Ethical Lapses Force More CEOs Out of Office

The share of CEOs forced out of office for ethical lapses has been on the rise, according to the 2016 CEO Success study by Strategy&, PwC’s strategy consulting business. The study, which analysed CEO successions at the world’s largest 2,500 public companies over the past 10 years, reports that forced turnovers due to ethical lapses rose from 3.9% of all successions in 2007–2011, to 5.3% in 2012–2016. The 36% increase was due in large part to increased public scrutiny and accountability of executives.

The increase was more dramatic at companies in the US and Canada, where forced turnovers for ethical lapses increased from 1.6% of all successions in 2007–2011 to 3.3% in 2012–2016, or a 102% jump. In Western Europe, the share of CEOs forced out for ethical lapses increased to 5.9% from 4.2%, and in the BRIC countries, to 8.8% from 3.6%.

It is noteworthy that there were 12 women globally appointed to the role of CEO in 2016 – 3.6% of the incoming class. This marks a return of the slow trend toward greater diversity that had been in place over the last several years, and a recovery from the previous year’s low point of 2.8%. The share of incoming female CEOs was highest in the US and Canada, rebounding to 5.7% after falling for the previous three years. Five industries – healthcare, industrials, information technology, consumer staples, and telecom services – did not have a single incoming female CEO in 2016.

Read the full story “More CEOs forced out of office for ethical lapses” at Chartered Accountants Worldwide online. This article was originally published by the Institute of Singapore Chartered Accountants (ISCA) in the June 2017 edition of ISCA Journal. 

Professionalism is Primary

In December 2003, Douglas R. Carmichael, Director of Professional Standards at the Public Company Accounting Oversight Board (PCAOB) was invited to speak about professionalism at the AICPA Annual National Conference in Washington, DC. In his presentation, he noted that: “Most organized professions have duties to clients and to the public. A lawyer has responsibilities to the court and the law as well as to individual clients. A doctor has responsibilities for public health as well as to individual patients. Poor management of duties to the public versus to individual clients can cause a lack of respect for a profession.”

Furthermore, “Some would say that is what happened to independent auditors. Intense pressure on the management of public companies to meet the earnings expectations of analysts led to intense pressure on auditors to help clients meet those expectations. There were economic incentives to preserve the relationship with the client. Building the client relationship had become the service ideal. Accommodation on questionable accounting practices was one result. There was a widespread erosion of professionalism and the profession lost the confidence of investors. This decline in professionalism did not happen overnight. Some would say it started decades ago.”

In concluding his presentation, he suggested:“One step that could be taken is to amend the ten basic auditing standards to add a new general standard that might be worded as follows: The auditor shall, in all matters related to the audit, act in a manner that places primary emphasis on protection of investors and the furtherance of the public interest in the issuance of informative, fair, and independent audit reports. This would make dedication to professionalism an overriding and mandatory obligation for the auditor of a public company.”

Learn more about professionalism by reviewing the presentation on Professionalism is Primary. Also, refer to previous postings about professionalism as part of this blog on Professional Judgment Matters.

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).

Applying IFRS - Online guidance and resource materials

The Chartered Professional Accountants of Canada (CPA Canada) maintain an IFRS web section to provide guidance and support for understanding and applying International Financial Reporting Standards (IFRS). Whether applying an existing standard, searching for information on new standards, preparing financial statements or communicating with clients or lenders about IFRS, check out these free online resources. The Reporting Alerts series summarizes new and revised standards.

In addition, the Viewpoint series discusses circumstances unique to the mining and the oil and gas sectors. CPA Canada and the Prospectors and Developers Association of Canada (PDAC) created the Mining Industry Task Force to share views on IFRS application issues of relevance to junior mining companies. CPA Canada, the Canadian Association of Petroleum Producers (CAPP) and the Explorers and Producers Association of Canada (EPAC) created the Oil and Gas Industry Task Force to share views on IFRS application issues of relevance to junior oil and gas companies. In addition, learn more about the importance of applying professional judgment when preparing or auditing IFRS-based financial reporting.

