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).

Accounting in Australia: Bridging the gap between education and practice

Accounting is a vocational discipline and the input of industry and professional bodies is important in the design of accounting programs. In fact, professional bodies have been prescribing a required skill set (Institute of Chartered Accountants in Australia and CPA Australia). As a result, a key focus of the professional accounting bodies and universities is the development of a range of technical and non-technical skills. The Learning and Teaching Academic Standards Statement for Accounting (December 2010) produced as an Australian Learning and Teaching Council (ALTC) standards project emphasized the need for professional judgment, knowledge, application of skills, communication and teamwork and personal management skills. These skills enhance the ability of graduates to apply acquired technical skills in a variety of contexts and situations and equip them with life-long learning skills.

The abstract to a current research article notes that: “Universities are being placed under increasing pressure to produce employable work-ready graduates who are able to cope in a rapidly changing work environment. This has resulted in universities offering their undergraduate students the opportunity to gain business acumen and real world experience by undertaking work-integrated learning (WIL) as part of their learning.”

“This paper proposes a three stage framework [see Figure 2 below] to effectively embed WIL into an undergraduate accounting program. Through careful planning and implementation in three accounting courses, students are encouraged to build essential discipline knowledge and transferable generic skills like communication, teamwork and problem-solving. The WIL framework seeks to narrow the expectations gap between industry, academia and students. It supports the development of graduates who can respond to rapidly changing economic circumstances, making them more employable and adaptable at the workplace.”

For more information, read the research article “A work-integrated learning (WIL) framework to develop graduate skills and attributes in an Australian university’s accounting program” by Raymond Leong and Marie Kavanagh, University of Southern Queensland, Australia. The article was published in the Asia-Pacific Journal of Cooperative Education, 2013 14(1), pages1-14);

A scientific worldview of accounting ethics and governance education

A 2012 research paper provides a critique of the approach in which the issue of accounting ethics and governance has been tackled through education. “In light of the existence of the International Education Standard (IES) 4 specifically on ethics as the relevant framework developed by the International Federation of Accountants (IFAC), the discussion in this paper centres on the requirement of IES 4 and the manner it is suggested for implementation. Based on the ontological and epistemological reality of the world as reflected in science which also parallels religion and Eastern belief system, we are sceptical of the degree of representation of reality of the model of ethics and governance that is currently upheld by accounting curriculum designers. A framework on ethics education that is more holistic is proposed [see Figure 1 below].”

According to the paper, the issue is whether accounting education today is founded on the premise of the desired model of education – one that emphasizes character building apart from cognitive and technical competence. The authors conclude that IFAC does uphold a moral/ethics-centric philosophical basis of education. In fact, IES 4 states “The program of professional accounting education should provide potential professional accountants with a framework of professional values, ethics and attitudes for exercising professional judgment and for acting in an ethical manner that is in the best interest of society and the profession.” Therefore, it can be implied that IFAC does consider the role of accounting education to be the platform to shape values, ethics and attitudes of professional accountants.

Read the 20-page research paper “A scientific worldview of accounting ethics and governance education: the right footing of International Education Standard 4, but...” by Arfah Salleh (Universiti Putra Malaysia) and Aziuddin Ahmad (Kolej Universiti Islam Antarabangsa Selangor) published in the January 2012 Asian Academy of Management Journal (Vol. 17, No. 1, pages 131–150).

Developing strategies to heighten professional skepticism and help overcome judgment biases

A current CAmagazine article observes that “There are many inherent barriers to making good judgments, but they can be overcome with some effort and proper safeguards.” It also notes that “Professional skepticism is a cornerstone of audit quality. It defines the quality of each audit judgment and, to a significant extent, is the essence of the audit. The connection between skepticism and professional judgment is complex, which research across many professional disciplines is proving. The relationship needs to be better understood to improve our audits.”

According to the author, “Skepticism is a questioning attitude; exercising professional judgment is a process required in forming an opinion of value. Having a skeptical attitude is essential for auditors when analyzing evidence, looking for inconsistencies in data and considering explanations from management. That attitude shapes the actions required in forming a professional judgment. And auditors need to make every judgment count on every audit they undertake.”

The article concludes that “Unconscious cognitive errors are very real human traits. Usually we are not conscious of their effect on our day-to-day judgments. While these traits can result in efficient and reasonably accurate choices for most of our routine decisions, our unconscious bias is the enemy of skepticism in complex situations. Basing conclusions on insufficient evidence, an inappropriate starting point, and recent memories can get professionals into serious trouble.”

Nonetheless, “Judgment bias can be overcome, but not without effort. Implementation of safeguards in every audit will help guard against inherent bias. Many of the larger accounting firms have developed strategies to heighten professional skepticism and help overcome judgment bias.” Learn more by reading the article “Tougher than you think” by Phil Cowperthwaite, FCA in the March 2013 edition of CAmagazine online. In addition, review other informative research and guidance materials on professional skepticism.

Professional Scepticism Paramount for Auditors

Research undertaken by the Institute of Chartered Accountants of Australia (ICAA) has found that “The value of exercising professional scepticism in auditing is front and foremost for auditors in practice, yet more work can be done to build capability in this area.” Using an innovative review approach, the ICAA has prepared a 16-page publication Preserving capital market confidence through audit quality, based on quantitative research on auditors from five major accounting firms in Australia.

The research assesses the importance of the main drivers of audit quality in those firms. Auditors from a range of levels across the firms, not just partners, provided a sense of where there may be different perspectives on commitment to quality. The findings reveal that professional scepticism ranks in the top three most important skills across all respondent groups.

The review approach supplements the Australian Securities and Investments Commission (ASIC)Audit Inspection Program and the firms’ national and international reviews. The ICAA will work with the firms to correlate findings from all research avenues, as well as assess whether this approach can be adapted for other practice areas.

For an overview of this research, read the article “Professional Scepticism Paramount for Auditors” by the Institute of Chartered Accountants of Australia published in the February 2013 edition of GAA Accounting. Also, review the additional research and guidance on professional scepticism currently available online.