Bias in Audit
It is always interesting to see how similar challenges are treated in different disciplines. That people’s decisions, and the way they see the world, do not always correspond to the decisions, and world view, of an optimizing robot is highly relevant to marketing. Marketers often look at the challenges, and benefits, consumers gain from not being a robot. We also look at decision making and seek to understand what managers are doing. I personally have given less thought to the equivalent issues in audit. Auditors have to “sign off” that the decisions made by other people are correct so it is extremely important that auditors make effective decisions. The ACCA (Association of Chartered Certified Accountants) have a project on banishing bias which aims to help auditors better understand the decision making challenges in a world where we aren’t robots.
A key challenge in audit is being “professionally sceptical”. The auditor gets offered information by clients and has to determine what to accept and what to investigate further. “ACCA believes that, because professional scepticism is defined in terms of a state of mind, further improvement must be informed by an understanding of psychology” (Gambier, 2017, page 5).
The idea is that: “Firstly, a standard-setting process that is informed by the literature on cognitive biases can lead to standards that either mitigate the impact of innate biases or at least avoid effects that may be detrimental to audit quality. Secondly, it may help in identifying areas where stakeholders other than auditors may be susceptible to innate cognitive biases” (Gambier, 2017, page 5).
To me this just makes sense. If you are involved in any process that involves reporting to people understanding how people think should be of great interest.
What Behavioural Effects Are Most Interesting To The ACCA?
The ACCA highlight 12 “cognitive biases”: There are six called biases; hindsight, outcome, confirmation, anchoring, conjunction and blind-spot bias. Plus six other effects; the availability heuristic, groupthink, overconfidence, recency, selective perception, and stereotyping. I’d guess confirmation bias is especially significant; we tend to seek out evidence that confirms our expectations. This is particularly worrying for auditors who are in danger of signing off on accounts without properly investigating those items that seem reasonable on first sight or when clients just seem honest.
It is fascinating to see how accountants are approaching these issues. I think understanding psychology is vital to effective audit so it is great to see the ACCA advising its members on the challenge.
Read: Andrew Gambier (2017) Banishing Bias? Audit, objectivity and the value of professional scepticism, ACCA (Association of Chartered Certified Accountants)