Professional Scepticism by Brendan Lenihan
Professional Scepticism –
Accountancy at the crossroads of science, art and psychology
by Brendan Lenihan
There are fundamental and interesting changes afoot in the area of professional scepticism. When I qualified about 30 years ago, the unbreakable assumption was that the ‘economic man’ was always rational. Professional scepticism was linked to being alert to some of the badness and madness in the world. Being prudent was always appropriate because of dark and unknowable ‘rainy day’ factors that might happen next.
By comparison to current thinking that seems very old fashioned now. And it is. Nowadays, based on Nobel prize winning advances in psychology and behavioural economics, leaders in accountancy are realising that as humans we are not entirely rational all of the time. Not because we are having a bad day, but because we are hard-wired to make systematic errors in certain circumstances. We do so predictably. It is not anybody’s fault – it is just the way we are. And we have also learned there are some things that can be done to mitigate the changes of that happening and its impact.

Surprisingly this isn’t an article focusing mainly on fraud, it is as much -if not more – about avoiding serious mistakes for your business or practice. It is more relevant, in my view, for business leaders, company directors, Audit & Risk committee chairs and CFOs as it is for auditors.

Importance of Professional Scepticism
Over the last year I have watched some television series about spectacular business and reputational demise – some from corruption, some from mistakes, in particular the excellent series on Wirecard and the corruption in FIFA. When you binge watch a few together it is clear that while they focus on different people and sectors, the stories have some striking commonalities.
hands on desk with computer and calculator
Looking back, after major scandals emerge or collapses unfold, professionals often realise that it is not that serious questions weren’t asked at an early stage. There may have been initial investigations after which the impression was given that everything was ‘okay’. Usually, high levels of reverence or deference to some experts or leaders soothed any initial qualms. If any doubts lingered, they were deemed to be about mere details, the ‘weeds’, not material.

But eventually when the full scandal explodes and we reflect on what has happened, everyone asks how come we didn’t really understand the importance of the issue or the full context of the data that was there in plain sight?

Why didn’t we make the right connections and linkages, until that last piece of data/evidence? For all our education and training, why didn’t we see it and ‘call it’ earlier?

Much of the problem we now know, lies in our psychology and in particular our cognitive biases, our tendency to systematically make mistakes.

When I look at the common characteristics that define professional scepticism, it is no surprise that most of these relate to the ‘headset’ and psychology we bring to our work. These should include a questioning mind; autonomy or independence of mind; sufficient self-esteem to challenge assumptions and resist pressure; a desire to search for knowledge and corroborate information and to suspend judgment until appropriate evidence is obtained; a flexibility in terms of approach and mindset.

In recent years we have added the importance of understanding that people’s motivations and perceptions may lead them to provide biased or misleading information, even when they have the very best of intentions.

“The trouble is, you think you have time”
The seminal work in the area of cognitive bias is the international best seller “Thinking Fast, Thinking Slow”, an enjoyable ‘must read’ for all professionals. It could be the subject of a series of articles here. But for now, it is enough to know that it explains and evidences how our decision making is ordered into two distinct systems. The first is fast and intuitive, which makes decisions in narrative, and handles the lion’s share of decisions we make, even complex business decisions. The other system is slower, runs on a logic engine and is hugely resource intensive so we use it surprisingly sparingly.
two men in business suits speaking in office
How we interact in the information age has exacerbated this. On your smartphone, things aren’t always quite as they seem, and we have very little time to spot this. In a world of misinformation, how can we know what is real and what is not?

In my practice I work with Boards, Audit & Risk Committees and management teams to make better decisions and avoid big mistakes. As an Audit & Risk Chair I get to have a front-line seat in applying these solutions in practice.

In business, like many other walks of life, some folks will lie and deceive and just say what it takes to get to the next level. But most stories of business demise are not like that, there are usually tales (at least initially) of bad decisions and misjudgements, many rooted in our brain where the decision was made.

That is why accountancy standard setting bodies are pouring huge resources into the area of repurposing professional scepticism for a new era. There are some references at the end of this article to some interesting pieces of work.

Beware. Applying this new version of professional scepticism isn’t all sweetness and light. It rallies us to reinforce core ethical values around objectivity and independence, but to do so with modern levels of agility. It also paints against the grain of some cultural norms in the way we do business, particularly in Ireland.