OECD unveils plan for cross-border tax reporting

Cross-border portfolio investments are greater than $35 trillion globally, but the intended tax benefits are so difficult to claim that they often do not reach their intended targets. In response, the Organisation for Economic Cooperation and Development (OECD) has developed and approved a standardized system of relief meant to streamline processes, reduce costs and assure investors their rights, while also improving tax compliance.

The electronic system allows tax authorities to exchange information and financial institutions to report information to tax authorities. The new “Treaty Relief and Compliance Enhancement” system is based on eXtensible Markup Language (XML) technology. The United States and Canada are among the 34 countries in North and South America, Europe, Asia, Australia and New Zealand that participate in the OECD.

The135-page “Trace Implementation Package” adopted on January 23, 2013 by the OECD committee that developed it would allow authorized intermediaries to claim exemptions or reduced rates of withholding taxes on a pooled basis on behalf of their portfolio investor customers.  The package contains a complete set of tools and documents for intermediaries to begin using the system, although OECD acknowledges there are still some technology issues to resolve and, in some cases, participating countries may need to change certain domestic laws to enable intermediaries to participate. Learn more about this system at the OECD website and read the article “OECD Offers Plan for Cross-Border Investment Tax Woes” at Compliance Week online

Integrated Reporting: the challenge of assurance

A recent news article on the website of the Institute of Chartered Accountants of Scotland (ICAS) observes that: “Integrated reporting (IR) continues to move forward.  There are now 83 pilot companies across the world which are testing out the integrated thinking processes necessary to deliver integrated reports and experimenting with how best to communicate the resulting information.” It also states that: “A prototype IR Framework was released at the end of November, which shows the direction of travel, and a 3 month consultation on a proposed framework will be published in April 2013.  It is hoped that a final version of the Framework will be published in early 2014.”

 

According to this article, the integrated report is likely to replace today's annual report as the main communication to the company’s stakeholders.  It is likely to contain a varied mix of different types of information - past, present and forward looking, financial and non financial. Some of the information may be extracted from the financial statements, CSR report, Governance report, etc. But, how will users know whether the report contains all the most important information or whether it is so slanted towards the positive that it is not really giving a realistic view?

 

In this regard, auditors could express a “balanced and reasonable” opinion on an integrated report. This would provide slightly less assurance than the opinion on the financial statements, reflecting the more judgmental basis of the information in the integrated report, the mix of different types of information, and the fact that less of the information will be objectively verifiable, thereby relying much more on the auditor’s judgment.  Also, with a greater degree of forward looking information, the inherent inability of anyone to predict the future means that a lower level of assurance is inherent.

“... it is important, though, that a positive opinion is clearly expressed, so that users can understand the nature of assurance being given, and that this will underlie the credibility of integrated reports...negative assurance and reporting by exception are too confusing to users. The auditing profession is perfectly capable of making the necessary judgments to express a positive opinion in this way, although greater judgment will be involved, and the auditor liability regime in some countries may make the auditors slightly reluctant.”

Learn more by reading the online article “Integrated Reporting: the challenge of assurance” by David Wood, ICAS Executive Director of Technical Policy and Services. In addition, see the related articles “A Template for Integrated Reporting” and “A professional judgment framework for financial reporting.”

A Template for Integrated Reporting

In an era in which news spreads as it happens over the Internet and social media networks, investors, society and governments are increasingly demanding that organizations be accountable to stakeholders, not merely shareholders, and be transparent about their activities. A forthcoming research paper outlines the concept of integrated reporting and proposes a template for integrated reporting. The model is based on the concepts in the King Report on Governance for South Africa (King III), and the International Integrated Reporting Council in the United Kingdom.

