A Message for All CAs - Living our Values

Pierre Brunet, FCA

On February 22, 2003, Pierre Brunet, FCA (Chair - The Canadian Institute of Chartered Accountants) gave a brief speech to new CA graduates at the Institute of Chartered Accountants of Ontario about Living Our Values as Chartered Accountants.

He noted that, “We are highly regarded as knowledgeable financial experts. And our standards – in disclosure and assurance, education, discipline, practice inspection, and professional conduct are recognized around the world. But it’s not only our standards that have won us the public’s trust. It’s the values we stand for. Honesty, integrity, objectivity, reliability. And in the future, these values will be even more important as the reliability of financial data becomes even more critical in our society.”

“Each of us in a position of trust, regardless of age or occupation, needs an ethical gyroscope. …The truth is, however, that rules and regulations have never been able to address the root of the problem … a problem that results from the obsession of certain individuals with accumulating power and wealth. This problem is at once timeless, universal, and all too human. And no matter how much we strengthen the system as a bulwark against abuse and greed, there will always be people who want to take advantage. This is why the efforts of individual CAs are perhaps even more important than actions we take as a profession. CAs such as yourselves, who work responsibly, every day, and live up to the values of our profession.”

“Most importantly, be proud to be a CA. Be proud not only of where we’ve been, but most of all of where we’re going. So put that CA on your business card. Because it stands not just for what we know. It stands for who we are. So, go forward with pride, and with the strength and sureness that only values will provide.”

Why do controllers compromise on their fiduciary duties?

A new research paper notes that, “Business controllers play a fiduciary role to ensure the integrity of financial reporting.” So, what makes these financial professionals bend or break the rules under pressure? It may result from being too sensitive to the feelings of others and mirroring their emotions. In other words, empathetic accountants may have a tendency to be less ethical.

The paper’s researchers found a correlation between the subjects’ emotional sensitivity and their willingness to flout the rules. The findings also suggest why the stereotypical reserved accountant remains controlled amidst an ocean of emotional pressures. For more information, read the research paper, Why Controllers Compromise on Their Fiduciary Duties: EEG Evidence on the Role of the Human Mirror Neuron System, to be published in the journal Accounting, Organizations and Society.

Exploring the Growing Use of Technology in the Audit, with a Focus on Data Analytics

In September 2016, the International Auditing and Assurance Standards Board (IAASB)’s Data Analytics Working Group (DAWG) released a Working Group Paper, Exploring the Growing Use of Technology in the Audit, with a Focus on Data Analytics. The Paper is open for comment until February 15, 2017. In addition, this publication is a call for nominations for a newly formed Project Advisory Panel to further advise the IAASB and the DAWG on developments relevant to standard setting.

The Paper provides insights into the opportunities and challenges with the use of data analytics in the audit of financial statements and outlines the insights gained from the activities to date. The purpose of the Request for Input is to:

• Inform stakeholders about the IAASB’s ongoing work to explore effective and appropriate use of technology, with a focus on data analytics, in the audit of financial statements; and 

• Obtain stakeholder input and perspectives on whether all the considerations relevant to the use of data analytics in a financial statement audit have been identified.

The DAWG paper (page 16) emphasizes that: “The use of data analytics in an audit of financial statements will not replace the need for the auditor to exercise appropriate professional judgment and professional skepticism. Strong views have been expressed by the IAASB CAG and at IAASB roundtables about the importance of the auditor having a thorough understanding of the entity and its environment in order to facilitate a high-quality audit in which professional skepticism is appropriately applied.”

For additional insights, refer to the June 2016 Audit Data Analytics Alert  issued by CPA Canada.

Do auditor judgment frameworks help in constraining aggressive reporting?

A 2016 research paper investigates whether alternative judgment frameworks help Big 4 audit managers and partners constrain management’s aggressive financial reporting under accounting standards that differ in their precision. The authors found that a framework based on the SEC’s Advisory Committee on Improvements to Financial Reporting (CIFiR) recommendation that auditors critically evaluate the pros and cons of alternative accounting methods helps auditors constrain aggressive reporting under less precise standards.

