Guidance for Applying a Professional Judgment Framework

Enhanced Communication and Collaboration
on Professional Judgment Matters

In 2011, the Institute of Chartered Accountants of Scotland (ICAS) sponsored the research report Professional Judgment Matters: Assessing the Need for Enhanced Communication and Collaboration. This guidance blog is an integral part of that research report which is available on Google Docs and on the Social Science Research Network (SSRN). The ICAS then published A Professional Judgement Framework for Financial Reporting in 2012. It was primarily targeted at accountants (both preparers and auditors) determining the appropriate accounting treatment for particular transactions.

In 2016, the ICAS released a new, up-to-date publication  A Professional Judgement Framework for Financial Reporting Decision Making to replaces the 2012 edition. It offers practical guidance for decision makers involved in narrative and financial reporting. The new edition has been broadened to make it more universally applicable to decision makers involved in financial reporting, whether accountants or nonaccountants, in the private or not-for-profit sectors. It also includes a new section on audit committees and further context on ethical decision making. Furthermore, the 2016 edition is shorter and more interactive for online readers.

The ICAS firmly believes that a principles-based approach to standard setting is a key driver of quality reporting. Therefore, the guidance includes recommendations for standard setters to ensure that standards provide the appropriate scope for professional judgment.

In this regard, it is entirely consistent with the 1995 Research Report Professional Judgment and the Auditor prepared by staff of the Canadian Institute of Chartered Accountants (CICA), Research Studies Department (J. Paul-Emile Roy, CA) under the direction of an 8-member Study Group of professionals. The 1995 Report identified many sources of information regarding the issues surrounding professional judgment. It developed a framework for professional judgment and discussed key factors that influence the judgment process. In addition, it provided valuable guidance to practitioners regarding their professional obligations when exercising professional judgment. Other blog postings regarding a “professional judgment framework” may also be useful for improving decision-making.

Guidance for Teaching Professional Judgment and Ethics

In 2015, Pearson Canada published the textbook Auditing: The Art and Science of Assurance Engagements,Thirteenth Canadian Edition by Professor Alvin A. Arens (Michigan State University), Randal J. Elder (Syracuse University), Mark S. Beasley (North Carolina State University) and Joanne C. Jones (York University). Chapter 4 (on pages 63-91) covers Professional Judgment and Ethics. The Chapter presents A Framework for Professional Judgment, discusses the Auditor’s Mindset and Judgment Tendencies, presents A Framework for Ethical Reasoning, and offers Professional Guidance on Ethical Conduct.

The authors note (see page 65) that “In its research report, Professional Judgment and the Auditor, the Canadian Institute of Chartered Accountants (now CPA Canada) said: Professional judgment in auditing is the application of relevant knowledge and experience, within the context provided by auditing and accounting standards and Rules of Professional Conduct, in reaching decisions where a choice must be made between alternative possible courses of action.”

The report further explained that professional judgment is analytical and systematic, objective, prudent, and carried out with integrity and recognition of responsibility to those affected by its consequences. This means that auditors must be able to justify a decision on the basis that it:

• Is well thought out;

• Is objective;

• Meets the underlying principles of GAAP and GAAS;

• Has evidence to support the decision;

• Maximizes the likelihood of “good” consequences;

• Is carried out with truthfulness and forthrightness; and

• Considers the impact on the financial statement users.

Accordingly, this type of decision making can be both complex and difficult. To assist auditors and firms, several professional associations such as CPA Canada, the Institute of Chartered Accountants of Australia, and the Institute of Chartered Accountants of Scotland, as well as the American Center for Audit Quality, have issued professional judgment and professional skepticism frameworks that provide auditors with a methodical approach.

The approach depicted in Figure 4-1 above (see page 66) is based on those various frameworks. Although the framework may seem to be simple, such frameworks are considered effective tools in guiding thinking and encouraging auditors to be aware of their own judgment biases and traps and what can go wrong. Judgment biases and traps are considered in more detail as part of the auditor mindset component of the framework (see page 67).

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.”

Making Judgment Professional

According to a 2013 Financial Reporting Commentary by Staff of Canada’s Accounting Standards Board, the debate over principles-based standards vs. rules-based standards has gone on for many years. All standards should be based on principles. There also needs to be some amount of guidance in the standards on how to apply those principles. The question is how detailed or rules-like should guidance be? What is the balance that provides enough guidance to apply the standards in a consistent manner – but still leaves sufficient flexibility for financial statements to provide information about the entity in a way that is most helpful to users?

