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Cracking open professional scepticism

It's a special kind of challenge that demands the insights of an auditor, a regulator and a psychologist. But that is exactly the kind of skills mix CPA Australia recently assembled for panels on professional scepticism hosted in a number of jurisdictions throughout the Asia Pacific.

A series of panel discussions with leaders of the audit profession and business - lead partners, regulators, directors, standard setters - alongside professional psychologists and behavioural scientists, explored the practical realities of professional scepticism. The objective was to go beyond conventional definitions and concepts, seeking a more concrete understanding of the challenges and real-world ways of cultivating professional scepticism.

Of course professional scepticism has become a topic du jour within the auditing profession in recent years. However, far from being the exclusive domain of auditors, a 'questioning mind' is an essential capacity in almost any governance role, particularly for directors.

As a crucial aspect of effective decision making for investment, analysis and any form of oversight or regulatory activity, scepticism is a quality that has a profound impact on the operation of our capital markets and economy at large. In financial turmoil and corporate collapses, a lack of scepticism has tended to be at the core of the post crisis critique. Often with sound justification.

So how then do leaders encourage a sense of professional scepticism in their own organisations? Among the insights from our panel discussion was that like much that comes to define corporate culture, it often happens informally. Indeed, a recurring theme was the importance of the informal relationships and dialogue with client staff, the general sense picked up by auditors on site, and the overall awareness of a bigger picture that may be quite different to the current focus of work.

Of course, it's a substantial challenge to document these informal but valuable aspects of auditing in audit files. Audit file inspections conducted by regulators have widely identified professional scepticism as an area for improvement. But the question of how these inspections can assess the shades of something that essentially happens inside the auditor's mind and between the lines is not straightforward.

Documentation is often overlooked as simple and mechanical but these discussions have highlighted its importance in seeking the most effective use of auditors' time and application of their minds. There has been a tendency in auditing standards over a number of decades to meet challenges with the introduction of more detailed requirements which can translate into longer checklists. With limited time, the time spent documenting these details can mean less time spent crucially interacting and perceiving.

Other insights were more counter-intuitive. While scepticism is often confused with a suspicious attitude, behavioural scientists recognise that beginning with excessively low expectations can be detrimental. Approaching a situation with a suspicious mindset could lead to normal, expected behaviours suddenly exceeding expectations, putting a halo around circumstances that could disguise real problems. It is arguable whether people can actually overcome such biases, but it is widely accepted that recognising and being aware of them is a first step.

Diplomacy, strong communication skills, the ability to build rapport and empathetic understanding were raised as potentially making all the difference to effectively applying professional scepticism in a time pressured or tense situation. Developing the right skills and abilities and setting the tone to encourage this trait among often young professionals is both a key part of the challenge and a genuine way toward enhancing the profession.

Of course, in the end the practical, human realities of professional scepticism and biases that may affect it are rich areas for exploration. It's a challenge we all must take on.

Alex's previous blog post

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