New ICAS survey: Principles not Rules

Is the principles not rules debate still valid in today’s corporate reporting landscape? What are the challenges in implementing principles-based standards? These were some of the questions for debate at an ICAS event to mark the 10 year anniversary of the 2006 publication of 'Principles not Rules: A question of judgement'.

The Institute of Chartered Accountants of Scotland (ICAS) recently surveyed members with an interest in corporate and financial reporting on their views on this debate. A similar survey was undertaken in 2011. 

Of the 199 respondents to the survey, the key findings were as follows:

• 90% of respondents had a preference for principles;

• 64% believe IFRS is very or mainly rules-based;

• 61% think that IFRS has become more rules-based in the last five years;

• There was very strong support for the idea that the profession is capable of operating within a principles-based environment;

• The main barriers to principles-based standards were considered to be:  the influence of US GAAP; the role of regulators in challenging judgments; the threat of litigation; and the lack of trust in preparers and auditors.. 

For a summary of the full results of this survey, see ICAS survey: Principles not Rules. To learn more, refer to previous postings about the principles versus rules debate.

Using Good Decision Making to Drive Value

EY - The Future of Decision Making

Making the right decision is hard. Companies have to frame the questions properly, find the right data to support the analysis, and do all this in a way that is transparent and repeatable. In 2012, Ernst & Young LLP (EY) commissioned a survey of 285 senior executives globally from across the consumer products sector. 81% of participants indicated that they needed to improve their decision-making speed and level of insight.

Survey respondents suggested that their people spent too much time making decisions based on intuition, working on mechanical tasks and focusing on unnecessary detail. Instead, they wanted their people to be adding more value through better use of leading indicators, conducting root cause analysis of issues, and linking strategy with resource allocation, planning and reporting.

To improve their performance management capabilities and drive profitable growth, companies need to take a more encompassing approach that not only implements driver analytics, but also uses the analytics to mathematically link business strategies with the market, competitor, operational and financial forces that drive value and, by extension, good decision making. Learn more from the EY guidance, The future of decision making: 5 Insights for Executives.

PwC - Using Data and Analytics to Re-Imagine Forecasting

According to PwC (United States), we are always forecasting - thinking about what will happen, assessing its likelihood, and contemplating the implications. But for CFOs, the stakes are much higher. The cost of being off the mark can be huge, not just in perception but also in dollars. A company’s cost of capital can be impacted by their assumptions and forecasts, and failure to accurately forecast demand fluctuations can result in too much, or not enough, inventory. In each of these situations, the cost of being wrong today can become extremely costly in the future.

This paper talks about the steps and factors a CFO may consider as they re-imagine forecasting in a way that allows themselves and their counterparts in the C-Suite to tease out signals that matter and deliver more value to their organizations in the short and long term. Learn more from the 2016 PwC guidance, Reimagine forecasting: High stakes decision making for CFOs.

The Art of Ethical Leadership (2013)

In October 2012, Praesta Ireland and Chartered Accountants Ireland (CAI) surveyed leading business executives on their ethical approaches, as well as their organization’s ethical codes and attitudes. The survey results provide encouraging news that many organizations are responding to the emerging and increasing risks that arise from unethical behaviour and the consequent adverse impact on an organization’s reputation.

The survey demonstrates that those charged with governance within organizations are expected to play a key role in establishing expectations relating to ethical behaviour. The example needs to be set by senior management by the way in which they behave and by ongoing monitoring of the effectiveness of their ethics policies and programs. An appropriate code of ethics remains the primary tool for guiding staff on corporate standards of behaviour and on how to respond to ethical dilemmas which they may encounter in their day-to-day work.

Having confidence that businesses, directors and professionals adhere to the highest ethical standards is critical to ensuring public trust in financial reporting and business practices and even to ensuring the future sustainability of businesses themselves. Those organizations that have developed ethics programs which include training about their values and how these are implemented, as well as ‘speak up’ policies, demonstrate they are actively trying to decrease their integrity risk. Business ethics are under the spotlight as never before. Therefore, it is anticipated that this 44-page report, The Art of Ethical Leadership, released in 2013, will stimulate further informed debate about the role of ethics and ethical decision-making in business.

Praesta Ireland is a member of Praesta International, the global leader in senior executive coaching, working in more than 20 countries. Since its foundation in 2001, Praesta Ireland has established a track record of professional, discreet and confidential service to major companies and organizations in support of the leadership development of their Chairs, CEOs, Senior Executives and Non-Executive Directors. Chartered Accountants Ireland is the largest and longest established accountancy body in Ireland. It has over 21,000 members and 6,000 students, and it is the leading voice of the accountancy profession in Ireland. Chartered Accountants Ireland was established as the Institute of Chartered Accountants in Ireland by Royal Charter in 1888. Its activities and those of its members are governed by its Bylaws and by Rules relating to professional and ethical conduct.

Additional information on ethics, including case studies, is available at the Chartered Accountants Regulatory Board (CARB). The case studies provide practical guidance for resolving ethical dilemmas on topics such as conflicts of interest, confidentiality and questionable accounting and business practices.

A research perspective on “Professionalism”

The academic research literature suggests that an understanding of “profession” and “professionalism” cannot ignore a post-professionalism perspective. Professions and the notion of professionalism are undergoing rapid change in a new global information age which necessitates new theories and explanations.

Post-professionalism is characterized by loss of exclusivity, increased segmentation through specialization of knowledge and the growth of technology. As a result, the services previously delivered exclusively by members of formal professions can now be delivered by general professionals or even non-professionals. The 1980s and 1990s witnessed a proliferation of studies of professionals, professions and processes of professionalization. Professional closure is often discussed in relation to education practices and struggles between the state and professional associations about regulations over practice rights and, similarly, professional regulation is typically viewed as involving struggles over accounting and auditing laws and standards.