Although the results highlight a limitation of counterfactual reasoning on its own at enhancing auditor constraint of aggressive reporting, this study provides evidence on how structured thinking can overcome this limitation. In particular, combining this consideration of the alternatives with a structured thought process that encourages auditors to think about the issue at increasing levels of abstraction effectively shifts auditor focus away from client considerations and towards substance-over-form considerations, thereby incrementally enhancing auditor constraint of aggressive reporting across different levels of accounting standard precision.

These research findings should be of interest to academics, regulators, standard-setters and auditors as they continue to contemplate ways to improve auditor professional judgment under different levels of accounting standard precision. For more information, read the research paper, Do Auditor Judgment Frameworks Help in Constraining Aggressive Reporting? Evidence under More Precise and Less Precise Accounting Standards by Ann G. Backof (University of Virginia - McIntire School of Commerce), E. Michael Bamber (University of Georgia) and Tina Carpenter (University of Georgia - C. Herman and Mary Virginia Terry College of Business) published in the journal, Accounting, Organizations and Society, Volume 51, May 2016, Pages 1–11.

Research and Guidance Resources by the Center for Audit Quality (CAQ)

Devoted to enhancing investor confidence and public trust in the global capital markets, the Center for Audit Quality (CAQ) is an autonomous, nonpartisan, and nonprofit public policy organization based in Washington, DC. Supported by a membership of U.S. accounting firms registered with the Public Company Accounting Oversight Board (PCAOB), the CAQ is led by a Governing Board made up of CEOs from leading public company auditing firms and the AICPA, as well as three members from outside the public company auditing profession. CAQ resources include guides, case studies, technical alerts, research reports, comment letters, amicus briefs, and videos. They are all publicly available and free of charge.

On August 7, 2016, top practitioners from the public company auditing profession gathered with leading academics at the CAQ’s Eighth Annual Symposium in New York, Research in Auditing – Insights from Academics and Practitioners. The event is a key part of the CAQ’s ongoing dialogue with the academic community on how research can help inform audit practice. As in past years, the 2016 Symposium included panel discussions on critical issues.

This Symposium panel focused on the advantages that can be gained when academics team up with members of the profession to inform their research. Behavioral and archival researchers working with the CAQ Research Advisory Board have benefited from conferring with auditors to better understand the challenges faced in practice, how those are addressed, and how changes in approach or audit methodology could impact the research question.

The Center for Audit Quality has also developed two video vignettes for use in the classroom (each approximately five minutes in length) that provide insights into the types of conversations that occur when auditors are assessing the internal controls used by management. In these scenarios, the focus is on a management review control over goodwill impairment estimates. The discussions captured in the videos can also be used in other teaching situations as they highlight communications and interviewing techniques, professional skepticism, and how to navigate conversations on difficult and sensitive issues. To learn more, refer to video Vignette 1: A Meeting between the Audit Manager and the Company Controller and video Vignette 2: A Meeting between the Audit Manager and the Engagement Partner.

Enhancing Auditor Professional Skepticism: The Professional Skepticism Continuum

A 2014 academic research paper published by the American Accounting Association notes that “Due to past high-profile audit failures, reported audit deficiencies in regulator inspection reports, and the growing number and size of complex estimates in the financial statements, there is a growing need for reliability and trust in financial reports and a corresponding increased demand for enhanced audit quality. Enhancing the level of professional skepticism applied in practice is one important means of improving audit quality, but there is a lack of practical guidance around the appropriate application and documentation of professional skepticism in the professional literature.”

The following graphic offers a proposed skepticism continuum. Such a continuum enables the auditor to take the perspective that is most appropriate considering the circumstances applicable to each audit area and assertion. Applying a continuum to a specific account and assertion takes place after a careful and rigorous initial risk assessment, and a continued re-evaluation of the risk throughout the audit to ensure that appropriate skepticism is applied to the collection and evaluation of audit evidence.

