Summary of the KPMG Professional Judgment Framework

KPMG LLP, one of the four largest international public accounting firms, launched an initiative in 2009 to enhance the professional judgment and professional skepticism of its people and teams. KPMG collaborated with two professors at Brigham Young University, Professors Steve Glover and Doug Prawitt, to emphasize these skills in its training. The result of this effort is refreshed professional judgment content throughout KPMG's audit training curriculum for all levels of audit professionals.

KPMG took the additional step of sharing and leveraging its professional judgment training content to create, again in collaboration with Brigham Young University Professors Glover and Prawitt, a monograph to help students accelerate the development of their professional judgment while still in college. The previously-posted monograph is titled Elevating Professional Judgment in Auditing and Accounting: The KPMG Professional Judgment Framework.

The monograph is only available in electronic form, with live Internet links and audio files embedded. In addition, there are video files and an instructor’s manual available separately to professors who register on KPMG University Connection. To learn more, see the 2013 Summary of the KPMG Professional Judgment Framework— Understanding and DevelopingProfessional Judgment in Auditing and Accounting, available online.

COMPETENT AND VERSATILE — Professional Accountants in Business

Worldwide, more than one million professional accountants work in commerce, industry, financial services, education, and the public and not-for-profit sectors. Many of them are in positions of strategic or functional leadership. These professional accountants in business (PAIBs) are well-placed to create long-term sustainable value for their organizations.
  
PAIBs play key roles in organizations— roles that often go far beyond the stereotypical perceptions of accountants. It may not be readily apparent to all employers and business owners, but they can capitalize on professional accountants’ training, knowledge and skill sets to help guide their organizations toward long-term sustainable success.

To help the global accountancy profession respond to changing expectations of society, financial markets and organizations, the International Federation of Accountants (IFAC) has identified eight drivers of sustainable organizational success. These eight drivers, which draw from various management and quality frameworks, provide a basis for understanding how professional accountants can support organizations in sustainable value creation.

The ability of PAIBs to help drive sustainable value creation is based on a range of professional skills and a particular attitude and mindset. That mindset needs to embrace five key areas: Professionalism and ethical behavior; Professional judgment; Organizational and environmental awareness; An investor and wider stakeholder focus; and Change, uncertainty and complexity. 

For more information, read the publication, Competent and Versatile: How Professional Accountants in Business Drive Sustainable Organizational Success, available at the International Center for Professional Accountants in Business on the IFAC website (www.ifac.org/paib).

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.

 

Practice-Based Education – Perspectives and Strategies

There are many challenges facing researchers, educators, practitioners and students in today’s practice worlds. Published in 2012, the 37-page Australian book Practice-Based Education- Perspectives and Strategies is part of a series that examines research, theory and practice in the context of university education, professional practice, work and society. The series examines places where two or more of these areas come together.

Themes explored in the series include university education of professions, society expectations of professional practice, professional practice workplaces and strategies for investigating each of these areas. The authors bring a wealth of practice wisdom and experience to examine these issues, share their practice knowledge, report research into strategies that address these challenges, share approaches to working and learning and raise yet more questions. The conversations in the series contribute to expanding the discourse around the way people encounter and experience practice, education, work and society.

This book explores the principles, context, practices and strategies of practice-based education from multiple perspectives. It examines the place and nature of practice-based university education, that is, education that prepares graduates for practice. This seems initially to be a straightforward goal. However, practice-based education is, in reality, a complex of ideas, pedagogies, opportunities and possible experiences. In this complexity of realisation and simplicity of concept lies its strength and potential for rich and productive higher education.

The book is written by leading academics in higher education and is aimed at a broad audience including university educators, as well as researchers and those in the professions. The book examines goals, trends, perspectives and strategies of practice-based education in international, professional education programs. There are three sections: 1. Contesting and Contextualising Practice-Based Education; 2. Practice-Based Education Pedagogy and Strategies; and 3. The Future of Practice-Based Education.