According to the author, an integrated report should explain the story of reaching the organization’s vision, underpinned by its values, enacted by management, monitored by governance and using facets of resources relating to financial capital, intellectual capital, social capital and environmental capital. The paper proposes an integrated reporting framework and provides an example of a template to use. Apparently, this is the first academic paper that provides a coherent framework on integrated reporting, along with a template.

The author supports a concise report that informs significant performance implications on the organizational vision during the reporting period. The paper does not define significance as it is an outcome of inquiry into reporting, rather than a rule, and instead leaves it up to preparers to use their professional judgment. Learn more by reading the online 48-page research article “A template for integrated reporting” by I. Abeysekera to be published in the Journal of Intellectual Capital, 14 (2), in May 2013.

Finding Integrity in the Auditor

 

A recent article by the Institute of Chartered Accountants of Scotland notes that “Amid global uncertainty, the search for professionalism and assurance has never been more important...” It also notes that the work the International Auditing and Assurance Standards Board (IAASB) is doing in relation to ongoing development of auditing standards and auditor reporting will be vital to providing assurance to investors, and clarity and confidence to a world sorely lacking both.

The article expresses the view that: “Confidence in an audit comes from confidence in the auditor; there's something wonderfully personal about the title ‘Auditor's Report’. It places an emphasis on the individual woman or man, on her or his expertise, evaluations and integrity. And where do you go for this integrity? Where do you go for men and women who have an innate understanding of what it means to be a professional? Where do you go for people who know their professional responsibilities and who act, not because of fear of regulators or because they’re blindly following rules, but because of who they are?”

According to the article, “It comes from the training they receive and the role models they look up. It comes from ethics declarations such as the one the newest CAs made at the recent Institute of Chartered Accountants in Scotland admissions ceremony in Edinburgh. And it comes from advice and discussion, between a community of peers and from senior to junior, about the professional issues of the days.”

Read the article “Finding Integrity in the Auditor” by Anton Colella in the August 2012 issue of GAA Accounting online (also available in the Digital Edition, page 53). To learn more, see other resources dealing with “integrity.”

Exploring Principles vs. Rules-Based Accounting and Auditing Standards - Deloitte Fireside Chats

The Deloitte Fireside Chats are made possible through a partnership between Deloitte LLP and the SEC Historical Society. As noted in the previous posting (June 24, 2012), an interactive conversation on October 22, 2009 explored the role of professional judgment in accounting and auditing. On October 28, 2009, a further interactive conversation explored the issues surrounding principles versus rules-based accounting and auditing standards.

Patricia Fairfield, Associate Professor, McDonough School of Business, Georgetown University served as moderator. The two panellists were: Scott A. Taub, Managing Director, Financial Reporting Advisors, LLC and former Acting and Deputy Chief Accountant, SEC Office of the Chief Accountant; and Robert Kueppers, Deputy CEO of Deloitte and a trustee of the SEC Historical Society.

The discussion addressed a number of issues. ...What is meant by principles-based and rules-based accounting standards? What are the characteristics of ideal accounting standards? How can ideal standards be achieved? When we talk about principles versus rules, do we have any idea what we are talking about? The reality is that preparers, auditors, investors and regulators all have different needs but they would like to see the same economic substance portrayed in a way that is most useful and most transparent. There’s a lot at stake in this debate.

One of the seminal events in the debate was the Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System. According to that Study, imperfections exist when standards are established on either a rules-based or a principles-only basis. "Principles-only standards may present enforcement difficulties because they provide little guidance or structure for exercising professional judgment by preparers and auditors. Rules-based standards often provide a vehicle for circumventing the intention of the standard. As a result of our study, the staff recommends that those involved in the standard-setting process more consistently develop standards on a principles-based or objectives-oriented basis."

In order to have a true principles-based accounting system, it isn’t just accounting standards that need to be written differently, but those applying the standards need to be thinking differently. There are implications for all parts of the financial reporting system, not just the writer of accounting standards. The term “objectives-based” or “objectives-oriented” recognizes that everybody has different views of what “principles-based” means. For example, a standard would set out the principles or objectives that the accounting for the particular item in the scope of that transaction is supposed to be looking towards. Then, those applying the standard would be charged with finding a method of accounting that is consistent with those objectives and principles.

