Biased Tendency: The Cause Of Audit Failure

Psychological research shows that people's wishes will greatly affect the way of information interpretation, even if they strive to be objective and fair.

From this point of view, if the majority of audit failures are attributed to deliberate fraud, it is believed that the whole audit profession is full of cunning.

In fact, the opposite is true.

As far as the internal law of audit activities is concerned, the deeper problem is that CPAs are influenced by the bias of unconsciousness.

So what is biased? The interpretation of "Hai Hai" is unfair and biased.

The main performance of biased tendency

1. ambiguity

When a piece of evidence appears ambiguous, people tend to have a favorable conclusion.

Many accounting decisions depend on people's interpretation of ambiguous information.

CPAs and their clients also have great discretion in dealing with some of the most basic accounting issues.

Michael, USA.

Three accountants such as Gibbins (michaelgibbins) have investigated 93 audit partners.

It is clear that 67% of respondents said that more than half of the clients need to decide something by negotiation, such as the confirmation time of income cost.

Executives are often eager to confirm revenue and are willing to postpone expenses.

Obviously, if there is a "right" confirmation time, there will be no such consultation and communication.

Another manifestation of ambiguity in audit practice is that customer companies tend to "extensively solicit opinions" - before asking to hire someone, a number of accounting firms are required to explain a specific accounting problem.

Because there is no "correct" conclusion, different accounting firms may give different opinions.

2. interest related

Whether for business or for smooth implementation of the project, CPA has good reason to maintain good relationship with customers.

Because in the current entrustment relationship, the employment and dismissal of CPA are usually determined by the audited unit. Once a certified public accountant has issued a non-standard audit report, the client will consider himself disadvantageous and produce an attempt to dismiss the accounting firm.

The reason why CPAs are often trapped in the dilemma of maintaining independence and losing customers is that although CPA charges fees to audit clients, they are not responsible for paying customers, but are responsible for all financial statements users who rely on audit reports.

This is very different from the fact that when a general customer buys a product, if there is a problem, the seller will have to assume the responsibility.

This unique "accountability mechanism" has challenged the interests related reality.

3. recognition of others

In a sense, auditing is a reappraisal of the judgement made by the managers of the client company.

Studies show that when people support others' judgment, if their judgment is consistent with their biased tendency, their self-servingbias will be stronger than that of themselves.

In other words, people are more willing to support others' conclusions, though they are too generous to their own advantage, than to support their own judgments.

The above way of thinking means that CPA is likely to accept more radical financial statements (aggressiveaccounting) provided by customers, and if it is independent of CPA to prepare financial statements, it will not be so radical.

4. take sides with acquaintances.

Between strangers and acquaintances, people are more reluctant to hurt their acquaintances.

Especially when these acquaintances are customers who maintain cooperative relations, the sense of partiality naturally sprouted.

The choice usually faced by CPA is to either question customers' financial statements and hurt customers (and at the same time hurt themselves), or harm unfamiliar investors without questioning the possible biased figures in the financial statements.

The demand of either or other makes CPA unconsciously inclined to open up the suspicious financial statements.

With closer relationship with customers, CPAs will be more partial to customers.

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5. close to home

People generally react strongly to the immediate consequences, but are indifferent to the distant consequences, especially when the distant results are uncertain.

Many bad habits of mankind originate from this habitual reaction.

Similarly, CPAs do not want to sign non standard reports because their costs (loss of reputation or legal proceedings) are still too long to take place, and the loss of relations with customers or loss of audit contracts is just around the corner.

6. make a small fortune.

People are naturally disguised or excused for their own frivolity, sometimes without even realizing that they are doing so.

CPAs are unconsciously accustomed to minor defects in their customers' homework, but eventually these minor flaws may accumulate into big problems.

Though he may realize that he has been biased, he must admit his mistakes before correcting his bias.

Again and again, CPAs may prefer to cover up problems so as not to expose unintentional errors to the public.

Theoretical examination of biased tendency

Experiments confirm that biased tendency has a great influence on people's judgement.

