (2) limit the potential demand for economically valuable alternative levels of assurance; (3) lead to excessive procedural routine or standardization in the conduct of the audit; and (4) be based on an enforcement agenda. In the end, standards overreach may undermine the economic value of the audit to many stakeholders and lead to fee pressure for audit firms.

 

Hopefully, these insights can inform future debates about the level and types of standards that are appropriate for the auditing profession. For more information, read the article “Do Auditing Standards Matter?” by W. Robert Knechel, PhD, University of Florida. This manuscript has been accepted for publication in an American Accounting Association (AAA) journal. The author has posted this preliminary version of the manuscript in the interest of making the information available for distribution and citation on a timely basis.

Ethics of Relationships between Accounting Academics and External Sponsors

They challenge and shape the accounting world, and support the standard-setters and regulators. For leading academic accountants, research informs not only accounting and the financial world in general, but also their work with aspiring accountants. The very best in academe are those scholars who challenge their students as well as established thought while shaping novel and inventive ways of looking at the accounting world. The need for rigorous research to support the decisions that have to be made by standard-setters and regulators is only going to increase (see the article “Inquiring minds” by Robert Colapinto in the April 2013 edition of CAmagazine online).

 A variety of relationships can develop between accounting academics and external sponsors that raise issues of ethical propriety. External donors may seek to influence academic decisions by applying pressure on recipients to gain favored treatment. These types of situations are on the rise because of increased commercialization of universities. A recently-completed study examined relationships between accounting academics and external sponsors that challenge academic independence because of conflicts of interest when donors seek to impose conditions on financial support.

 

The authors solicit the opinions of academic accountants about how likely they are to go along with the conditions. They link these activities to the following ethical issues: fair-mindedness, objectivity and integrity. They conclude that the more experienced accounting academics (i.e., full professors, current chairs, holders of endowed chairs and designated faculty fellows) are less likely to engage in ethically questionable relationships with external sponsors than academics who are less experienced.

 

The results are driven primarily by two cases: allowing a Big Four CPA firm to interview students before other firms as a condition of continued recruiting and allowing a firm to decide on the recipient of a named faculty fellowship. Read more in the forthcoming research article “Ethics of Relationships between Accounting Academics and External Sponsors,” by Steven M. Mintz, Li Dang and Arline Savage in Issues in Accounting Education (2013) published by the American Accounting Association.

Information Integrity – January 2013: An AICPA-CICA White Paper

Various types of information are increasingly being made available by business entities to stakeholders, including management, investors, regulators, shareholders and other interested parties. This information may include: excerpts from financial statements, such as inventories or accounts receivable; data from the company records, such as production volumes; and key performance indicators. Stakeholders use this information in making decisions, interpreting or using other information and generally increasing their knowledge about the subject matter.

To make the best decisions, users need to have confidence in the integrity of the information. With this in mind, the AICPA Trust Information Integrity Task Force, in conjunction with the Canadian Institute of Chartered Accountants (CICA), prepared a white paper called Information Integrity in January 2013. The purpose of this white paper is to define what information integrity means and to provide context for it to users, preparers and practitioners.

The 28-page white paper offers insight on how information can have integrity and discusses how information integrity can be achieved and maintained. It should be of interest to professional accountants in the accounting profession as a whole, including those in public practice, in business and industry, and other participants in the business reporting process, such as producers and consumers of business information.

The effective internal auditor: 7 key attributes

As the role of the internal auditor shifts, through regulatory changes or a more volatile economy, so do the skills required to do the job well. The skills shift is demonstrated by what companies expect of the internal audit function. Technical skills are a prerequisite, but those skills alone are not enough as the job’s scope broadens.

A recent report co-authored by Richard Chambers, chief executive and president of the Institute of Internal Auditors (IIA) provides insight on Succeeding as a 21st Century Internal Auditor: 7 Attributes of Highly Effective Internal Auditors. The report, produced by the IIA and global staffing firm Robert Half, discusses these seven traits: Integrity; Relationship building; Partnering; Communication; Teamwork; Diversity; and Continuous learning. These attributes fall into the category of soft skills, but more and more those skills are required, not desired.

For more information, read the Robert Half news release “Transformation of Skills Key to Success for Internal Auditors, Reveals Report.” In addition, review the related CGMA Magazine article “Internal Auditors Must Focus More Attention on Strategy.” Also, see related postings dealing with Internal Auditing.

CIMA, IFAC and PwC combine forces to look at business model reporting

Accountancy Age recently reported that: “The Profession has joined forces in investigating financial reports reflection of the business model and how that can be included into future integrated reporting.” It notes that a background paper Business Model, which reviews business models and how they are represented in financial reports, was prepared for the International Integrated Reporting Council (IIRC) by the Chartered Institute of Management Accountants (CIMA), the International Federation of Accountants (IFAC) and PricewaterhouseCoopers (PwC).

The Executive Summary to the 23-page background paper explores and reconciles divergent approaches in business model reporting with the aim of reaching a common, widely-accepted definition of the business model for use in Integrated Reporting (<IR>). Specific implications for the development of the International <IR> Framework are summarized. A distinction is made between business model disclosures and other information, such as: external factors or context; capitals; governance; strategy and resource allocation; opportunities and risks; performance; and future outlook. These elements are highly interconnected as shown below.

To learn more, read the report Understanding Transformation: Building the Business Case for Integrated Reporting. It tracks the behavioural changes of businesses on their journey towards Integrated Reporting during the first year of the IIRC Pilot Programme. Also, refer to other developments on integrated reporting.