...Yes, there might be implementation guidance but the purpose of the implementation guidance is to illustrate the principles and objectives, not to address specific fact patterns. An optimum amount of implementation guidance is going to require more judgment, more civil interchange with clients about what’s the best accounting and what’s the right answer. In this regard, those who look at the potential of a professional judgment framework as a panacea and those that look at it as a trap are misunderstanding the purpose of the judgment framework. The purpose is to get to better accounting answers, not to mandate a way to do things. It’s to help people who are applying accounting standards to make those judgments in an intelligent way.

To learn more about this debate, refer to the “Deloitte Fireside Chat – Part II: Exploring Principles vs. Rules-Based Accounting and Auditing Standards (October 28, 2009)” available as an Edited Transcript and as an Audio Recording on the SEC Historical Society website. Also, refer to the August 2011 postings on SEC Views on a Framework for Professional Judgment – Part 1, Part 2 and Part 3.

The Role of Professional Judgment in Accounting and Auditing - Deloitte Fireside Chats

The Deloitte Fireside Chats are made possible through a partnership between Deloitte LLP and the SEC Historical Society. On October 22, 2009, an interactive conversation explored the role of professional judgment in accounting and auditing. The session recognizes that the meaning of professional judgment and its application in accounting and auditing have become subjects of interest and discussion for standard setters, preparers, auditing professionals, investors, regulators, faculty and students.

Zoe-Vonna Palmrose, PricewaterhouseCoopers Auditing Professor and Professor of Accounting in the Marshall School of Business at the University of Southern California served as moderator. The two panellists were: Gregory Jonas, serving on the PCAOB Standing Advisory Group and a member of the SEC Advisory Committee on Improvements to Financial Reporting (CiFR); and RobertKueppers, Deputy CEO of Deloitte and a trustee of the SEC Historical Society.

The CiFR identified five concerns that a judgment framework could help. First, many re-statements have resulted from deemed errors in judgment. Second, regulators believed that there are many cases of unpersuasive or under-supported judgments being made by practitioners. Third, companies and auditors believed that, from time to time, regulators did not respect their reasonable judgments and they substituted the regulators’ personal preferences for reasonable judgments in requiring revisions to financial statements when citing audit deficiencies. In other words, there was some mistrust between preparers and auditors and, on the other hand, the regulatory community on the subject of judgment.

The fourth concern was confusion in practice as to what constitutes a persuasive judgment. In the auditing literature and the accounting literature, the profession has never addressed what are the qualities of a persuasive judgment. Fifth, there seems to be a demand for detailed rules as a substitute for professional judgment, which undermines the goal of principles-based standards. There is a defeatist, self re-enforcing bad loop of practice demanding ever more detailed rules, so that they won’t be second guessed by overseers about the quality of their judgments.

The CiFR suggested that a judgment framework could serve four goals. The first was to improve the quality and reliability of the judgments made in practice. The second was to improve an auditor’s confidence that regulators will indeed respect reasonable judgments. The third was to establish criteria for judgments and thereby reduce uncertainty about the characteristics of sound judgment. In other words, clarify what people are looking for from judgment. The fourth goal was to enable principles-based standards.

To learn more, refer to the “Deloitte Fireside Chat – Part I: The Role of Professional Judgment in Accounting and Auditing (October 22, 2009)” available as an Edited Transcript and as an Audio Recording (one hour) on the SEC Historical Society website. Also, refer to the August 2011 postings on SEC Views on a Framework for Professional Judgment – Part 1, Part 2 and Part 3.

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.

