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.