For example, an article in Sloan management review (sloanmanagementreview, 1997) describes a group of experiments: the subjects were two people in a group, playing separately in a motorcycle and car collision lawsuit.

The plaintiff is a motorcycle driver, and the defendant is a motorist.

The two actors have received relevant information, including police reports, medical certificates, witnesses' testimony, etc. their task is to resolve the case through consultation.

If the negotiation fails, the judge will decide the amount of compensation and the party concerned will also be fined heavily.

Before the formal negotiations begin, the experiment requires that each of the subjects make a prediction. If the consultation fails, the judge will determine the amount of the plaintiff's compensation.

In order to avoid the interference of biased tendency, each actor is told that his opponent can not see his prediction, and his prediction will not have any effect on the judge's decision.

The result of the experiment is unexpected, and the plaintiff's forecast of the amount of compensation is far greater than the amount predicted by the defendant.

In order to reduce the biased tendency of the subjects, the experiment requires that the parties can get a certain reward if they can correctly predict the amount of compensation awarded by the judge.

In addition, write a defense speech to the other party.

However, neither of these two methods has been able to reduce bias. The two sides still believe that the amount of compensation awarded by the judge is in their favor.

In another test of the group, the researchers provided 16 reasons for the subjects, of whom 8 were good for the plaintiff and 8 were good for the defendant, and the subjects needed to predict how the neutral third party would evaluate these reasons.

As a result, the subjects generally believed that their favorable reasons were more convincing than those of the other side.

When the subjects read the relevant information and played the role of the plaintiff or defendant respectively, the degree of bias was significantly reduced.

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As far as an audit report is concerned, it is impossible to find some mistakes that can be attributed to bias. It is impossible to tell whether a mistake in the audit is biased or criminal.

Such as Marx.

Bazell Man and max.h.bazerman did an experiment.

First, imagine a company that might be sold, and send a group of intricate data to a group of business school undergraduates, asking them to estimate the value of the company.

Students taking part in the test play different roles: buyer, seller, buyer audit and seller audit.

They get the same information.

As expected, the value of selling is much higher than that of the buyer.

The judgment of both sides is obviously biased towards their clients.

At the end of the experiment, it is required that the CPA of the buyer and the seller estimate the true value of the company, and indicate that the closer the valuation is to the neutral expert, the more rewards they will receive.

However, in spite of the above incentive schemes, the valuation of the seller's audit is still 30% higher than that of the buyer's audit. This confirms the persistent influence of egoism: once participants are biased in interpreting Target Corp's information, it is difficult to revert to impartiality after that.

Lloyd.

Lioydtanlu has launched another research on CPA.

The study was conducted by 139 certified public accountants in a large accounting firm in the United States.

First, the CPA is divided into two groups, and then each of the CPA provides 5 ambiguous financial briefs, requiring them to judge the accounting work of each briefing.

It is suggested that one group assumes that they are carrying out the audit, and the firm where they work has business dealings with the company providing financial briefing. Meanwhile, half of the personnel in each group are required to issue the audit report first, then explain whether the accounting operation of the audited company is in line with the generally accepted accounting standards of the United States (GAAP), while the other half is just the opposite. First, it is explained whether the accounting operation of the audited company is in line with GAAP, and then completes the audit report.

As a result, for these 5 Financial briefs, if they are playing certified public accountants who are carrying out the audit, they will think that the company's accounting operation is in line with the possibility of GAAP. The average is 30%. high. In addition, the company's financial statements should be judged first, and the audit report will be registered, and the data obtained will be closer to the financial data reflected by the clients than other CPA's data.

The study shows that even experienced CPAs are not immune to bias, and they are more likely to accept biased financial data than their own biased data.

These experiments show that even if associating with a certain hypothetical relationship with customers, it will distort the CPA's judgement.

If there is a long-term relationship with customers, such as the stable income of Arthur and Arthur from the Enron Corp, the distortion will be more obvious.

Solutions to biased tendencies

1. reduce or limit competition in the audit services market

The reason for reducing or restricting competition in the audit service market is that: (1) the quality of audit services is not easy to be verified.

