Professional-Skepticism Considerations for Standard-Setters
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Presentation by Doug Prawitt, PhD, CPA, at the IAASB Meeting, in New York, June 17 2015.
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Professional-Skepticism Considerations for Standard-Setters
- 1. Professional Skepticism—Considerations for Standard Setters Doug Prawitt, PhD, CPA Brigham Young University
- 2. Fundamental nature of the problem—maintaining questioning mindset and behavior despite: •rivers of experience where few problems arise •where the majority of companies and managements are “just trying to do a good job” •where human nature makes one want to be agreeable with the people with whom one works • where incentives on the part of the agents (staff) are usually NOT well aligned with those of the principal (audit firm owners) •all in the presence of a powerful human tendency toward confirmation bias.
- 3. Difficult Two-Way Hindsight Problem… •Regulators are always likely to cite lack of PS when a problem is identified post-audit •Auditors are not likely to be rewarded when they do extra work and find nothing
- 4. Solutions? At broadest level: • Elicit appropriately skeptical mindset • Incentivize appropriately skeptical behaviors • Develop effective ways of documenting skeptical mindset and behaviors
- 5. In terms of incentives: •Tone at the top (all the way to the “top”) •Evaluations and rewards based on appropriate exercise of skeptical behaviors (even when nothing found) •Less emphasis on meeting time budgets, deadlines •Better management of busy season pressures •Alignment of goals/incentives of principals and agents (partners/staff)
- 6. In terms of mindset: •Shared conceptual framework, common terminology around professional judgment and professional skepticism (2-way street) •Emphasize understanding of purposes/objectives •Encourage appropriate mindset (e.g., avoid confirmatory language— “concurring partner”) •Encourage auditors to “make the opposing case”
- 7. • Write standards so that the focus is not on compliance with the standards but on the exercise of PS in the application of PJ! • Develop guidance/conventions for documenting appropriate exercise of PS • Beware of pressures toward less judgment in auditing—appropriate exercise of PS is harder to document than is compliance with a procedure!
Editor's Notes
- The very top is TCWG!
- Vital role of seeking for disconfirming information/making the opposing case in exercise of PS. Philosophy of science argues that the only way to get persuasive evidence in favor of a proposition is to carefully consider how and where the proposition might NOT be true and go after evidence that it is in fact NOT true. Absence of contrary evidence in such a scenario is persuasive where simply seeking evidence that a proposition is true may not be. Examples of Cloyd/Spilker tax situation—law students versus Macc students and accountants. Also Nelson paper—change language in standards…from emphasizing confirming an assertion to finding evidence that might disconfirm the assertion—auditors did better (look this up!). Some movement already here—“concurring partner” to “quality review” partner; even “client” to “entity” along with the change from management being to the “client” to TCWG. But more could be done here in the standards to emphasis “making the opposing case”—hate to say it, but a more lawyerly mentality… :-)
- Two-way street with issue of documentation—standards can/should consider how exercise of skepticism can be documented adequately (even in face of later discoveries of adverse outcomes). However, over-emphasis on documentation might actually discourage exercise of PS by cutting in to time available and by discouraging application of audit activities that are difficult to document. (EG—discourage audit procedures like analytical procedures that require a good deal of judgment and that are very subjective in favor of selecting a sample of items…even when analytical procedure would be better). Write standards so that the focus is not on compliance with the standards but on the exercise of PS in the application of PJ! But again, documentation of appropriate exercise of PS in the application of PJ is harder to document than is compliance with a procedure.