According to the paper, “A shared understanding would allow audit professionals to identify, communicate, and exercise a level of professional skepticism appropriate for the risks involved, and would enable regulators to fairly evaluate, after the fact, the level of skepticism applied. The skepticism continuum we propose represents a potential step forward in understanding the nature of professional skepticism and in applying it appropriately under varying circumstances.”

The paper concludes that, “In order to make the necessary changes, the profession, academics, regulators, and standard setters should work together to better understand the nature of professional skepticism, including how skepticism is threatened at various structural levels, current measures in place to mitigate those threats and, then, finally, how skepticism can be enhanced at the various structural levels. Our hope is that this paper will provide a conceptual foundation to facilitate a productive ongoing dialogue that will lead to specific actions to enhance auditor professional skepticism and, ultimately, audit quality.”

To learn more, read the full paper by Steven M. Glover and Douglas F. Prawitt, both Professors at Brigham Young University, “Enhancing Auditor Professional Skepticism: The Professional Skepticism Continuum” in Current Issues in Auditing: December 2014, Vol. 8, No. 2, pp. P1-P10.

Supporting Credibility and Trust in Emerging Forms of External Reporting

The Integrated Reporting Working Group of the International Auditing and Assurance Standards Board (IAASB) has released a Discussion Paper, Supporting Credibility and Trust in Emerging Forms of External Reporting: Ten Key Challenges for Assurance Engagements. It is intended to facilitate an open discussion about the IAASB’s potential role regarding emerging forms of external reporting, which are referred to as “EER”, and where others can or need to play a role in a holistic and interactive process to support credibility and trust in these reports. A Frequently Asked Questions page and a document called At a Glance have been created as additional resources. Comments on the Discussion Paper are requested by December 15, 2016.

It is noteworthy that Challenge 8 of this Discussion Paper deals with Exercising Professional Skepticism and Professional Judgment. It notes that, “There may be more areas that require judgment in applying EER frameworks than in applying financial reporting frameworks and more areas where the judgments in preparing the subject matter information are susceptible to subjectivity and management bias. There are therefore generally more areas where there is a need to apply professional judgment and professional skepticism in EER assurance engagements. At the same time, given the broader and more diverse subject matters addressed, it may be more challenging for the practitioner to obtain the competence needed to support the application of professional judgment and professional skepticism in relation to such engagements.”

Furthermore, “Professional judgment and professional skepticism are interrelated and play a fundamental role in assurance engagements. The IAASB, in conjunction with the International Ethics Standards Board for Accountants (IESBA) and the International Accounting Education Standards Board (IAESB), is currently exploring how best to emphasize the importance of exercising professional skepticism within a financial statement audit, including whether changes are needed to the ISAs or whether other action may be necessary.”

Defining the “Public Interest” - Financial Reporting and Assurance Standards Canada

The accounting profession serves the “public interest” but what exactly does the term mean? Canada’s Auditing and Assurance Standards Oversight Council (AASOC) has clarified how it defines the “public interest” in a newly-released paper. The paper, “AASOC’s Consideration of the Public Interest,” outlines who is the public, what are the interests of the public and how the AASOC evaluates whether an action, decision or policy is in the public interest.

To provide a structure for the consideration of the “public,” a stakeholder approach was adopted.  Fostering trust, economic growth and long-term financial stability are of immense importance to the public at large. This makes the public at large, even those who do not invest in capital markets, a stakeholder in our work. The broader public, including those who do not invest in stocks and bonds of individual companies, are also often stakeholders through investment funds, pension plans and as taxpayers.

Present and potential investors, financial institutions and other creditors of private entities and public institutions, including government related bodies and not-for-profit organizations, have a prominence as stakeholders in our considerations. In short, those economic participants who entrust or consider entrusting their money to an entity.

Additional stakeholder groups that are integral to the functioning of audit and assurance services in Canada, each with roles in serving and protecting the public interest, include:

•    audit committees and similar bodies or persons charged with governance, including parliamentary committees;

•    management and financial information preparers;

•    providers of audit and assurance services; and

•    various financial regulators and inspectors.

