The Briefcase 35: Just One More Thing - Accountants and Professional Scepticism

As Lieutenant Columbo reached for the doorknob, he suddenly halted. He turned his head and, bringing his cigar away from his lips, said: "Just one more thing… I was wondering if you checked whether those assets actually exist?” While there isn’t an episode of Columbo where he audits a dodgy business, there are situations where you might feel a little bit like the scruffy genius.

Professional scepticism isn’t entirely the same as being Columbo – it’s more about maintaining an enquiring mind, looking for evidence, being willing to ask the awkward follow-up question, wearing long coats, smoking cigars, and talking about a wife that no one has ever seen. Admittedly, a lot of those things are also things that Columbo does.

Anyway, let’s try and forget Columbo and focus on you, an accountant.

🧐 So, what actually is professional scepticism?

In simple terms, scepticism means not accepting something as true without questioning it. In accounting, that mindset is actually written into the rules. The International Auditing and Assurance Standards Board (IAASB) defines professional scepticism as:

"An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.”

ISA 200 also requires auditors to apply this mindset, stating that:

"The auditor shall plan and perform an audit with professional scepticism recognising that circumstances may exist that cause the financial statements to be materially misstated.”

In practice, this means auditors should stay alert for things like:

• Evidence that contradicts other audit evidence.
• Information that raises doubts about the reliability of documents.
• Conditions that may indicate fraud or error.
• Situations where additional audit procedures might be needed.

Put simply, professional scepticism is what stops you accepting management’s word for things, and instead has you reaching for your cigar in the manner of a certain glass-eyed detective who will remain unnamed.

🧑‍⚖️ Getting judgemental

Professional scepticism often gets mentioned alongside another accounting favourite – professional judgement. And, while they’re related, they’re not the same thing. It’s helpful to imagine professional scepticism as the thinking, and professional judgement as the doing.

For example:

Modern financial reporting relies heavily on estimates and assumptions. Things like asset values, provisions, and forecasts often involve a fair amount of judgement. And this means we need to remain sceptical of any figures, and scrutinise the estimates and assumptions that are holding them up. This is often the best time to take the cigar out of your mouth and ask the big questions.

🚩 Red flags

Professional scepticism isn’t about being a swivel-eyed, paranoid mess. You can’t rush into an office and grab people by the cuffs and demand that they start talking. Instead, you’ve got to calm down, take things slow, and just recognise the little things that aren’t adding up. Experienced accountants develop a kind of radar for unusual patterns.

Things that make an auditor’s ears perk up:

• Financial trends that change suddenly without a clear explanation.
• Forecasts that assume everything will go perfectly.
• Documents that are missing or duplicated.
• Data that looks suspiciously tidy.

Sometimes, the red flags are the people you talk to, rather than in the spreadsheets. Maybe a manager becomes defensive when asked about a particular transaction. Maybe a department that’s otherwise been cooperative struggles to produce supporting documents. Maybe a staff member seems oddly nervous whenever certain questions come up.

None of these prove anything on their own, but they might have you fiddling with your keys as you walk home in the rain in your big long jacket.

😬 The expectation gap

Despite all the scepticism in the world, auditors don’t catch every fraud. In reality, that’s not what they’re there to do. Audits provide reasonable assurance, not a guarantee that every irregularity will be uncovered. However, most people seem to believe they should be performing a citizen’s arrest when they confront even a whiff of suspicious activity. Which is a bit like hoping the chef at the restaurant you’re at will help you fit a lighting fixture in your bathroom – it’s not their job!

When a company collapses because of fraud or accounting manipulation, the first reaction is often people moaning that the auditor should have caught it. This misunderstanding is sometimes called the expectation gap – the difference between what auditors are designed to do and what people think they do.

Still, professional scepticism plays a big role in narrowing that gap. The more questioning and evidence-based the approach, the stronger the audit conclusions tend to be. And a reliable organisation will always appreciate an auditor who stops just as they’re about to leave, turns around, and says, "just one more thing”.

🧠 Final thoughts

Although it’s tempting, we shouldn’t approach an audit Elvis-style. We can’t perform an audit with suspicious minds. That said, a healthy dose of cynicism can go a long way. That’s all it means to embody professional scepticism – keeping in play the possibility that things aren’t all as they seem, but not assuming foul play.

Although there’s rarely an episode of Columbo where it turns out it was all an accident and actually everyone’s telling the truth, we just have to accept sometimes an accountant’s life isn’t quite as exciting.