Detailed guidance makes it easier to determine the accounting for specific transactions and events – just check the rules. It also makes consistent application of the standards more likely. However, in some circumstances rules may not result in financial statements that provide the most relevant information. This is because those writing the standards often cannot foresee all the different types of transactions and circumstances that the rule will be applied to. In the extreme, detailed rules can become a straightjacket that limits the ability of financial reporting to provide information that meets user needs. Detailed rules can also make it easier to structure transactions to achieve a certain accounting result that is contrary to the underlying principles of the standard.

Professional judgment searches for the accounting that best meets the objective of financial statements – communicating information to financial statement users that helps them in making resource allocation decisions and assessing management stewardship – and is consistent with primary sources of GAAP. This is the test that must be met when applying professional judgment. In many cases, it will be clear there is only one method of accounting that meets this test for a specific transaction or event. However, differences in key facts or circumstances may result in different accounting being appropriate for similar transactions or events.

Read more about this Commentary on Making Judgment Professional and the ongoing debate over principles-based standards vs. rules-based standards.

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.

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.

Best Practice Resources for Tax Practitioners in Canada

All tax engagements involve some common elements. However, the time and expertise required may vary significantly for each engagement. More than 50% of insurance claims against Chartered Accountants are tax-related but the majority can be avoided with an effective tax risk management strategy.

The newly revised second edition of the CICA Tax Practice Manual contains 22 comprehensive chapters. It provides information on the important risks associated with tax practice, recommendations and best practices to minimize those risks, as well as useful tools and practice aids to accomplish risk minimization that will assist in improving productivity.

In the electronic version of the Manual, the practice aids are listed at the end of each chapter. Word files, PDF files and links are now included on a CD which accompanies the print version of the Manual. The URLs are included on both the CD and in the electronic versions for quick access to source documents.

Enhancing Audit Quality: Canadian Perspectives - Auditor Independence

The discussion paper Enhancing Audit Quality: Canadian Perspectives - Auditor Independence was issued in September 2012. It is the result of a collaborative initiative by the Canadian Institute of Chartered Accountants (CICA) and the Canadian Public Accountability Board (CPAB). The initiative focuses on three interrelated key areas in enhancing audit quality – the independence of auditors, the role of audit committees and auditor reporting. This 31-page paper was prepared by the Independence Working Group (IWG) in response to global proposals to modify auditor independence rules.

As discussed in the August 2012 publication Enhancing Audit Quality: Canadian Perspectives - Initiative Overview (see Appendix A thereof), audit quality is affected by many factors other than auditor independence. Indeed, many of the factors affecting audit quality involve parties other than auditors, their firms or the audit committees of companies they audit. Accordingly, considerations of the broader issues are outside the scope of this paper.

Following introductory and background chapters, this paper considers the meaning of “independence” (Chapter 3), and describes the current Canadian independence framework (Chapter 4) and the role of professional skepticism (Chapter 5). Next, the paper identifies and describes those global proposals in response to the financial crisis that are relevant to independence (Chapter 6). Guiding principles for evaluation of these global proposals adopted by the IWG are noted (Chapter 7). The paper concludes with an evaluation of the relevant global proposals and the consensus reached by the IWG on each of the proposals (Chapter 8).

To learn more about this joint CICA-CPAB initiative, see “Enhancing Audit Quality: Canadian Perspectives.”

Using a conceptual framework in setting accounting standards

A current research paper examines the nature and role of a conceptual framework for financial reporting. Although much has been written about such frameworks and their purported role, there are still questions about what it is and how it is used in setting accounting standards. It is noteworthy that the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are currently revising and converging their frameworks.

Using insights from the philosophical literature, this paper considers the nature of the statements that appear in the chapters of the conceptual framework on objectives and qualitative characteristics. It then considers how these statements are used by standard setters in reasoning towards accounting standards. The kind of reasoning involved and the type of statements that are used in such reasoning is examined.

The idea that some of the statements in the conceptual framework express desires that are to be fulfilled by financial reporting, regulated by accounting standards, is explored. These should be conceived as expressing general desires that are used in practical or instrumental reasoning towards accounting standards, rather than as universal desires that enable the deduction of such standards. The need for the exercise of judgment in such reasoning is explored.