The paper notes that, "Ultimately, the consideration of whether a particular activity is in the public interest requires the exercise of professional judgment." The exercise of professional judgment includes that we stand back from the full suite of criteria (for example, transparency, public accountability, competence, independence, due process and balancing of potential outcomes) to consider whether the final result is in the public interest." Read the AASOC paper to learn more about the interests of the public and how the AASOC evaluates whether an action, decision or policy is in the public interest.

ICAS – Ethical Decision-Making Framework

According to the Institute of Chartered Accountants of Scotland (ICAS), “There has been a lot in the media recently about Artificial Intelligence (AI). One of the most difficult tasks for any AI designer will be to replicate the ability to place ethical considerations into the decision-making process. Whilst this might be easier for certain aspects, such as determining compliance with a set of rules on auditor independence, it will be much trickier in other areas where a real understanding of the circumstances, and possible available courses of action, is required.”

The ICAS has prepared guidance for those faced with such dilemmas by publishing a Discussion Paper on Ethics Principles and an Ethical Decision-Making Framework. To learn more, read the ICAS discussion paper, The Five Fundamental Ethics Principles: Time for Evaluation? and the ICAS guidance on an Ethical Decision-Making Framework. In addition, review the guidance entitled, What Do You Do Now? Ethical Issues Encountered by Chartered Accountants, and the ICAS ethical dilemmas series called Shades of Grey.

New ICAS survey: Principles not Rules

Is the principles not rules debate still valid in today’s corporate reporting landscape? What are the challenges in implementing principles-based standards? These were some of the questions for debate at an ICAS event to mark the 10 year anniversary of the 2006 publication of 'Principles not Rules: A question of judgement'.

The Institute of Chartered Accountants of Scotland (ICAS) recently surveyed members with an interest in corporate and financial reporting on their views on this debate. A similar survey was undertaken in 2011. 

Of the 199 respondents to the survey, the key findings were as follows:

• 90% of respondents had a preference for principles;

• 64% believe IFRS is very or mainly rules-based;

• 61% think that IFRS has become more rules-based in the last five years;

• There was very strong support for the idea that the profession is capable of operating within a principles-based environment;

• The main barriers to principles-based standards were considered to be:  the influence of US GAAP; the role of regulators in challenging judgments; the threat of litigation; and the lack of trust in preparers and auditors.. 

For a summary of the full results of this survey, see ICAS survey: Principles not Rules. To learn more, refer to previous postings about the principles versus rules debate.

Enhancing Public Trust in the Accounting Profession Using Professional Judgment

A 2004 dissertation empirically examined the impact of ethics instruction and ability on student propensity to use professional judgment in resolving accounting ethics dilemmas. The literature has supported the need for increased ethics instruction in accounting programs as a vehicle to improve ethical decision making in the accounting profession. The significance of the American Institute of Certified Public Accountants (AICPA; 2004) Code of Professional Conduct as the profession’s source of authority relative to ethical decision making was documented.

The Code emphasizes three trust characteristics (ability, benevolence, and integrity) identified in the literature that are important relative to enhancing public trust in the accounting profession. Ability is important to ethics instruction as it determines the extent to which students acquire a working knowledge of the provisions of the AICPA Code of Professional Conduct. The ethical norms contained in the Code’s provisions are derived from the underlying ethical decision-making characteristics inherent in the accounting profession’s organizational culture. These characteristics relate to an individual’s ethics system, ethics application perspective, moral reasoning perspective and level of moral reasoning.

The literature has supported a deontological ethics system, holistic ethics application perspective, orthodox moral reasoning perspective, and conventional level of moral reasoning as appropriate for ethical decision making in the accounting profession. All of these characteristics point to the use of professional judgment rather than personal judgment in the resolution of accounting ethics dilemmas.

According to the author, there are several avenues for future research efforts relative to increasing the use of professional judgment in present and future accounting leaders and ultimately enhancing public trust in the accounting profession. They are (a) replicating the study’s repeated measures experiment to other sample frames within the sample population, (b) extending the repeated measures experiment to other sample populations, (c) conducting a longitudinal study involving student use of professional judgment, (d) preparing and conducting repeated measures experiments that evaluate the impact of the other important trust characteristics of benevolence and integrity on student use of professional judgment, and (e) developing and testing a comprehensive model of professional judgment that incorporates all three of the important characteristics that enhance public trust.