A professional judgment framework for financial reporting

The Institute of Chartered Accountants of Scotland (ICAS) has been pursuing a campaign in support of principles-based financial reporting standards since the publication of Principles not Rules: A Question of Judgement in 2006. According to the ICAS, principles-based standards provide a framework within which the economic substance of transactions can be faithfully presented and better serve the needs of business and markets, and the public interest.

 

 

The key to the effective functioning of a principles-based framework is the ability of preparers and auditors to exercise professional judgment in the application of principles to the circumstances of a particular transaction or accounting issue. The basis of such judgments needs to be properly documented, so that regulators (who also need to have the experience and expertise to consider and challenge such judgments) can assess the reasonableness of the judgments based on the facts and knowledge available at the time of the judgments.

 

In an effective principles-based environment, each party plays a key role in making their own judgments and challenging others’ judgments, building up trust that all the parties have sufficient experience and expertise and that they approach their different roles in a proportionate and sensible manner. In the light of comments received on earlier work and involvement in similar work undertaken by the Global Accounting Alliance (GAA), there is a need for guidance on how to make judgments, especially in jurisdictions which are first time adopters of International Financial Reporting Standards (IFRS) or which are used to operating in a prescriptive or rules-based environment.

 

The ICAS has therefore developed A Professional Judgement Framework for Financial Reporting: An international guide for preparers, auditors, regulators and standard setters which offers guidance that may be useful around the globe. Other postings regarding a “professional judgment framework” may also be useful.

IAESB - Revised standard on professional values, ethics and attitudes

The International Accounting Education Standards Board (IAESB) of the International Federation of Accountants (IFAC) has released for public exposure a proposed revision of International Education Standard (IES) 4, Initial Professional Development-Professional Values, Ethics and Attitudes. IES 4, part of the IAESB’s project to improve the clarity of its standards, is aimed at educational organizations, employers, regulators, government authorities and other stakeholders who support the development of professional accountants.

Drafted in 2004, IES 4 prescribes the values, ethics and attitudes that professional accountants should acquire during the education program leading to qualification. A revised draft of IES 4 was exposed for public comment in May 2011 and, although respondents’ comments were generally supportive, further clarification was requested to explain the requirements on learning outcomes, assessment and reflective activity (the recurring process of reviewing experiences with a view to improve future actions). As a result, the IAESB has made substantial changes to the content of IES 4.

In addition to addressing these issues, the proposed revised IES 4 requires IFAC member bodies to regularly review and update their professional accounting education programs, including formal education and workplace training. Updating the knowledge content of professional accounting education programs and the content of workplace training on a regular basis improves the likelihood of learning outcomes being relevant and developing appropriate competence.

In a continuing effort to improve the clarity of its standards, the IAESB has undertaken a project to redraft all eight of its IESs in accordance with its new clarity drafting conventions. IES 7, Continuing Professional Development, is the first clarified standard to be released since the project began in December 2010. Under the current timetable, the IAESB anticipates that all IESs will have been revised and redrafted, or redrafted only, by the third quarter of 2013. The IAESB invites all stakeholders to comment on its proposals at www.iaesb.org. Comments are requested by October 11, 2012.

Developing a framework for “Professionalism”

Australia was the first country outside of the United States to adopt the Certified Financial Planner (CFP) certification model for practitioner excellence. In 2007, the Financial Planning Association of Australia introduced a structured professionalism framework to demonstrate the profession’s commitment to best practice. The publication, A framework for financial planning professionalism, states that professionalism is based on three pillars: professional membership, professional conduct and professional accountability.

The three pillars are illustrated in the following professional framework exhibit. Professional membership is about ensuring that only the right people can become members. Professional conduct is about ensuring members adhere to the high standards set for the profession and that they are supported in following professional ideals. Professional accountability is about protecting the reputation of all members by putting in place an independent, peer-driven disciplinary mechanism.