Guidance for Professional Accountants in Business

According to the International Federation of Accountants (IFAC):
“Professional accountants in business (PAIBs) are a very diverse constituency, and can be found working as employees or consultants in commerce, industry, financial services, education, and the public and not-for-profit sectors. Many are in a position of strategic or functional leadership, or are otherwise well-placed to collaborate with colleagues in other disciplines to help their organizations toward long-term sustainable success.”


The PAIB Committee provides leadership and guidance on relevant issues pertaining to professional accountants in business and the business environments in which they work. This guidance is helpful because “Professional accountants support their organizations in a wide range of job functions at various levels, including leadership and management; operational; management control; and accounting and stakeholder communications.”

The key roles and expected areas of competency of PAIBs are discussed in Competent and Versatile: How Professional Accountants in Business Drive Sustainable Organizational Success and an accompanying employer-focused brochure. This discussion explains how professional accountants can broadly be categorized as creators, enablers, preservers, and reporters of sustainable value for their organizations, and the wide scope of their activities in organizations can be better promoted by the profession. In addition, it highlights the importance of the professional accountant’s mindset that needs to embrace: professionalism and ethical behaviour; professional judgment; an investor and wider stakeholder focus; organizational and environmental awareness; and change, uncertainty, and complexity.

Professional skepticism and professional judgment: Two hot-button issues in the audit world

According to a recent article, “Threats of inherent bias in making judgments can be overcome if processes include appropriate safeguards.” The article notes that “Professional skepticism and judgment are two hot-button issues in the audit world. Many experienced auditors are finding the mounting questions vexing, with the implied criticism of their judgment process.”

Attention to professional judgment and skepticism comes at the same time as advances in cognitive psychology. There is increased attention on the way our brains are programmed to make judgments. It turns out that making good judgments is not intuitive and is much more difficult than initially realized. In fact, our brains are programmed to make snap judgments, often based on little evidence and guided by strongly built-in unconscious biases. Although the ability to react quickly and decisively may be vital to survival in life and death situations, it is not usually helpful in conducting an audit.

The article concludes that “Audits of micro-entities may be low risk by definition, but significant judgments are still necessary and auditors must still approach these engagements with a skeptical attitude. Unconscious biases can have a detrimental impact on auditor judgments. Regardless of the size of the audit team, it is important to have safeguards to protect against these unconscious threats. A rigorous process to help reduce unconscious bias in making judgments is essential in even the smallest of audits.”

For more information, read the article “Good judgments” by Phil Cowperthwaite, FCA, in the April 2013 edition of CAmagazine online. As well, see “Developing strategies to heighten professional skepticism and help overcome judgment biases” and “Are checklists killing the CA profession?” In addition, review other informative research and guidance materials on professional skepticism.

Professional Judgment Matters: Collaboration by Academics, Accounting Organizations, Regulators, Standard-Setters and Others

Chartered Accountants (CAs) practice in a wide variety of fields including public accounting, business, government, education, research, consulting, regulation and standard setting. In each of these areas, CAs are recognized for their expertise and for their ability to exercise sound “professional judgment” in a multitude of different contexts.

About one year ago, the research report Professional Judgment Matters: Assessing the Need for Enhanced Communication and Collaboration was completed. It is available on Google Docs and on the Social Science Research Network (SSRN). As noted in the abstract to the report, the goal was to answer the research question: “With regard to professional judgment matters, is there a need for enhanced communication and collaboration by Chartered Accountants?” Based on the results of the academic and professional literature review, the collective views expressed by CAs in face-to-face meetings and by an online survey, and the interest shown in the communications blog, it’s time to collaborate!

Interest in this blog is growing. The blog has about 100 postings to date but the number of pageviews is now more than 13,000. Also, it is encouraging to see that the interest is by professional accountants from around the world. The top 10 countries are the United States, Canada, Russia, the United Kingdom, Australia, Germany, France, Malaysia, Philippines and India, in that order.

Because CAs practice in a wide variety of fields, the guidance addresses many different professional judgment matters. For example, the guidance covers the following topics: research, professionalism, judgment, expertise, ethics, skepticism, biases, principles vs rules, education and teaching. It also covers a number of practice areas, such as accounting and auditing, financial reporting, taxation, business and internal auditing.

This guidance is drawn from many diverse sources, including academics, accounting organizations, regulators and standard-setters. For example, refer to the Global Accounting Alliance (GAA Accounting), the Institute of Chartered Accountants in England and Wales (ICAEW) and the UK Financial Reporting Council (FRC), the Institute of Chartered Accountants of Scotland (ICAS), the Institute of Chartered Accountants of Australia (ICAA), the New Zealand Auditing and Assurance Standards Board (NZAuASB), the American Institute of Certified Public Accountants (AICPA), the US Public Company Accounting Oversight Board (PCAOB), the US Securities and Exchange Commission (SEC), the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and the Canadian Institute of Chartered Accountants / Canadian Public Accountability Board (CICA / CPAB). It is apparent, however, that the current guidance is both limited and piecemeal, with inadequate attention to national and international collaboration.

Clearly, there is an ongoing need for enhanced collaboration on professional judgment matters. How can this be done? The AICPA and ICAS website pages on professional judgment provide a beginning. Constructive feedback and suggestions for improvement are welcome and appreciated (please e-mail your comments to paul.emile.roy@gmail.com).