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The International Ethics Standards Board of Accountants (IESBA) latest Exposure Draft “Proposed Revisions to the Code to Promote the Role and Mindset Expected of Professional Accountants” is the culmination of a debate over recent years on professional skepticism, and whether the underlying concept should be extended beyond an audit and assurance context to the whole accountancy profession.

The IESBA concluded that it should not, and the Exposure Draft introduces a new concept of an “inquiring mind”, that would be applicable to all professional accountants. My response to the IESBA highlights some challenges with this approach.   Among these is that the key to making it workable in the context of accountancy would be to establish criteria that can be taught, measured and monitored.  But there are no workable tests for an inquiring mind.

The good news is that a fresh concept to capture the mindset of professional accountants is not required.  I believe there is one already available that forms a significant part of the International Code of Ethics for Professional Accountants.  It is professional judgment. 

Professional judgment is described in paragraph 120. 5.A1 of the Code as “the application of relevant training, professional knowledge, skill and experience commensurate with the facts and circumstances, including the nature and scope of the particular professional activities, and the interests and relationships involved”. 

This, however, is a description not a definition. Nor does it include any of the personal qualities based on applying psychology and behavioural economics that are an important part of IESBA’s focus in its consultation.  Considering the central role of professional judgment, not only in ethics, but in every aspect of accountancy, this omission is problematic.  So too is the absence of a framework which would enable the profession to train, measure and monitor professional judgment, putting it where it belongs - at the heart of professional accountancy practice.  Without a measurement framework, education in professional judgement up to qualification and in training afterwards is understandably patchy and unsystematic. 

The starting point for professional judgment is a definition.  Based on a wider use of judgment in management, this could be: “A combination of personal qualities, relevant knowledge and experience with professional standards to form opinions and make decisions”.  Recognising, however, the sensitivity of departing too far from the current description, that is compatible with the variations of the definition which already exist, such as those in the context of ISAE 3000 (revised) and CSRE 2000, the words “personal qualities” could be added to what is currently in the Code.

Whatever the definition, judgment can be evaluated by incorporating the 6 elements given below.  With each, there is an illustration of an action:

(i). What I take in

In any professional activity, the quality of what is understood in written material and in meetings is an important first step to form a professional judgment.  Understanding does not necessarily improve with seniority and knowledge – any impatience, overconfidence or increasing rigidity of approach may reduce the quality of what is taken in.   

Example for action:  training in observation techniques 

(ii). Who and what I trust

Knowing who and what to trust is essential to the quality of professional judgment, the more so as the use of the internet, including social media, has become pervasive.  Examples of the importance of trust are in judging the quality of data being submitted for a financial plan or the professional competence of a member of the team.  

Example for action:  Enhancing the quality of team members by using judgement explicitly as a basis for hiring, appraisal and promotion.   

(iii). What I know about this

Rich professional experience is a great source of value.  But even combined with knowledge, it is not enough to provide the basis of professional judgment, which is about putting both in the context of taking a view or making a decision.  The quality of this judgment will be the way in which relevant experience and knowledge can be brought to bear in a given situation, such as a cash management problem or the interpretation of variances from budget. 

Example for action:  Enhancing knowledge through work experience and secondments and/or the use of coaches and mentors.

(iv). How I feel about this

Good professional judgment implies that the professional will be able to be dispassionate.  But this cannot be assumed unless he or she is aware of their own biases, including the balance between personal risk aversion and commercial uncertainty. 

Example for action:  Greater awareness of personal biases such as anchoring, representativeness and risk appetite or tolerance.   

(v). How I choose

The combination of experience, knowledge and personal qualities comes together to formulate choices as much in day-by-day financial management as such contentious areas as the accounting treatment of goodwill or the choice of transfer prices.  The professional will need to ensure that the choices have been appropriately framed, including on timing and with an understanding of the management of risk.  

 Example for action:  Developing artificial intelligence programmes for routine choices. 

(vi). How I carry it out

The professional providing an opinion or carrying through a recommendation to a decision will need to have experience on many aspects of turning plans into reality.  So he or she will need to be aware of execution issues, again including risk management, for example in the chances of an IT project being completed on time. 

Example for action:  Being explicit on the trade-offs in delivery between speed and cost. 

The emphasis on professional judgment incorporates the welcome move of IESBA to recognise the need to be aware of bias, and as can be seen, the framework provides encouragement for the accountant to recognise their own biases.  Revisiting the Board’s desire to incorporate an “inquiring mind”, this is required throughout the above framework, but especially in (i), (ii), (iv) and (v).   Putting a framework in place to identify the elements of professional judgment would achieve what “inquiring mind” seeks to do, but in a more robust way. 

To make a framework for professional judgment operational, guidance and practice notes would be needed.  Education (and where necessary retraining) by firms and the profession should incorporate professional judgement based on an agreed definition and explicit framework. 

In summary, a clear definition and measurement framework for professional judgment would enhance trust in professional accountants.  It would also provide a counter to those who believe that the only way forward is through yet more laws and rules.   For the future, it would complement the inevitable changes to the profession arising from the use of artificial intelligence.  I suggest these are good reasons to consider a globally accepted definition and measurement framework for professional judgment.   

Professor Sir Andrew Likierman

Professor of Management Practice in Accounting, London Business School

Andrew was educated at the University of Vienna and Balliol College Oxford. He is Professor of Management Practice at the London Business School having previously been Professor of Accounting and Financial Control. He has also served in a number of administrative roles, including as Dean from 2009 to 2017. His current research is on the role of judgement in management after he became curious as to why judgement, which is generally highly valued, is not developed or used in management. He has an Honorary Doctorate from the London Business School and from three other universities.