The nature of the other statements in the conceptual framework is ambiguous. They are sometimes taken to be empirical statements about how the desires are to be fulfilled and sometimes taken as statements about the meaning of expressions used to express these desires. The paper suggests that the development of the conceptual framework would be easier and the final product would have more credibility if its nature and role was more clearly understood.


Dr Ian Dennis

This paper makes reference to the research study Professional Judgment in Financial Reporting by Michael Gibbins, PhD, FCA and Alister K. Mason, PhD, FCA, published in 1988 by the Canadian Institute of Chartered Accountants (CICA). It also makes reference to the Ross Skinner article Judgment in Jeopardy, first published in CA Magazine in November 1995 and reprinted in Canadian Accounting Perspectives in 2005. For more information, read the 33-page article “Using a conceptual framework in setting accounting standards” by Dr Ian Dennis, Senior Lecturer in Accounting and Finance, Oxford Brookes University Business School.

 

Enhancing Audit Quality: Canadian Perspectives

Since the 2008 global financial crisis, policy makers, regulators, standard setters and others around the world have been considering changes to the financial system to promote greater financial stability and to reduce systematic risk. Audit quality is among the factors being discussed, with major audit reform initiatives well underway by the European Commission; the United States’ Public Company Accounting Oversight Board; the United Kingdom’s Financial Reporting Council; and the International Auditing and Assurance Standards Board, which has launched a project on enhancing auditor reporting

Enhancing Audit Quality: Canadian Perspectives is a consultation process being led by the Canadian Public Accountability Board (CPAB) and the Canadian Institute of Chartered Accountants (CICA) to gain stakeholder input on key issues emerging with respect to enhancing audit quality globally, and the impact on Canada. To provide effective coordination and direction to this work, an enhancing audit quality steering group (chaired by David Brown, a leading securities lawyer and former chair of the Ontario Securities Commission) has been established, along with three working groups, with experts from audit committees, auditing and assurance standard setters, auditors, investors, prudential and securities regulators, financial-statement preparers, CPAB and the CICA.

The working groups will focus on three aspects of audit quality and reform being discussed internationally. The working group on the role of the audit committee will focus on the reporting relationships between audit committees and their key stakeholders, along with enhancing and promoting professional skepticism by the audit committee and the auditor. The working group on auditor reporting will target enhancing the information value of the auditor’s report and expanding auditor association with management disclosures outside of the financial statements. The working group on auditor independence will focus its efforts on the options relating to the appointment and rotation of, and non-audit services provided by, auditors that will improve independence, objectivity, professional skepticism and audit quality at firms.

Leveraging Change – The New Pillars of Accounting Education

According to Tim Forristal, CA (Vice President, Education at the Canadian Institute of Chartered Accountants), “Ours is a time of incredible change in the accounting world. Within a few short years, a new, multi GAAP environment has emerged, with the adoption of IFRS, new accounting standards for private enterprises, and the evolution of not for profit standards. Thus it has never been more important for the accounting profession and accounting and business educators to work together to determine how best to prepare tomorrow’s accountants.”


In November 2010, the Canadian Institute of Chartered Accountants (CICA) partnered with the University of Toronto to respond to this challenge. The result was Leveraging Change – The New Pillars of Accounting Education, a one-day symposium during which leading academics from Canada, the United States, and the United Kingdom explored the new pillars of accounting education along with 100 delegates from across the country.

The five new pillars were identified for the symposium as: (1) accounting principles and concepts; (2) ethical decision-making; (3) professional and personal attributes; (4) professional judgment; and (5) integration. The Pillars are not based on a formal research process but on an extended dialogue among the CICA, the University of Toronto and other interested academics. The Pillars re-position and re-emphasize areas that have long been of interest to educators and to the accounting profession alike.

The objective of the Symposium is to begin the process of rethinking accounting education by articulating the questions that accounting educators need to ask. During the Symposium, 15 thought papers were presented. Those papers raise the questions eloquently and so begin this important discussion. For more information, visit the CICA’s newly redesigned website section on Supporting CA academics. Also, refer to the blog post on October 11, 2011, Should Professional Judgment be a Pillar of Accounting Education?

Enhancing Professional Skepticism in Auditing

In February 2012, the Canadian Institute of Chartered Accountants (CICA) issued an Auditing and Assurance Bulletin on Enhancing Professional Skepticism. The Bulletin addresses how certain specific audit procedures required by Canadian Auditing Standards (CASs) can enhance professional skepticism. It is intended to help raise practitioners’ awareness in a timely manner of significant new or emerging issues or other noteworthy circumstances related to engagements addressed by the pronouncements of the Auditing and Assurance Standards Board (AASB). It is also meant to direct practitioners to relevant requirements, application and other explanatory material in the CICA Handbook – Assurance.