One View on Using Professional Judgment

The meaning of professional judgment and its application in an audit environment continue to be subjects of interest and discussion by auditing and accounting faculty, students, standard setters, regulators and auditing professionals alike. As accounting frameworks continue to call for increased judgment by preparers of financial statements, the auditor assessing those judgments will, in turn, need to apply professional judgment.  An article published in 2009 offers one “view from the profession” about the meaning and importance of professional judgment, as well as one approach that may be employed when applying professional judgment.

The phrase “professional judgment” is not new to the accounting and auditing profession. Recently, there has been an increased emphasis on the importance of professional judgment as a result of regulation, standard setting, inspections and a move toward more principles-based accounting and auditing standards. In its August 1, 2008 report, the Advisory Committee on Improvements to Financial Reporting recognized the “need for a cultural shift towards the acceptance of more judgment” and recommended that both the SEC and PCAOB issue statements of policy articulating how the reasonableness of accounting and auditing judgments is evaluated. So, while professional judgment may not be a new concept, its use is becoming increasingly more vital to the appropriate application of accounting and auditing standards.

For details, read the American Accounting Association (AAA) article “Using Professional Judgment” by Guy Moore, Senior Advisory Partner for Professional Practice, Deloitte & Touche LLP in The Auditor’s Report publication online (Volume 33, No. 1, Fall 2009). Also, refer to the August 2011 postings on SEC Views on a Framework for Professional Judgment – Part 1, Part 2 and Part 3.

Principles not Rules: A Question of Judgement

The Institute of Chartered Accountants of Scotland (ICAS) published (in April 2006, updated July 2008) a research report called Principles not Rules: A Question of Judgement. The Introduction to this 27-page report was written by Hugh Shields, Chairman of the Working Group (Director and Head of Financial Reporting at Barclays Capital, a division of Barclays Bank). He states that: “The key to true and fair financial reporting is the balanced exercise of judgement. If standard setters, preparers, auditors and regulators could all exercise judgement on broadly equal terms, then this would provide the healthy tension which is needed for true and fair financial reporting and for communication with stakeholders.”

According to Shields, “Principles-based accounting standards are based on a conceptual framework, consist of a clear hierarchy of overriding principles and contain no ‘bright-line’ or anti-abuse provisions. Such an approach requires the use of judgement by preparers, auditors and regulators. ...With the safeguards afforded by such an approach, all parties should be more able to accept the consequences of exercising judgement in a principles-based accounting world.

“Against the above background, much greater simplicity in standard setting becomes possible. An interviewee in this project noted that: “Any accounting standard should be capable of being explained in one minute.” Yet some standards currently seem to defy any simple explanation at all. In the interests of all parties involved in financial reporting and, in particular, the broad range of users, such a situation should not be allowed to persist.”

Shields further notes that, “Einstein once said that ‘Everything should be made as simple as possible, but not simpler.’ This perfectly captures the Working Group's view that accounting standards should be firmly governed by high-level principles with only the absolute minimum additional guidance required to make the standard operational. Preparers and auditors would, therefore, need the courage to exercise and defend their judgements in this simplified accounting world. Users and regulators would need the wisdom to accept that there may be more than one answer and, over time, all parties would have to build the trust that this state of the world implies.”

A summary of 10 recommendations is presented in the report (page 3). A review of the professional, academic and regulatory literature on the principles versus rules debate in international accounting standard setting entitled Principles-Based or Rules-Based Accounting Standards? A Question of Judgement is available on the lCAS website. Also available is the output from the financial instrument workshop sessions Principles not Rules: Report on Proceedings of Financial Instrument Workshops.

Professional Judgment: Are Auditors Being Held to a Higher Standard Than Other Professionals?

This discussion paper on Professional Judgment was commissioned by the Institute of Chartered Accountants in Australia and written by Professor Ken Trotman, PhD, FCA, Centre for Accounting and Assurance Services Research, University of New South Wales. The September 2006 paper forms part of the Institute’s objective to deliver effective and visionary thought leadership initiatives that profoundly and positively impact business and the accounting profession.

