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.