The framework publication also states: “Our community comprises of our clients, the media, consumer groups and advocates as well as the broader community in which we all live. As a profession, we have obligations and responsibilities to build good relations with the whole community – to be productive and contributing members who make a positive difference to society.”

Furthermore, “A quality professional framework that is supported by the profession and the regulators will underpin these vital goals. Trust will flow on from a robust framework that is supported by members and regulators and shown to have ‘teeth’. The profession’s disciplinary process must be transparent, fair and deliver penalties that match the expectations of the regulators and the community and reinforce best practice behaviours within the profession.”

“The bottom line is that increased community respect will drive the profession’s ‘value proposition’ which will translate into a number of positive outcomes for your business and for you. Some of these outcomes will include increased client stability, growth and profitability.” For more information, also refer to the FPA Code of Professional Practice issued in July 2011.

Harvard Business Review - Making Smart Decisions

According to the research, bad decisions can often be traced back to the way the decisions were made. Perhaps the alternatives were not clearly defined, the right information was not collected or the costs and benefits were not accurately weighted. Sometimes, the fault lies in the mind of the decision maker rather than in the decision-making process.



The research has examined eight psychological traps that can affect the way that decisions are made. They include the anchoring trap, the status-quo trap, the sunk-cost trap and the confirming-evidence trap. They also include the framing trap, the overconfidence trap, the prudence trap and the recallability trap. The best way to avoid all of these traps is awareness. Forewarned is forearmed!

Learn more by reading the article “The Hidden Traps in Decision Making” by John S. Hammond, Ralph L. Keeney and Howard Raiffa in the Harvard Business Review on Making Smart Decisions.

Accountants’ Insecurity Relating to Work Diversity

Chartered Accountants (CAs) practice in a wide variety of fields. This requires different competencies and implies the application of professional judgment in a multitude of different contexts. However, academic research provides evidence that, shortly before the collapse of Enron, experienced CAs were appreciably insecure about their professional identity and the appropriateness of the basic principles of their system of expertise. According to the research findings: “Interviewees were uncomfortable with the realities of auditor independence, were doubtful of the future of the profession, and had difficulties in describing the key features of a typical professional accountant in a context where accounting firms and individual accountants become involved in domains conceptually far removed from accountancy’s core domains.”

The research paper reported that: “...expert accountants did not trust to a high degree their system of expertise. Furthermore, our interviews suggest that through their reflexive abilities, accountants interpreted a number of their daily working experiences as being inconsistent with the routine and procedural application of accounting/auditing knowledge, thereby generating doubts about several of the key premises that underlie accounting expertise. As a result, interviewees had inconsistencies in the biographies of their professional lives; they saw the role of the firms and that of the professional institutes to be antagonistic. However, although doubts about the profession’s system of expertise regularly emerged from interviewees’ daily experiences, interviewees were not affected by these doubts to the point of being incapable of continuing their working lives as CAs or of engaging in radical reform initiatives.”

The research paper concludes that: “...All of this leads us to suggest that professional institutes establish channels for rank and file members to communicate concerns emerging from reflexive interpretations of daily experiences, and adopt mechanisms to examine these concerns and formulate, if necessary, proposals for institutional change. Like most modern institutions, professions seek to exclude from their members’ lives fundamental issues that cast doubt on the premises of their systems of expertise.”

The paper further concludes that: “Although suspicious and dissenting voices may be costly to deal with in the short term, it seems to us that providing conduits for members’ concerns and adopting a process to examine them might translate into professions having standards that better respond to the needs of society. These changes might also result in practitioners being better equipped to deal with situations in which they feel insecure, and perhaps avoid the occurrence of corporate scandals where auditors are blamed for not having issued qualified reports. Unfortunately, it seems that it takes a crisis of legitimacy on the scale of Enron to enact change.”

To learn more about this research, refer to the research paper “Professional Insecurity and the Erosion of Accountancy’s Jurisdictional Boundaries” by Yves Gendron, Ph.D, CA, University of Alberta  and Roy Suddaby, Ph.D, University of Iowa, Canadian Accounting Perspectives, Vol. 3 No. 1 (2004) pp. 85–115.