This 100-page dissertation is available online. For more information, read, Enhancing Public Trust in the Accounting Profession Using Professional Judgment Rather Than Personal Judgment in Resolving Accounting Ethics Dilemmas, by Gene R. Sullivan submitted in April 2004 to Regent University School of Leadership Studies in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Organizational Leadership.

New Code of Professional Conduct for Ontario CPAs

In a June 2016 communication, the executive of the Chartered Professional Accountants of Ontario (CPAs) stated that: “As CPAs, we hold ourselves to a high standard in everything we do. We conduct ourselves at all times according to the shared values and ideals of our profession, regardless of position, sector or tenure, and we commit to our profession 24 hours a day, seven days a week. That’s why I am pleased to inform you of a new CPA Code of Professional Conduct  that was recently approved by CPA Ontario’s Council and is now in effect. It will be presented to members for ratification at the next Annual General Meeting in September 2016."

"While most members will not be impacted, the new CPA Code recognizes that our membership provides professional services beyond public accounting. Members providing these services may note a number of changes, such as in the Rules that govern relationships amongst professional colleagues and in Rule 210 Conflicts of Interest, as well as greater guidance provided to clarify common areas of confusion."

"As CPAs, we share common interests, ethics and concerns; now, we share a common philosophy, principles and, indeed, rules of the profession. The inclusion of all professional accountants under a common code — one that reflects the most stringent requirements of the legacy bodies — is one of the benefits of unification."

"Though the CPA Code is built upon foundational pillars — the fundamental principles of professional behaviour, integrity and due care, objectivity, professional competence and confidentiality — the whole is greater than the sum of its parts. Our commitment to its principles is not situational; it does not stop at the end of the working day. In short, as CPAs, we live our lives according to our personal values and professional code — the CPA Code of Professional Conduct. Its purpose is clear, its principles timeless, and its vision defines us not only as a profession but as a community."

For an overview of the new CPA Code, refer to the article, A New Code of Professional Conduct, on page 8 of the Spring 2016 issue of the publication Discussion and Analysis, available online.

Using Good Decision Making to Drive Value

EY - The Future of Decision Making

Making the right decision is hard. Companies have to frame the questions properly, find the right data to support the analysis, and do all this in a way that is transparent and repeatable. In 2012, Ernst & Young LLP (EY) commissioned a survey of 285 senior executives globally from across the consumer products sector. 81% of participants indicated that they needed to improve their decision-making speed and level of insight.

Survey respondents suggested that their people spent too much time making decisions based on intuition, working on mechanical tasks and focusing on unnecessary detail. Instead, they wanted their people to be adding more value through better use of leading indicators, conducting root cause analysis of issues, and linking strategy with resource allocation, planning and reporting.

To improve their performance management capabilities and drive profitable growth, companies need to take a more encompassing approach that not only implements driver analytics, but also uses the analytics to mathematically link business strategies with the market, competitor, operational and financial forces that drive value and, by extension, good decision making. Learn more from the EY guidance, The future of decision making: 5 Insights for Executives.

PwC - Using Data and Analytics to Re-Imagine Forecasting

According to PwC (United States), we are always forecasting - thinking about what will happen, assessing its likelihood, and contemplating the implications. But for CFOs, the stakes are much higher. The cost of being off the mark can be huge, not just in perception but also in dollars. A company’s cost of capital can be impacted by their assumptions and forecasts, and failure to accurately forecast demand fluctuations can result in too much, or not enough, inventory. In each of these situations, the cost of being wrong today can become extremely costly in the future.

This paper talks about the steps and factors a CFO may consider as they re-imagine forecasting in a way that allows themselves and their counterparts in the C-Suite to tease out signals that matter and deliver more value to their organizations in the short and long term. Learn more from the 2016 PwC guidance, Reimagine forecasting: High stakes decision making for CFOs.