Like optimism. Of all locations we ought to learn the lesson of the global financial crisis. Good people on good boards in top companies made really poor decisions. Why? The consensus is now focused on how disastrous decisions contained a level of optimism and overconfidence, unjustified by the facts.

Professional scepticism is one of the vital response tools to puncture the collective overconfidence that is an almost inevitable prospect when we ask humans to make important decisions in groups.

Using these new tools paints against the grain of exuberant optimism, cheerleading of management teams and levels of trust (sometimes bordering on gullibility) that can occasionally sail into public view in Irish business culture. Sometimes the ‘trust card’ can be played to top up weak or middling evidence that is put before professional accountants. Or even at a more basic level, to shore up a clear assumption that top management ‘knows all’ in terms of what happens in an organisation. As organisations grow increasingly complex, logically this is less likely to be the case.

man smiling on phone in office
As a Non-Executive Director, scepticism is, for me, closely related to the idea of constructive challenge, but with a twist. Challenge is typically about what is put in front of you as information, explanation or evidence. Scepticism is often, in my experience, about what isn’t there, but probably should be.

But in being sceptical, you will be faced with the inevitable push back around the board table – “A stopped clock is right twice a day”; “Come on, a Business Plan is a plan to succeed, not a plan to fail”. The appropriate response should draw on another vital area – risk management tools, how you should address the effect of uncertainty on reaching your objectives.

Practical tips to build healthy Professional Scepticism
Above all, plan and manage your time better to create time and space, especially the pace of your work (fast vs slow). Easier said than done. For example, it must always be okay to extend audit testing, if necessary. Too many plans and agendas are so rigid that they can’t accommodate more audit testing or committee consideration of big judgements. Not good. While no manager wants their teams going down rabbit holes, there must be sufficient capacity to start pulling at threads that may reveal a different pattern of facts at play. The trouble is, you think you have enough time (when often you don’t) to make the best decisions.

Emphasise asking the right questions and a focus on quality rather than quantity. For example, when faced with a large population of data how many times do we calculate the median (usually a more reliable measure) as opposed to the ‘average’. (The median number of legs on humans is two. If you calculate the average number of legs attached to humans, it is certainly less than two!)

Strengthen your Audit & Risk Committee and Board, who should stand back and have oversight of these areas. This is the often overlooked ‘G’ in ESG reporting (Environmental, Social and Governance).

Use the best tools (for example data analytics) to see the whole population of data points, not just a sample. That is eminently possible these days.

Update your skills on areas like cognitive bias, critical thinking, data analytics. If you are qualified more than 10 years, educate yourself in ground-breaking advances in psychology and behavioural economics.

Promote a culture of healthy scepticism. Where you produce or consume ‘flash’ measures (like RAG reports – ‘Red Amber Green’ or ‘Traffic Light’ reports) adopt a practice of looking out for “watermelons” – measures that are green on the outside but when you dig into them turn red!

Put into practice the importance of diversity in your teams. Different personality types, different backgrounds, ways of thinking. Embrace areas like gender, social class, refugee status, neuro status and other forms of diversity and listen to what follows.

Learn the skills of mediating or managing conflict – this isn’t necessarily going to be easy.

These are a few of the bridgeheads to the new skills of the future for professional accountants.

Still some open questions
There are interesting questions facing accounting regulators now. Do professionals need to seek out alternative evidence when faced with conclusions? Do you need to go looking for issues or wait for issues to find you? (Probably the latter if you’re an auditor, but I suspect some part of the former if you run a business or are responsible for its governance).

Is professional scepticism innate or can it be learned, or indeed planned in to work packages? In my experience it is certainly easier for certain personality types. For the rest of us it is a way of thinking that is vital to success as a professional accountant, and added to by experience. In all cases it is much easier when understanding the principles of “Thinking Fast, Thinking Slow”.

Often the key to success as an accountant is beating low expectations – people expect us to be miserable, mean and depressing people to be around. So it was with trepidation that I offer this article on professional scepticism.

In reality, the changes afoot in this area truly deserve a mini-series on Netflix, drawing on Nobel prize winning advances in the areas of psychology and behavioural economics to shape some timely improvements in our professional practice as accountants. Now that’s an idea that will be met with scepticism.

Brendan Lenihan headshot
Brendan Lenihan
FCA, B. Comm, Dip Prof Acc, Dip Corp Gov, Accredited Mediator is a professional accountant, independent non-executive director and management consultant. Find me on Linked In.