Auditors' virtues and the exercise of professional judgment

One of many lessons learned from infamous audit failures (such as Enron, WorldCom and Nortel) is that rules cannot replace auditors' professional judgment. Transactions can be structured around rules and rules cannot be made to fit every situation. Professional judgment is fundamental to the auditor's ability to fulfill society's expectations, as it ensures that situations are appropriately handled where the rules are not appropriate or do not yet exist. Professional judgment requires not only technical competence but also depends on auditors' ethics and virtues.

While auditors' ethics are related to their formulation of professional judgment, auditors' virtues are related to their exercise of professional judgment. Much research has investigated the role of auditors' ethics in the formulation of professional judgment. For example, auditors' ethics are associated with the ability to detect fraud and to detect departures from GAAP and the Codes of Ethics. In addition, auditors' ethical reasoning is associated with gender, age, years of employment, political orientation and education.

To identify auditors' virtues as defined by the Canadian accounting community, in-depth interviews were done with nine CAs identified as experts in ethics and auditing, and exemplars of the accounting community. This resulted in an extensive inventory of virtues important to the auditor's role. In addition, a survey was undertaken to determine the relative importance of the auditor's virtues included in the inventory. More than 400 CAs participated from public practice and from private industry. Participants rated the importance of each virtue on a scale of one (not at all important) to five (highly important). The following exhibit presents the results of the survey.

Learn more by reading the CAmagazine article “Virtuous auditors” by Theresa Libby, PhD, CA and Linda Thorne, PhD, CA. Also, refer to the blog posting “Professional Judgment – Ethical Thinking by Chartered Accountants”.

Professional Judgment – Ethical Thinking by Chartered Accountants

It is generally accepted that ethical thinking by Chartered Accountants (CAs) is based on their knowledge and the application of fair and comprehensive codes of professional conduct, such as the IFAC Handbook of the Code of Ethics for Professional Accountants. Education, training and experience, as well as professional and organizational commitment, influence a CA’s ability to utilize principled ethical thinking when exercising professional judgment.

Accounting research suggests that accountants can think about ethical issues in one of three ways that correspond to the three types of ethical thinking: pre-conventional, conventional and principled thinking. CAs use pre-conventional ethical thinking when they decide what is right or wrong based upon consequences, and often, self-interest. An example of using pre-conventional thinking is management’s decision to pad a budget because a bonus will be received if the budget is met.

CAs use conventional ethical thinking when social consensus, such as accepted practices, rules and laws, define what is right or wrong. An example of using conventional ethical thinking is management’s structuring a contract, such as a lease, solely to achieve a particular accounting result. CAs use principled ethical thinking when they use universal ethical principles of justice and the common good to determine what is right or wrong. An example of using principled ethical thinking is management’s voluntarily disclosing to shareholders the firm’s environmental and social practices, even if they are less than flattering, because it is right or justifiable to do so. Once CAs use principled ethical thinking to determine the right thing to do, they should be encouraged to do it.

For more information, read the article “Ethics and the accountant” by Linda Thorne, PhD, CA and Dawn Massey, PhD, CPA in the premier issue of CMA Magazine online.