Do Personal Feelings Intrude into the Sober World of Audits?

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Is an outside auditor likely to be swayed by feelings of either fondness or dislike for client personnel? It is generally believed that an auditor attuned to those feelings won’t let them affect professional judgment, but that’s not necessarily the case. This was the surprising conclusion reached by researchers of the article",How Audit Reviewers Respond to an Audit Preparer's Affective Bias: The Ironic Rebound Effect", published by the American Accounting Association in the March/April 2015 issue of “The Accounting Review.”

The new study, conducted by Vicky B. Hoffman, professor of business administration at the University of Pittsburgh, and doctoral candidate Michele L. Frank, finds the impact of bias awareness to be the opposite of what you might expect. Instead of discounting what audit preparers have to say, outside auditors seem to rely on their conclusions more than they would without such awareness.

"Reviewers who are not informed about the preparer’s affect are not significantly influenced by the preparer’s judgment and arrive at judgments more consistent with the audit evidence,” the authors said in the article. “In contrast, reviewers who receive the same preparer judgment and work paper evidence, but who are also informed of the preparer’s affect, are significantly influenced by the preparer’s judgment." In other words, the reviewers “fail to mitigate this bias” in their own judgments.

"Failure to mitigate doesn't mean that reviewers simply adopt a preparer's recommendation", explains Hoffman in the American Accounting Association’s press release. "It does mean letting a preparer's bias significantly impede a reviewer's own good judgment."

The authors, who were both auditors at Big 4 accounting firms before pursuing careers in the academic world, refer to this phenomena as the “ironic rebound effect.” It is akin to what jurors encounter when thy are instructed to ignore evidence that has been improperly introduced at trial.

Here’s How It Works

Their experiment involved 119 audit managers and senior managers from two Big 4 accounting firms averaging almost ten years of experience. All participants received brief background information about a manufacturer of electronic components whose primary competitor has developed a product prototype that may be technically superior to its own and is expected to sell for about 20 percent less. Subjects were asked to assume the role of an audit manager assigned to review inventory judgments made by a hypothetical senior auditor, the preparer.

In  half the cases, the preparer reached a very favorable to the client, that no writedown of inventory is required, while the remaining cases recommended a highly unfavorable writedown of $1.2 million. Furthermore, almost half the reviewers of the favorable recommendation were informed that the preparer had previously worked with the client’s controller at a different company and really liked him. Nearly half  of the reviewers of the unfavorable conclusion were informed that the preparer had a negative prior experience with the controller, whom he found arrogant, condescending and extremely unpleasant. The remaining subjects, serving as control groups, receive no information about personal likes and dislikes.

Despite assurances of client competence, reviewers made widely variant judgments that were apparently influenced by whether the preparer liked or disliked the controller. Among the subjects who reviewed favorable judgments, those who were informed that the controller was very pleasant urged an average writedown of $42,000, only about one third the $119,200 suggested by those who were told nothing about personal relationships. For participants reviewing unfavorable judgments, those with no knowledge of personal likes or dislikes recommended an average of $183,103. And reviewers whose preparer said the controller was extremely unpleasant called for a staggering $357,333 more—almost double!

The authors attributed this disparity to the "ironic rebound effect." Based on psychological research, they claim that when people attempt to ignore or minimize facts—in this case, the preparer’s biased judgment—they are subconsciously alerted to when they are relying on this information. If there is uncertainty about how much to discount the facts, the monitoring process intensifies, keeping the information at the forefront of working memory and thus increasing its effect on judgments.

In addition, the authors surmised that in actual audits this effect on reviewers may be increased by “secondhand affective reactions, which are subconsciously positive toward client personnel the preparer likes and negative toward those that the preparer dislikes." Finally, the authors are cautious about advising how to counter this ironic rebound effect. They say that an “alarm bell” should go off when personal feelings come to light, prompting reviewers to consider their judgments.

About Ken Berry

Ken Berry

Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.           

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