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.

Professional scepticism: Establishing a common understanding and reaffirming its central role in delivering audit quality

In March 2012, the Auditing Practices Board (APB) of the UK Financial Reporting Council (FRC) issued guidance on professional scepticism. The document builds on the August 2010 APB Discussion Paper, Auditor Scepticism: Raising the Bar, and the subsequent Feedback Paper published in March 2011, which summarized the Responses to the Discussion Paper and outlined the actions that the APB, and other parts of the FRC, intended to take in light of the responses received.

The guidance document is written in an unusual format for an APB document, being much more discursive than is customary and drawing analogies from a diverse group of areas. This is because scepticism needs to be more broadly understood and drawing these analogies will facilitate that understanding. The APB is also keen to stimulate and provide input to an international debate on the issue of scepticism. The document will provide valuable input to that debate.

With this objective in mind, the document: explores the roots of scepticism and identifies lessons for its role in the conduct of an audit; discusses scientific scepticism and the scientific method; reviews the origins of the modern audit; and offers conclusions about professional scepticism in the audit. It also discusses the conditions necessary for auditors to demonstrate the appropriate degree of professional scepticism and lists five proposals to take these matters forward. To learn more, read the 23-page guidance Professionalscepticism: Establishing a common understanding and reaffirming its centralrole in delivering audit quality.

Collaboration on Professional Judgment Matters for CAs – Part 2 of 3

As previously noted, a new research report has just been completed on Professional Judgment Matters: Assessing the Merits of Enhanced Communication and Collaboration.

The following discussion is Part 2 of a three-part excerpt from the executive summary in the report.


“Chapter 2 reviews the current academic and professional research literature on professional judgment. A number of important observations can be drawn from that review, with respect to the CA profession, decision making in financial reporting and auditing (including the role of professional scepticism) and the exercise of professional judgment.

The most important finding is that CAs need to keep in mind, at all times, the Rules of Professional Conduct. The Rules state that: “It is a mark of a profession that there is a voluntary assumption, by those who comprise it – the professional community – of ethical principles which are aimed, first and foremost, at protection of the public and, second, at achieving orderly and courteous conduct within the profession.” Furthermore, according to IFAC, the fundamental principles of professional ethics include integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. All professional accountants must adhere to these principles regardless of the career path they may choose.

Chapter 3 is about creating a communications blog. It refers to two blogs, Migrating to IFRS and Corporate Reporting to Stakeholders, both of which emphasize Internet-based communications and the exercise of professional judgment. The number of postings to date and the significant number of pageviews for the recent period provide a measure of the success of Internet-based communications. This chapter concludes that it has been a very short time since the blog on Professional Judgment Matters: Guidance for Chartered Accountants was created on June 18, 2011. Considering the small number of posts to date (24), it is encouraging to see that the level of interest in the subject matter (research and guidance) is steadily increasing. It is also encouraging to see that the interest is becoming global in nature. This suggests that “If you build it, they will come!”

The project proposal for this research initiative calls for an open dialogue with selected CAs. The dialogue included seven face-to-face meetings on an ad hoc basis over a six-month period and an ongoing series of e-mails. In addition to a candid exchange of views, the participants provided several significant materials dealing with professional judgment matters. Those matters are discussed in Chapter 4 under four subtopics:

• Professional Judgment: A Pillar of Accounting Education;
• Teaching and Learning Professional Judgment;
• Outline for a Course on Professional Judgment; and
• Accountants’ Insecurity Relating to Work Diversity.

The dialogue also provided a strong incentive for engaging with CAs on a broader basis. This led directly to the development of an online survey to assess whether there is a need for enhanced communication and collaboration by CAs. Chapter 5 presents the results of an online survey called “Professional Judgment Matters for CAs.” The survey results reinforce the findings in the research literature and the key messages conveyed during the dialogue. Overall, there is considerable support (84%) for enhanced communication and collaboration by CAs, facilitated by an Internet-based resource centre.”

Additional excerpts from the executive summary are provided in Part 1 and Part 3 of this series of posts.

Professional Judgment – The Mark of a Profession

The Rules of Professional Conduct are part of the Member’s Handbook of the Institute of Chartered Accountants of Ontario. The Foreword states that the Rules are comprehensive in their scope, practical in application and addressed to high moral standards. They serve not only as a guide to the profession itself, but as a source of assurance of the profession's concern for the public it serves.

According to those Rules, “It is a mark of a profession that there is a voluntary assumption, by those who comprise it -- the professional community -- of ethical principles which are aimed, first and foremost, at protection of the public and, second, at achieving orderly and courteous conduct within the profession.”

The rules of professional conduct presume the existence of a profession. Since the word "profession" has lost some of its earlier precision, through widespread application, it is worthwhile reviewing the characteristics which mark a calling as professional in the traditional sense.

Much has been written on the subject and court cases have revolved around it. The weight of the authorities, however, identifies the following distinguishing elements:

·       there is mastery by the practitioners of a particular intellectual skill, acquired by lengthy training and education;

·       the traditional foundation of the calling rests in public practice -- the application of the acquired skill to the affairs of others for a fee;

·       the calling centres on the provision of personal services rather than entrepreneurial dealing in goods;

·       there is an outlook, in the practice of the calling, which is essentially objective;

·       there is acceptance by the practitioners of a responsibility to subordinate personal interests to those of the public good;

·       there exists a developed and independent society or institute, comprising the members of the calling, which sets and maintains standards of qualification, attests to the competence of the individual practitioner and safeguards and develops the skills and standards of the calling;

·       there is a specialized code of ethical conduct, laid down and enforced by that society or institute, designed principally for the protection of the public;

·       there is a belief, on the part of those engaged in the calling, in the virtue of interchange of views, and in a duty to contribute to the development of their calling, adding to its knowledge and sharing advances in knowledge and technique with their fellow members.

By these criteria, chartered accountancy is a profession. It is essential to recognize that a profession does not cease to be a profession because a proportion of its members enter salaried private employment. These members continue to belong to the profession and to be subject to the rules of professional conduct. It should be recognized that some members of the profession might acquire the required skills outside of public practice. 

Can you really teach good judgment? (Part 2 of 3)

The KPMG monograph, Elevating Professional Judgment in Auditing: The KPMG Professional Judgment Framework (available at the KPMG University Connection) offers a judgment framework. That framework depicts constraints, influences and biases that threaten good judgment, with the box on the outer rim of the framework labeled “Environment” and the triangle at the top labeled “Influences/Biases.” At the bottom are Knowledge and Professional Standards, as these factors provide the foundation for quality judgments. The framework includes a number of components, such as mindset, consultation, reflection and coaching. At the core, there is a five-step judgment process.

The monograph presents simple, but powerful, principles that help overcome common threats to good judgment and that enhance professional skepticism. In addition, it covers several common judgment tendencies and how they can lead to biased judgments, and offers techniques to overcome or reduce the potential impact of these biases. After laying a foundation for individual judgments, the monograph discusses common threats to good judgment in groups, and the techniques that can improve the quality of group judgments.

According to KPMG, the mindset, skills and techniques behind good judgment begin to form at a young age and can be taught and improved with experience and practice. It is critical that accounting and auditing students receive a strong foundation in the fundamentals of professional judgment. KPMG is committed to sustaining an ongoing dialogue about professional judgment. Therefore, it is now taking the important step of sharing and leveraging the content with the key stakeholder groups, including the academic community.