How do you ensure that you are skeptical enough as a professional?
This article was originally published in the August 2010 issue of ICPAS INSIGHT Magazine.
The AICPA recently released Practice Alert 1998-2, Professional Skepticism and Related Topics, which states that, “Generally accepted auditing standards require the auditor to exercise due professional care in the planning and performance of the audit and in the preparation of the auditor's report. Due professional care requires the auditor to exercise professional skepticism, which can be best defined as an attitude that includes a questioning mind and working practices that encompass a critical assessment of audit evidence. Since evidence is gathered and evaluated throughout the audit, professional skepticism should be exercised throughout the entire audit process.”
In other words, a healthy dose of professional skepticism can go a long way. Times have changed for client services professionals. Accountants in particular walk a tightrope, facing a difficult balance between questioning information and keeping clients happy. Question a client too rigorously and you may lose that client. Fail to question a client rigorously enough and you may be exposed to a world of woes.
Professional liability coverage is an additional “pocket” for recovering lost funds, and attorneys are indeed pursuing fiduciaries with greater vigor. Lawrence A. Wojcik, Esq., a partner at DLA Piper US LLP, specializes in defending corporations, directors, officers, auditors, accountants, lawyers and other business entities. He explains that, “In over 30 years of representing auditors I have learned that the ability to remain skeptical in the second audit of an entity and those audits thereafter is one of the most daunting tasks facing the audit team.
“Healthy professional skepticism requires a continual reassessment of the changing dynamics of the business being audited, as well as a rigorous re-examination of the management of the entity and the pressures they are subject to,” he continues. “The most significant threat to professional skepticism is the over reliance on ‘checklist auditing’ based on historical experience rather than an assessment of the risks to the business presented by the current environment in which it operates."
Wojcik has touched on a key element: Time. It’s increasingly difficult to question data and practices as time goes by, since the client-accountant relationship becomes less formal and more collegial. While this certainly strengthens bonds, it can also lessen an accountant’s independence.
In light of this, what can you do to keep your professional skepticism healthy?
Talk to your staff: Often, staff accountants are the ones who see questionable data or practices firsthand. Make sure there are ways for them to report their observations. SAS 99 calls for brainstorming sessions with the full audit team, and serves as a great guideline for any accounting function. A staff accountant with a high degree of healthy professional skepticism can be quashed by someone higher up the organizational chart, creating a lasting morale problem. I have spoken to many staff auditors and staff accountants who felt they had nowhere to turn with their concerns and questions.
Rotate key positions: Rotating key personnel in critical functions may mean shortterm costs, but it will introduce new perspectives and heightened independence, both of which are vital to determining where problems exist. For rotation to be effective you need accurate documentation of duties and functions; otherwise the job will simply move with the person being rotated. Another plus is that job rotation communicates the fact that your organization is committed to enhanced diligence.
Evaluate each client relationship: Is one client growing rapidly, unable to keep controls in place, while another is in cash crunch and cost-containment mode? Unfortunately, these scenarios are ripe for unethical activity. Assess the relationship itself: Are you able to ask tough questions and confront issues? Is profitability “buying” your compliance and silencing your skepticism? Keep Wojcik’s words in mind—it’s the second (and subsequent) engagement that challenges you to stay skeptical. Create a post-engagement checklist that identifies these issues and continues to assess the dynamics in play.
Face yourself in the mirror: Have you been lulled into a comfort zone that inhibits the critical analysis of the data right in front of you? Getting comfortable in a long-term relationship is very human, but putting reminders in place, before and after engagements, helps to keep professional skepticism at the forefront.
Questioning representations, assessing potential difficult situations and documenting duties may have short-term costs associated with them, but they also pay longterm dividends. Can you afford to let professional skepticism go on life support?