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.

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?)

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. 

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.)

Can you really teach good judgment? (Part 1 of 3)

According to a recent publication, Elevating Professional Judgment in Auditing: The KPMG Professional Judgment Framework, a common question people have is, “Can you really teach good judgment?” Many believe that it is a gift; either you have it or you do not. Others would say you cannot teach good judgment; rather, it must be developed through the “school of hard knocks” after many years of experience. There is no question that talent and experience are important components of effective professional judgment, but it is possible to enhance your professional judgment skills through learning and applying some key concepts. As with other important skills, the sooner you start learning how to make good professional judgments, the better.

The KPMG monograph and related training materials (available at the KPMG University Connection) were developed with the help of two professors from Brigham Young University, Steven Glover and Douglas Prawitt. Their research focuses on the judgment and decision making of accounting and auditing professionals. They have taught graduate (MBA) courses on effective judgment and decision making for many years.

Graduate courses in professional judgment are also being offered at selected Canadian universities, For example, Professor Efrim Boritz teaches a course on Professional Judgment (ACC 690 on pages 90-91) at the University of Waterloo. The course covers a variety of topics, such as: Introduction to Professionalism and Professional Judgment; Being a Trusted Adviser; Methods of Studying Professional Judgment; Bounded Rationality; Heuristics, Framing and Biases; Knowledge, Expertise, Specialization; Ethics, Skepticism and Rules of Professional Conduct; Multi-person Tasks and Professional Judgment; Role of Decision Aids in Professional Judgment; and, Conflicts and Negotiations.

SEC Views on a Framework for Professional Judgment – Part 2 of 3

According to the US Securities and Exchange Commission (SEC) Committee on Improvements to Financial Reporting (“CiFR”), there are many categories of accounting and auditing judgments that are made in preparing financial statements. Any guidance should encompass all of these categories, if practicable (see Final Report, pages 88-96).

Some of the categories of accounting judgment are as follows:

·       selection of accounting standard;

·       implementation of an accounting standard;

·       lack of applicable accounting standards;

·       financial statement presentation;

·       estimating the actual amount to record; and

·       evaluating the sufficiency of evidence.

In addition, there are many levels of professional judgment that occur related to accounting matters. Preparers must make initial judgments about uncertain accounting issues; the preparer’s judgment may then be evaluated or challenged by auditors, investors, regulators, legal claimants and even others, such as the media. Guidance should not suggest that those who evaluate a judgment must re-perform the judgment according to the guidance. Instead, guidance should provide clarity to those who would make a judgment on factors that those who would evaluate the judgment would consider while making that evaluation.

Judgment, with respect to accounting matters, should be exercised by a person or persons who have the appropriate level of knowledge, experience, and objectivity to form an opinion based on the relevant facts and circumstances within the context provided by applicable accounting standards. Judgments could differ between knowledgeable, experienced, and objective persons. Such differences between reasonable judgments do not, in themselves, suggest that one judgment is wrong and the other is correct.

About this Blog

Judgment defines a profession! In fact, the ability to make good judgment calls is paramount to the success of any professional. For Chartered Accountants (CAs), sound "professional judgment" is based on ethical behaviour together with an appropriate foundation of technical skills and critical thought processes, sustained and enhanced by professional development.

Professional judgment requires a commitment to gather all the pertinent facts, the discipline to examine the fact patterns in relation to a consistently-applied framework, and the willingness to consider alternative positions. In addition, it requires the application of relevant knowledge, expertise and practical experience in selecting a rational course of action.

The aim of this blog is to support CAs by:

• opening a global communication channel to collaborate on professional judgment matters;
• examining the theory, concepts and factors that influence the professional judgment process; 
• highlighting research and guidance that may help improve the quality of professional judgment.

After all, professional judgment matters!