According to the Executive Summary of this paper, “Auditors today are subject to increased expectations from regulators and the investing public. At the same time, corporations are expanding, transactions have become more complex and there are requirements on auditors to provide much greater levels of assurance related to financial fraud.”

The paper further notes that “judgment is the ‘cornerstone’ of auditing and describes some of the 40 years of research that has considered judgment and expertise. While the literature recognises that ‘of course experts make mistakes’, there appears to be a growing presumption that this should not be the case for auditors.”

“In many professions, the difficulty of making judgments is recognised. This paper discusses the role of judgment in medicine, the legal system, police investigations and marketing. It is recognised that errors of judgment do sometimes occur in these professions. The question that arises is whether auditors are being held to a higher level of accountability than other professions. This is particularly important where the scope of audits is constrained by the price society is willing to pay for such services. It is suggested that even a well-conducted audit, following all appropriate audit standards, can fail to detect a material fraud in the financial statements, particularly where management has gone to great lengths to cover up the fraud. These considerations are important in an environment where audit standards have the force of law.”

“The concept of cumulative evidence is discussed by reference to the Public Company Accounting Oversight Board (PCAOB) reviews of the Big 4 in the US. It is concluded that any inspection process should be concerned with whether sufficient cumulative evidence has been obtained rather than specific aspects of particular audit tests. The paper suggests that Australian inspection agencies have an opportunity to more fully inform investors than has been the case with the PCAOB, by providing a more even-handed assessment that describes both the good and the bad. The market needs to be aware of not only problems but also enhancements in independence procedures and quality controls and whether the enhanced policies are continuing to work effectively.”

(Read the discussion paper Professional judgment: are auditors being held to a higher standard than other professionals?)

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

According to the US Securities and Exchange Commission (SEC) Committee on Improvements to Financial Reporting (“CiFR”) accounting judgments should be based on a critical and reasoned evaluation made in good faith and in a rigorous, thoughtful and deliberate manner. Preparers should have appropriate controls in place to ensure adequate consideration of all relevant factors (see Final Report, pages 88-96).

Factors applicable to the making of an accounting judgment include the following:

·       the preparer’s analysis of the transaction, including the substance and business purpose of the transaction;

·       the material facts reasonably available at the time that the financial statements are issued;

·       the preparer’s review and analysis of relevant literature, including the relevant underlying principles;

·       the preparer’s analysis of alternative views or estimates, including pros and cons for reasonable alternatives;

·       the preparer’s rationale for the choice selected, including reasons for the alternative or estimate selected and linkage of the rationale to investors’ information needs and the judgments of competent external parties;

·       linkage of the alternative or estimate selected to the substance and business purpose of the transaction or issue being evaluated;

·       the level of input from people with an appropriate level of professional expertise;

·       the preparer’s consideration of known diversity in practice regarding the alternatives or estimate;

·       the preparer’s consistency of application of alternatives or estimates to similar transactions;

·       the appropriateness and reliability of the assumptions and data used;

·       the adequacy of the amount of time and effort spent to consider the judgment.

When considering these factors, it would be expected that the amount of documentation, disclosure, input from professional experts, and level of effort in making a judgment would vary based on the complexity, nature (routine versus non-routine), and materiality of a transaction or issue requiring judgment. Material issues or transactions should be disclosed appropriately. Existing disclosure requirements should be sufficient to generate transparent disclosure that enables an investor to understand the transaction and assumptions that were critical to the judgment. In addition, when evaluating the reasonableness of a judgment, regulators should take into account the disclosure relevant to the judgment. 

It is imperative that the alternatives considered and the conclusions reached should be documented contemporaneously. This will ensure that the evaluation of the judgment is based on the same facts that were reasonably available at the time the judgment was made. The lack of contemporaneous documentation may not mean that a judgment was incorrect, but would complicate an explanation of the nature and propriety of a judgment made at the time of the release of the financial statements.