This Bulletin was issued in response to certain matters identified by practice inspectors and questions received by provincial practice advisors. In particular, this Bulletin addresses how to apply professional skepticism in accordance with CASs. It notes that: “CASs define professional skepticism as an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence (paragraph 13(I) of CAS 200).”

The Bulletin further states that: “Paragraph A19 of CAS 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Canadian Auditing Standards, calls for the auditor to plan and perform the audit with professional skepticism in order to reduce the risks of:

• overlooking unusual circumstances;
• over generalizing when drawing conclusions from audit observations; and
• using inappropriate assumptions in determining the nature, timing and extent of the audit procedures and evaluating the results thereof.”

 

The topics covered by the Bulletin include the following: Overall auditor alertness; Risk assessment; Related parties; Accounting estimates; Inquiries of others; Accounting policies; External confirmations; Analytical procedures; Testing of journal entries; Evaluation of misstatements; Written representations; and Forming an opinion. After discussing these matters, it concludes that: “Auditors are encouraged to consider the matters discussed in this Bulletin, and continue to improve the application of professional skepticism in the audits they perform.”

 

For additional insight on professional skepticism, refer to Professional Judgment – Education Continued and the three-part series on Learning about Professional Skepticism (November 23, November 29 and November 30, 2011).

Professional Judgment and Canadian Generally Accepted Auditing Standards – 1975

Thirty-seven years ago, in February 1975, the CICA’s Auditing Standards Committee proposed, subject to comments received following exposure, to publish the contents of an Exposure Draft as CICA Handbook: Section 5100 - Generally Accepted Auditing Standards. This Exposure Draft was a re-exposure of material previously included in a November 1973 Exposure Draft. At that time the Committee used wording closely following and, in most places, identical to that used in the AICPA Statement on Auditing Standards No. 1, Codification of Auditing Standards and Procedures.


The Introduction to the Exposure Draft stated: “Although the Committee’s intention remains, as a general principle, to use words closely following AICPA Statements (or other professional pronouncements) in cases where this is appropriate, consideration of responses received to the 1973 Exposure Draft indicated that several significant changes were desirable in this particular case. The November 1973 Exposure Draft contained two other Sections of background material, which have been eliminated. "Responsibilities and Functions of the Independent Auditor" required extensive changes and will be dealt with at a later date. The discussion previously included under the heading "The General Standards" related to ethical matters [emphasis added], which are within the jurisdiction of the provincial Institutes and Order. Accordingly, it is the Committee’s intention not to deal further with this topic in the Auditing Recommendations Section of the CICA Handbook, other than including the substance of the three November 1973 general standards as one general standard in paragraph 5100.02 in the interest of completeness.”

It is noteworthy that the Introduction also stated that concurrent with the issuance of this Exposure Draft as an Auditing Recommendation, the Committee would intend to amend the Introduction to Auditing Recommendations by inserting the following as a new paragraph in the "Application" section:

"Among the Recommendations issued, GENERALLY ACCEPTED AUDITING STANDARDS, Section 5100, constitute the basic professional standards with which, in the Committee’s view, the auditor should comply when reporting upon financial statements. In adhering to such basic standards the auditor should have regard to the specific Auditing Recommendations in the Handbook while exercising his professional judgment [emphasis added] as to what procedures are required for such adherence. In addition, the Handbook provides Recommendations with respect to unaudited financial statements, to which Generally Accepted Auditing Standards do not apply.”

The Role of Professional Judgment in Standard Setting (Part 4 of 4)

As previously mentioned (see Part 1, Part 2 and Part 3), the CICA Special Committee on Standard-Setting (SCOSS) presented its Report to the CICA Board of Governors in 1980. The report (pages 11-14) discussed the need for professional judgment in standard-setting, taking a principles-based approach, using principles rather than detailed rules, and clearly stating the role of professional judgment in the CICA Handbook.

