Application of Professional Skepticism in Management
Professional skepticism is a crucial skill required in the management of firms. It involves observing income patterns over a particular duration and creating reconciliations to come up with the right forecasting in terms of business performance. Practicing professional skepticism helps a person to become more creative through raising questions and assessing the existing evidence. Besides, the auditor to think ahead of time and come up with a forecast that will not have a significant effect on the firm. However, there is a thin line between practicing professional skepticism and being dishonest. Besides, there is an assumption that practicing professional skepticism contributes to confirmation bias. Therefore, it is advisable to use professional skepticism prudently to avoid getting into conflict with key stakeholders in the business.
Professional skepticism helps to identify activities that are inconsistent in the business. For instance, when a business records extremely high profits or losses, the auditors can compare the forecasted performance and actual performance then identifies the inconsistencies. Depending on the inconsistency, the auditor can conclude whether the activity was a result of fraud, error, or an error resulting from an attempt of fraud. Focusing more on fraud while carrying the professional skepticism is crucial since it identifies any attempt or successful manipulation of figures. When the auditor identifies these inconsistencies, it becomes easy to take legal action against the perpetrators of the acts (Glover& Prawitt, 2014). Therefore, carrying the professional skepticism protects a business from getting into deliberate or accidental inconsistencies which would affect performance.
Professional skepticism is also crucial to management since it acts as an additional proof when carrying out auditing. First, an auditor can use the data from professional skepticism as backup evidence to the main one given by the organization’s manager. Once the auditor gets the official books of accounting and the professional skepticism report, it becomes easier to establish where the manager erred or tried to manipulate the data to evade taxes or engage in the misappropriation of funds. Second, using professional skepticism helps an auditor to identify any inconsistencies from the data presented by the organization. The data is used to make a firm conclusion about the overall performance of the business (Carpenter & Reimers, 2013). Thirdly, professional skepticism prevents the person from making decisions that are not well thought. Consequently, this ensures that the auditor’s report is bound to be more accurate than before. Therefore, before overlooking professional skepticism practice, the business should give it a try.
Practicing professional skepticism is not easy due to leadership issues. Some businesses focus more on the amount of revenue they receive, the overall growth and profitability while ignoring the crucial role played by professional skepticism. Due to the policies in the organization, some managers might be discouraged to practice professional skepticism while trying to get promotions and other favors (Hurtt, 2010). Another barrier to practicing professional skepticism is the lack of proper training for professional managers. The inadequate training is risky to the organization, and as a result, most of them avoid implementing the skills. Although professional skepticism is crucial in management, it is also risky; hence businesses do not apply it in their organization. For instance, a manager might make huge projections compared to the business performance, while in the real sense, the overall economy is underperforming (Bowlin et al., 2015).
The three case studies in the weekly assignment show how professional skepticism is applied in management. In the first case, I would have asked the senior accountant to train me on how to carry out the professional skepticism before presenting the report to the chief finance officer (CFO). This would have also improved my confidence when making the financial projections based on past business performance. In the second case, I would have carried out professional skepticism, and depending on the outcome, take legal action against the controller and CEO. Carrying out a professional skepticism would likely find the controller and CEO guilty of attempting fraud. The third was a result of poor communication between the top management and the subordinate staff. The top management should have relayed crucial information to the subordinates to make the audit of the firm easier.
From the discussion above on the case studies, several actions should have been taken to prevent the occurrence or curbed the magnitude in the cases. The first element from the professional skepticism report is the attributes of auditing. The organizations should facilitate professional training of the auditors to make them conversant with the technical attributes of management. Second, I observed that, while carrying out auditing in an organization, caution is crucial. If the risk of getting into losses are high, the auditor should be risk aversive. The auditor is also supposed to carry out a comprehensive analysis of the books of account and engage other stakeholders in the organization. Finally, all auditing steps must be carried out in good faith and optimal integrity. In this case, the editor should not presume that they are engaging with honest people. A professional auditor who carries out these skepticism steps performs better.
References
Bowlin, K. O., Hobson, J. L., & Piercey, M. D. (2015). The effects of auditor rotation, professional skepticism, and interactions with managers on audit quality. The Accounting Review, 90(4), 1363-1393.
Carpenter, T. D., & Reimers, J. L. (2013). Professional skepticism: The effects of a partner’s influence and the level of fraud indicators on auditors’ fraud judgments and actions. Behavioral Research in Accounting, 25(2), 45-69.
Glover, S. M., & Prawitt, D. F. (2014). Enhancing auditor professional skepticism: The professional skepticism continuum. Current Issues in Auditing, 8(2), P1-P10.
Hurtt, R. K. (2010). Development of a scale to measure professional skepticism. Auditing: A Journal of Practice & Theory, 29(1), 149-171.