6 elements of professional judgement

Knowledge and experience are of course essential for management accountants, but it is those with good professional judgement who are likely to be part of the management team.

Take the budget, for example. Professional judgements are necessary at all stages: To determine whether revenue and cost estimates are credible; which capital projects to include; whether to recommend that a struggling project be given more time; how tight or loose the budget should be; the balance between investment and consumption; whether cost-cutting will jeopardise long-term prospects. It could be a long list.

With artificial intelligence (AI), professional judgements will be even more important. AI will enhance management accounting capabilities, disrupt existing practices, and take over many routine tasks. A higher proportion of the remaining tasks will require judgement, with AI providing better data.

After looking at professional and academic sources and discussions with many senior figures in the profession, I have defined professional judgement as "the combination of personal qualities with relevant knowledge, experience, and professional standards to form opinions and make decisions".

To give an idea of the personal qualities involved, they include acumen, character, common sense, discernment, emotional intelligence, insight, intelligence, intuition, gut feel, perceptiveness, reason, risk awareness, and wisdom. Under professional standards come the qualities associated with integrity and ethical behaviour.

Professional judgement isn't about being judgemental ("You ought to ...") or being cautious. It is very much in tune with the profession's ethical principle of objectivity — not allowing bias, conflict of interest, or the influence of other people to affect your decisions or actions.

6 elements that determine judgement

The following six elements determine whether you, or someone else, has judgement. Each element includes three illustrative examples for improvement.

1  What you take in

This is a measure of the quality of comprehension in both reading and listening, which requires taking in information but also evaluating, analysing, and putting it into context. Quality of listening and reading includes being perceptive about how things are said and what is not said, for example, areas not covered in an email or a report.

Take, for example, monthly management information reports incorporating both financial and nonfinancial information. There is often dissatisfaction about quality — too much, too difficult to understand — and there is a need to pick up such signals even without colleagues complaining. Knowing what to look for is another part of judgement, such as which variances to follow up on and whether to use any additional nonfinancial measures. These measures may form part of a balanced scorecard, where any additional information has to be weighed against the dangers of excessive complexity. Finally, there is the ability to understand what colleagues need when acting as a business partner.

Three ways to improve include:

• Seeking feedback from a coach or mentor on your listening skills. Test yourself regularly by asking, "So what you are saying is ...", to double-check whether you understood correctly;
• Being aware of any tendencies you have to ignore or suppress inconvenient information; and
• Insisting on clarity in the way information is presented.

2  Whom and what to trust

Management accountants are rightly seen as trustworthy professionals, so it is particularly important that when they use information from others, there are processes in place to know whom and what to trust.

Professional judgement will help to spot techniques such as low-balling in project proposals or setting easily reachable targets.

Three ways to improve include:

• Understanding the perspective and motivation of the person providing the information;
• Making clear that in staff hiring, appraisal, and promotion, good judgement is seen as important; and
• Verifying information through corroboration and comparison.

3  What you know about this

Knowledge has to be combined with judgement in applying management accounting techniques. One example might be deciding whether to apply a technique such as zero-based budgeting to any part of an organisation. Another could be deciding whether a choice of performance comparators is justified. Or there is a decision on the risk of introducing AI to marketing set against the risk of not introducing it.

Experience is a key element in the judgement of how to apply that knowledge, but while experience is rightly valued, it is not enough. It must also involve learning about people, not only processes, systems, and technology. An example here is understanding how colleagues will react to changing market conditions or adverse variances in setting targets and controls. Poor judgement may mean missed deadlines and cost overruns or may result in the organisation running out of cash.

Three ways to improve include:

• Seeking information to question whether analogies and lessons drawn from experience are correct, appropriate, and complete;
• Using mentors and coaches; and
• Gaining additional perspectives by a secondment to another function or location.

4  How you feel about this

Accountants are as prone to bias as any other group, and they need to be aware of what their biases are. Caution is fine, but risk aversion carried to extremes is not.

Keeping to a plan when circumstances have changed (anchoring) is one kind of bias. Using an inappropriate analogy (representativeness) is another. Seeing what we want to see (confirmation) is a third. Or it may just be strong preferences, as when it is tempting to prefer performance measures that are quantifiable. Pushing for quantification, which is designed to reduce bias, when quantification may not be appropriate may itself be an expression of bias.

Three ways to improve include:

• Training in understanding the common forms of bias;
• Having greater awareness of your own biases, including your risk tolerance or risk appetite; and
• Welcoming diverse views and perspectives to meetings and discussions.

5  How you choose

There are many sources on the mechanics of decision-taking, but it will be the management accountant's professional judgement through experience, knowledge, and personal qualities that come together to formulate and present the choice. This includes recognising whether choices have been appropriately framed, whether certain alternatives (including more radical options) have been excluded, and whether risk has been appropriately considered.

Judgement is needed at every level of decision-making. The basis of cost allocation, for example, will normally be a logical connection — time spent, numbers of people involved, volume, etc. For expenditure without such a connection — research and development or product-range marketing — the question may be whether to use activity-based costing and/or take into account wider implications, such as the effect on incentives. With a new transfer-pricing system, the effects on internal motivation will need to be considered if the organisation is profit-centre-based.

Judgement is also central to financial reporting and then the audit — assumptions based on forecasts and probabilities have to be made about all key elements of the balance sheet and profit and loss account. Conspicuous among these are decisions about writing off goodwill, capitalising costs, depreciation rates, revenue recognition, and bad debt provisions.

Three ways to improve include:

• Training in advanced decision analysis, for example, risk assessment and scenario building;
• Recognising problems and learning to deal with problem conditions for choices, such as time pressure, or high emotions such as anger; and
• Clearly presenting choices, particularly of qualitative elements.

6  How you implement it

A choice is not the end of the story — successful implementation is also part of good judgement. Increasing the frequency of management reporting, for example, comes with the potential trade-off that an early closing may affect the quality of the figures. In implementation, too, there are often risk management issues, such as new IT applications, which can lead to great ideas in principle not being delivered in practice, or projects that run late and over budget.

Three ways to improve include:

• Identifying reasons for past problems in implementing plans (especially projects);
• Training using cases to improve the probabilities of success in implementation; and
• Using pre-mortems to anticipate the implications and risks of variations from plan.

(Timing issues will need to be addressed as part of elements five and six. An example would be whether to undertake more work to verify information on a project proposal. Risk assessment will form part of elements two, four, five, and six.)

The key role of judgement

Good judgement turns a management accountant from a skilled technician into a potential finance leader. It is particularly important for those who want to move into CFO and general management roles. In this, as in many other areas, understanding human behaviour as well as techniques is central to the quality of management accounting.

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Sir Andrew Likierman, FCMA, CGMA, is professor of management practice at, and the former dean of, the London Business School. He is a past president of CIMA, was head of the UK Government Accountancy Service, and was a director of the Bank of England. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.