The following excerpt from that report discusses the need to clearly stating the role of professional judgment in the CICA Handbook: “In paragraph A.202 of the foregoing discussion [see Part 1] we pointed out that the role of professional judgment has not, in our view, been adequately spelled out by the profession. Section 1500.06 of the Handbook contains the words “No rule of general application can be phrased to suit all circumstances or combinations of circumstances that may arise and the determination of what constitutes fair presentation or good practice in the particular case requires the exercise of professional judgment.” These words, however, are not italicized and hence they constitute explanation rather than a “Recommendation” or standard. Their implications are not further developed in the Handbook and are certainly not completely clear. In fact, another Section of the Handbook that related to the interaction of professional judgment and accounting standards (Section 5500.20) has recently been removed from the Handbook and not replaced. [Paragraph A.301]

We believe that the lack of an explanation of the role of professional judgment in the Handbook is a serious defect. In the foregoing discussion, we presented a view of the role of professional judgment that would, if adopted by the profession, give it much greater importance. We acknowledge, as we also stated in paragraph A.203 [see Part 1], that this view might not reflect a consensus in the profession, even though it does reflect our view as a committee. [Paragraph A.302]

However, regardless of whether our view on professional judgment is accepted, we remain convinced that the role of professional judgment should be stated clearly in the Handbook. Therefore, we present as our first recommendation:

Recommendation 1. The Role of Professional Judgment
THE ROLE OF PROFESSIONAL JUDGMENT IN THE INTERPRETATION AND APPLICATION OF ACCOUNTING AND AUDITING STANDARDS SHOULD BE EXPLAINED CLEARLY IN THE HANDBOOK.” [Paragraph A.303]

The Role of Professional Judgment in Standard Setting (Part 3 of 4)

As previously mentioned (see Part 1 and Part 2), the CICA Special Committee on Standard-Setting (SCOSS) presented its Report to the CICA Board of Governors in 1980. The report (pages 11-14) discussed the need for professional judgment in standard-setting, taking a principles-based approach, using principles rather than detailed rules, and clearly stating the role of professional judgment in the CICA Handbook.

The following excerpt from that report discusses the use of principles rather than detailed rules: “Failure to recognize the role of judgment can lead to odd results, of which one example may suffice. Securities legislation in a number of provinces requires compliance with generally accepted accounting principles -- i.e. published standards -- but permits deviation with approval of the relevant Securities Commission. This power of exemption is obviously appropriate to deal with cases when compliance with published standards might result in undue detriment to a reporting enterprise. However, it seems anomalous that this exempting power of a Securities Commission might have to be invoked to relieve an enterprise from the requirements of published accounting standards even though the result of compliance would be an unfair or misleading presentation. [Paragraph A.210]

Yet, we are informed that this power would be used for such a purpose. We cannot see why it should be necessary for a group composed largely of non-accountants to give permission for non-compliance with a standard on the grounds that the result of compliance (determined perhaps largely on the evidence of expert accountants) is unfair and misleading. [Paragraph A.211]

In applying professional judgment, objectivity and intellectual integrity are just as, or even more, important than skill and experience. Occasional instances of poor or dishonestly applied judgment will not undermine good financial reporting as long as the profession as a whole approaches problems with objectivity and integrity. However, if any significant number of auditors are prepared to accept these instances as precedents or to claim “judgment” as the rationalization for inappropriate presentations by their clients, the pressure on other auditors to accept similar presentations by their clients can become intense. Detailed and inflexible rules may then be seen as the only defence against accounting practices being set at the lowest level that any auditor can be found to accept. [Paragraph A.212]

In addition to these pressures, the profession may be concerned with legal liability and may perceive compliance with strict rules as a defence. Bureaucracies will demand detailed rules for essentially the same reason, i.e. to shield themselves from criticism. The cumulative weight of these pressures for detailed rules may prove unbearable and it might seem prudent to simply give in now. We urge that an attempt to resist be made and we believe the profession can meet the challenge. If we are proven wrong, detailed rules can be drafted and adopted: but, once we abandon principles for detailed rules, it may be impossible to turn back.” [Paragraph A.213]

The Role of Professional Judgment in Standard Setting (Part 2 of 4)

As previously mentioned (see Part 1), the CICA Special Committee on Standard-Setting (SCOSS) presented its Report to the CICA Board of Governors in 1980. The report (pages 11-14) discussed the need for professional judgment in standard-setting, taking a principles-based approach, using principles rather than detailed rules, and clearly stating the role of professional judgment in the CICA Handbook.

