Guidance on Professional Judgment for CPAs in China

At a China Press Conference in Beijing on February 15, 2006, Graham Ward, President, International Federation of Accountants remarked that: “The decision by China to converge towards international auditing standards sends a clear message to the world that both the Chinese people and the Chinese accountancy profession are committed to transparency, quality and high professional standards. Support of these standards will benefit not only the accountancy profession, but also, and even more importantly, all Chinese citizens and the Chinese economy as a whole. Why? Because following high, internationally accepted standards builds trust in the audit process; it builds credibility in the information provided by auditors; it builds investor confidence – all of which are vital to the development of your capital markets. As your economy continues to expand, you are far better positioned to improve the quality of life of your citizens.”

He concluded that: “I am proud that IFAC and the CICPA are working together. Through adherence to high professional standards we can, together, bring about social stability and good governance in business. Through convergence to international standards we can, together, deliver our promise of quality. And through acting in the public interest, we can, together, build public trust and sound economies that support a better quality of life for all. I firmly believe that China’s move toward convergence will go a long way towards improving the life and livelihoods of the people of the People’s Republic of China.”

In line with the convergence towards international auditing standards,  Guidance on Professional Judgment for CPAs (released by the Chinese Institute of Certified Public Accountants on March 26, 2015) states that: “the term professional judgment refers to the application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.” Accordingly, the guidance makes recommendations related to improvement of the quality of CPA’s professional judgment, recommendations for accounting firms, recommendations for CPAs, recommendations for regulators and recommendations for standard setters.

Learn more about the Chinese Institute of Certified Public Accountants – CICPA and the current situation in China by reading the Overview of the Accountancy Profession in China (released by the CICPA on January 21, 2016). The Overview explains that: “The accountancy profession was introduced to China in the early 20th century, mainly serving the booming national industry and commerce. After the founding of the PRC, the profession had played a vital role in the national economic recovery. It was suspended in the Mid-20th century when China adopted a planned economic system; along with China’s historical economic reform and opening up policies, the accountancy profession was revitalized and reconstructed and grew steadily. With over 30 years of development and growth, the accountancy profession in China is now a widely recognized and respectable profession. Accountants are an important link of integrity chain of the market economy and they are entrusted to safeguard the public interest.”

Expertise Management by Public Accounting Firms

Research suggests that professional expertise may be viewed as an attribute of an accounting firm rather than just an attribute of individual experts. One research paper constructs a model that leads to the identification of three strategies applicable to accounting firms. A Knowledge firm develops and sells proprietary knowledge to a selective clientele, whereas a Full Service firm develops and sells general professional knowledge to a broad clientele. A Relationship firm is in-between the other two firm types. 

Associations are hypothesized between these strategies and a variety of firm activities such as client selection, diffusion (or concentration) of expertise within the firm, sharing of expertise within the firm, and formalization of quality control processes. A questionnaire was completed by 219 audit and tax partners and consulting, insolvency and forensic accounting principals in 15 public accounting firms.

The results are consistent with the existence of three distinct types of firms. The results also indicate that partners are aware of local pressures that they personally face (such as the need to sell more services to clients) and less aware of the effect of broad structural features of the firm (such as size and decision aids). The key structural features that are salient to partners involve the need for selectivity in choosing clients and the need for the firm to develop specialized proprietary technical knowledge.

To learn more about this research on expertise, read the paper “Expertise Management by Public Accounting Firms” by Michael Gibbins and Karim Jamal, University of Alberta (February 6, 2001 Version).

Teaching Professional Judgment in Accounting

In May 2005, the University of Lethbridge and the Institute of Chartered Accountants of Alberta sponsored the Banff Education Conference titled Professional Judgment: Can It Be Taught? The opening forum at the conference was a panel discussion on the topic presented by academics and practitioners. The session included an overview of the research literature on expertise as a basis for considering the nature of professional judgment and the implications of various attributes of expertise for accounting education.

Past practises and current pressures facing practitioners in exercising good judgment were addressed, including increased complexity of transactions and decreased time to assess problems. The forum also included a discussion of the need for educators to help guide students to develop an understanding of a problem rather than simply seek the answer. There was a discussion of particularly challenging topics for students to grasp in a principles-based environment. The forum culminated in a question and answer session involving the panelists and the attendees at the conference.

The research paper, Teaching Professional Judgment in Accounting, summarizes the presentations and the discussion that took place during the forum. It was prepared by Robert Correll, CPA Canada; Karim Jamal, University of Alberta - Department of Accounting, Operations & Information Systems; and Linda Robinson, University of Waterloo - School of Accounting and Finance. The paper was also published online in January, 2010 in the journal Accounting Perspectives (Vol. 6, No. 2, 2007).