A recent research study offers an innovative approach to the research on “professionalism” for a specific profession, that of the Certified Financial Planner (CFP). The study uses a framework which distinguishes between the ‘what’ and ‘how’ aspects. The ‘what’ aspect of the experience is the direct object of experiencing the professionalism of financial planners; the ‘how’ aspect is the act of experiencing the phenomenon. The indirect object that is the intention behind the act is not the focus of this study (see Figure 1 below).

This study considers the CFP certification requirements in Australia, Hong Kong and the United States. These requirements establish a framework for professionalism, but they are not the only influences. CFP professionals are also influenced by their work through the behaviour and standards of their employer and by government licensing and regulation. This paper describes the variations in how CFP professionals experience professionalism in each country.

The significance of this study is that identifies the elements of professionalism that CFP’s experience as being part of the professionalism of financial planners. Much of the existing research on the professions and professionalism focuses on historical perspectives and on identifying the characteristics that distinguish a profession and a professional from a sociological viewpoint.

In summary, the purpose of this paper is to present the preliminary findings of conceptions of professionalism of CFP’s from each of the three countries independently. The major finding of the research is that CFP professionals experience professionalism in ways that reflects the factors that influence their professionalism. Professionalism is experienced as putting the client’s interest first, being knowledgeable as evidenced by professional credentials, following a planning process and being guided by regulation and standards.

For more information, see the research paper “What and how financial planners experience professionalism: a phenomenographic study (preliminary findings)” by: Associate Professor Ken Bruce (CEO/Campus Director, CQU Institute of Higher Learning); Dr Abdullahi Ahmed (Senior Lecturer in Finance, School of Commerce & Law, CQUniversity, Rockhampton, Australia); and Dr Helen Huntly (Professor, Dean, School of Education, CQUniversity, Bundaberg, Australia).

Creating a sustainable ethical operating environment

With the importance of ethics and non-financial reporting rising on the global agenda, accounting professionals are in a unique position to make an important contribution to creating a sustainable ethical operating environment. In this regard, the AICPA and CIMA have developed a number of resources to assist professional accountants in guiding their organizations to long-term sustainability and success. These resources shed light on the challenges many business clients face, and so apply to professional accountants in a firm setting as well.

The ethical resources include the following:

(1) The report Managing responsible business – a global survey on business ethics explores the importance placed on business ethics, ethical performance and ethical management within organizations, and the specific role played and challenges faced by accounting professionals. The survey findings show that there are pressure points and ethical gaps within organizations and highlights the role accountants can take in reducing those gaps.

(2) Accountants add value by supporting and driving the right decisions in all areas of a business. They help colleagues understand income, costs, risks and opportunities. Focusing on an organization’s future prospects, in addition to understanding and learning from past performance, accountants know how the different parts of a business come together. Responding to ethical dilemmas: CGMA ethics resources provides links to resources to help accounting professionals navigate ethical dilemmas and respond in a manner that upholds their career success.

(3) The CGMA case study: Navigating ethical issues highlights issues related to non-disclosure at the corporate level that come to the attention of non-executive financial managers and controllers. This case study features the role of corporate controller for a large public company, making decisions that will affect the future of the controller and many others. The facts of this hypothetical case cover integrity and objectivity, confidentiality, internal accounting controls, and procedures for investigating and reporting irregularities.

(4) The Ethical reflection checklist was designed to provide organizations and individuals with an overview of how well ethical practices are embedded in the business. Firms can leverage this checklist with their clients to open the discussion on business ethics in the workplace. Questions cover areas such as ethical statements and codes of conduct, training, collection of ethical data and reporting of ethical issues, and support when faced with ethical dilemmas.

With the backing of a strong ethical culture, all accountants can be highly effective in playing a key role—drawing on both their training and understanding of professional ethics, as well as their skills in obtaining, analyzing and acting upon management information—to guide their organizations, or those of their clients, to long-term sustainability. Explore these and the many other resources available on cgma.org. Also, read the article “Fostering a More Ethical Business Culture” at AICPA Insights online.

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.

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”.

Survey on Professional Judgment Matters for CAs

Chartered Accountants in Canada and internationally are invited to participate in an online “Survey on Professional Judgment Matters for CAs.” The objective is to assess whether there is a need for enhanced communication and collaboration by CAs with regard to professional judgment matters. This seedcorn project is sponsored by the Institute of Chartered Accountants of Scotland (ICAS).

According to the academic research, the value of “professional judgment” is a function of both its importance and its quality, and each of these depends on the other. Regardless of whether CAs work in education, public practice, industry, government or elsewhere, the quality of their 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.

The importance and quality of professional judgment is the subject of the survey, which examines the feasibility of creating an Internet-based professional judgment resource centre. Survey questions require a simple Yes or No answer, but space is provided for participants who want to add comments. The survey results will be used in summary form only and all responses will be treated as confidential. An overall summary of the survey results will be provided by e-mail to all survey participants in December 2011 upon completion of this initial phase of the project.

The “Professional Judgment Project Proposal” and the “Support for Survey on Professional Judgment Matters” are available online at Google Docs.

Please take 5 minutes to complete the online survey by November 18, 2011 (www.surveymonkey.com/s/ProfessionalJudgmentMatters).

 J. Paul-Emile Roy, CA, Researcher and Consultant

E-Mail: paul.emile.roy@gmail.com