The following excerpt from that report discusses the importance of taking a principles-based approach: “Although most standards contain descriptions of the circumstances to which they are intended to apply, these descriptions are necessarily general rather than highly detailed. If a standard covers, as is usually the case, a range of circumstances that, while not identical, are sufficiently similar to be treated uniformly, there will inevitably be situations on the edge of the range whose intended treatment is uncertain. Thus, an accountant may not be able to determine precisely and directly what circumstances were or were not intended by the standard-setting body to be covered in a standard. He must reach such a conclusion indirectly. If, in his professional judgment, the application of a standard to his particular circumstances produces an unfair or misleading result, he would usually infer that the circumstances were not contemplated when the standard was set. [Paragraph A.207]

This conclusion is valid only if the misleading result is the consequence of the particular circumstances and not of the accountant’s personal opinion of the standard itself. He may, for example, disagree generally with a particular standard and believe that it would produce an unfair result in all cases -- but this view of the standard does not put him at liberty to ignore it, since his view has been over-ruled by the standard-setters. It is only when the accountant can reasonably infer that it is the particular circumstances that result in a misleading presentation that deviation from the standard becomes not only permitted but necessary. [Paragraph A.208]

In dealing with situations where no standard apparently applies, it is important that the accountant consider the spirit and apparent intent of the published standards. If strict compliance with a published standard gives an apparently inappropriate result, the accountant should consider what the standard was trying to achieve and why it fails in his case. He may thus identify those changes in treatment necessary to bring the presentation of his particular circumstances within the spirit and principles of the standard. This may be difficult and more than one possible treatment may seem to comply with the spirit of published standards. These problems are both the price and reward of being a professional. The important thing is that the professional not seize on the non-applicability of a standard to adopt solutions completely at variance with the principles on which published standards are based.” [Paragraph A.209]

The Role of Professional Judgment in Standard Setting (Part 1 of 4)

On December 19, 1980, the CICA Special Committee on Standard-Setting (SCOSS) presented its Report to the CICA Board of Governors. The report (pages 11-14) discussed the need for professional judgment in standard-setting, taking a principles-based approach, using principles rather than detailed rules, and clearly stating the role of professional judgment in the CICA Handbook. Although that report was issued more than 30 years ago, the observations and views of the Special Committee appear to be equally valid today and are, therefore, reproduced in this four-part series.

The SCOSS report begins with a general overview of professionalism and professional judgment as follows: “Professionalism in accounting and auditing involves more than just knowledge and skill. A professional accountant is distinguished from a bookkeeper by his ability to analyze and organize financial information so as to draw from it conclusions about economic realities. The professional accountant then presents this information in a way that enables others to make use of it. To be effective the process of analysis, organization and communication of relevant data requires professional judgment because of the variety of circumstances (or “economic realities”) and user needs that are encountered by a professional accountant while carrying out this function. [Paragraph A.201]

The need for judgment in carrying out a task would seem, by definition, to preclude the use of standard answers or methods. An understanding of the relationship between standards and professional judgment thus appears to lie at the very heart of the profession’s function. Yet this relationship has not, in our view, been adequately spelled out by the profession, nor does there seem to be a consensus as to what that relationship is or should be. [Paragraph A.202]

The following discussion presents a view of the role of professional judgment. In presenting it, we are aware that it might not reflect a majority view in the profession, but it does reflect this committee’s concerns and it will also illuminate the general approach to standards, and to standard-setting, that we take in this report. We also note that this matter has been addressed in the recently published Research Study “Corporate Reporting: Its Future Evolution.” [Paragraph A.203]

No individual chartered accountant can possess the wisdom and experience of the profession in the aggregate. Also, although the number of different factual circumstances the professional accountant may encounter in practice may seem limitless, the vast majority of cases fall into a manageable number of categories. It is in the public interest that it have the benefit, whenever possible, of the wisdom and experience of more than the individual practitioner when it comes to circumstances that occur sufficiently often that a consensus as to their proper treatment can be developed. Setting out such consensus is one role of accounting standards. [Paragraph A.204]

Another goal is comparability of financial information from enterprise to enterprise and from situation to situation when the circumstances involved are similar. If similar circumstances are not presented in similar ways, the user of the information loses one of the benefits of the professional accountant’s function. Thus, the function of accounting standards is to guide the judgment of the professional accountant so that the highest quality of measurement and presentation is consistently produced in any particular commonly-encountered set of circumstances. [Paragraph A.205]

On the other hand, every chartered accountant must from time to time encounter circumstances that differ, or at least appear to differ, from those contemplated by published standards. In these cases the accountant must decide, with little guidance from standards, what is appropriate presentation in the circumstances. The aggregate wisdom of the profession offered by standards is no longer directly relevant because it has not been applied to the circumstances. The apparent comparability offered by simple compliance with the most nearly applicable standard is a potential trap -- to present different circumstances as if they were similar is just as bad as to present similar circumstances as if they were different. Blind compliance with standards is both unprofessional and contrary to the public interest.” [Paragraph A.206]

Should Professional Judgment be a Pillar of Accounting Education?

Chartered Accountants (CAs) practice in a wide variety of fields. For example, they may be auditors of publicly-traded corporations, advisers to privately-held organisations, CFOs (overseeing treasury, financing and strategic investment decisions), IT consultants, corporate finance advisers, tax specialists, forensic accountants, accounting professors, controllers (managing performance measurement and control systems), internal audit directors, government financial officers and insolvency practitioners. Each of these careers requires different competencies and implies the application of professional judgment in a multitude of different contexts.

The diversity that one encounters within the accounting profession raises several questions for which answers are not necessarily forthcoming. For example, do these different career streams require different sets or portfolios of cognitive skills? Do these career streams demand similar or distinct levels of cognitive skills? Moreover, does the optimal configuration between specific expertise and cognitive skills differ across these career streams? In that regard, the advent of articling within business organizations as an alternative to accounting firms is likely to bring further broadening in the range of careers and experiences of professional accountants.

Judgment and expertise in professional accounting have been topics of interest for many decades. Both concepts share many commonalities as judgment is the most evident outcome from expertise, while expertise is required to exercise judgment. However, both concepts can also be considered to be multi-dimensional. Two key aspects that underlie professional judgment in accounting are 1) relevant knowledge and experience so that 2) a choice must be made between alternatives.

In summary, we have learned a lot over the past two decades about professional judgment and expertise, but there remains some uncertainty as to what they are, as well as how and when to develop them. It appears that the development of professional expertise and judgment through generic learning processes may not be optimal. The literature also raises questions as to whether university education is necessarily the best time to provide such professional judgment and expertise abilities.

The preceding views are adapted from the discussant’s comments “Further Developing Professional Attributes in CAs: An Impossible Challenge?” by Michel Magnan, PhD, FCA, Concordia University, in response to the presentation “Teaching the Fine Arts of Being a Professional Accountant” by Susan Wolcott, PhD, CPA. Both the presentation and the discussant’s comments were part of the November 22, 2010 symposium Leveraging Change - The New Pillars of Accounting Education which was held in Toronto, Canada. The pillars of accounting education include: professional judgment; professional and personal attributes; accounting principles and concepts; ethical decision making; and integration.

(For more information on this symposium, contact Irene Wiecek, FCA, at the University of Toronto and/or Tim Forristal, CA, or Gord Beal, CA, at the Canadian Institute of Chartered Accountants (CICA). Refer to the CICA website for more information on What Do CAs Do?)

Comparing Thoughts on Professional Judgment - 1937 and 1988

“Proficiency in accounting work is largely a matter of experience and judgment; the underlying theory of the science is not particularly profound. The test comes when we attempt to apply the general fundamentals to the infinitely varied and complex situations found in the world of commerce. Factual information and accuracy in its procurement are essential, but its value is submerged unless with it is synchronized the development and training of the judgment...the solution of business problems not only calls for an orderly marshalling of facts, but, what is equally important, careful analysis and logical reasoning from such facts, the formation and establishing of effective conclusions and the exercise of sound judgment.” (This quote is drawn from the article by Kris A. Mapp, FCA, "Educating Our Students - What Is Our Responsibility?" Canadian Chartered Accountant, October 1937, page 258.)

“According to the academic research literature, the exercise of professional judgment by those preparing and auditing financial accounting information is at the core of financial reporting. Without the flexibility and the intelligence provided by professional judgment, the complex system of financial accounting procedures, standards and rules would be ponderous, unresponsive, insensitive: in short, unworkable. Financial reporting, as it operates in Canada and elsewhere, requires professional judgment at many levels, in a host of circumstances, and by a variety of skilled and experienced professionals. In fact, professional judgment is an essential part of financial reporting.” (This quote is drawn from the CICA Research Study, Professional Judgment in Financial Reporting, Michael Gibbins and Alister K. Mason, 1988, page 1.)