Take the doctor as an example, the patient knows whether he is recovering after treatment. In the case of lawyer, the client will know whether he wins or loses after litigation.

Auditing is not the same. Even if a certified public accountant does nothing, it can provide the same product.

(2) customers need sellers to recommend what they should buy.

For example, when you go to a department store to buy clothes, you know what you want to buy.

But the audit service is not the case. Just like you go to see a doctor, you don't know what you need, but you know what's wrong with your body, and the doctor will make a diagnosis for you.

(3) CPA needs to spend time and energy to explore the needs of customers, and must charge a fee.

(4) the environment of excessive competition facilitates customers to make use of the antagonism between accounting firms to generate the motive to purchase audit opinions.

(5) free competition can lead to the failure of the audit service market, that is, the "lemon market" (marketforlemons): the result of competition makes the quality of service worse.

Under the premise of insufficient effective demand in audit market, if accounting firms and CPAs increase too much, competition will intensify.

Therefore, it is necessary to elevate the entry threshold of accounting firms and certified public accountants, such as improving qualification examination conditions and increasing examination difficulty.

At the same time, the existing moral hazard in the stock market and the lack of professional competence will be withdrawn.

In short, as with a diploma, the easier it is to get the lower the value, the more the more, the faster the depreciation.

2. refactoring principal-agent relationship

Ronan, Professor of New York University (joshuaronen), proposed that "audit" and "insurance" should be combined to solve this "original sin".

Each company is free to decide whether to buy or not to buy a certain amount of "financial misrepresentation" insurance, and to disclose the amount of insurance in the notes of accounting statements.

If a company's annual report shows 5 million yuan of financial misrepresentation reflects insurance, and the other's annual report shows no insurance, investors will accordingly evaluate the company's share price accordingly.

The insurance company outsourced the audit to the accounting firm, and the CPA could conduct a more detailed audit of the company that chose not to buy insurance.

This means reconstructing the relationship of audit entrustment, so that the CPA can avoid the embarrassment of wanting to "eat the king's money" and "go one's own way", internalize the audit quality problem (internalize), that is, the entrusted insurance company is responsible for the supervision, and not only rely on the external forces to assume regulatory responsibilities.

3. mandatory rotation system

Sarbanes of the United States.

The Oxley act, which has stripped the advisory business from the auditing business completely, has not been able to shake the basis of objective bias.

If we want to eliminate bias, we must eliminate the threat of dismissal of Certified Public Accountants due to non-standard reports.

At the same time, the contract for employing a certified public accountant should be multi period (for example, 5 years). Unless the accounting firm fails to perform its duties within this period, it may not be dismissed. If the audit fee and other details are determined, it is not allowed to change at will.

As for the implementation of partner rotation in the same firm, the relevant partners still have strong motivation to please customers, and it is difficult to correct the bias caused by interest.

However, such regulations also raise the following doubts: the closer to the closing date, the more relaxed the CPA is, that is, the lack of positive motivation to disclose the facts of improper reflection found in the audit process. When the CPA first commissioned a new client audit, due to limited scope and depth, the probability of audit failure was higher than that of continuous audit projects.

Is there any need for regular rotation? This is indeed a challenge, and it is also the reason that the independence of CPA is always limited to some extent.

But CPA is a special pursuit of independent occupation. Only by playing a fair and non biased role between the trustee and the trustee can it show the value of existence. The forced rotation system helps to cut off the "umbilical cord" of biased tendency.

4. standardizing audit fees

Vicious competition between peers will aggravate the biased tendency of CPAs.

It is not enough to rely solely on honesty education. The only effective means is to make important norms for audit fees.

The following measures may be considered: first, the non audit fees (including travel, board and lodging fees) paid by clients to accounting firms or related offices account for more than 25% of audit fees ("Sarbanes").

The Oxley act is 5%) or the non audit fee is more than 200 thousand yuan. The listed company should disclose the amount and proportion of the public disclosure. It belongs to the non-listed company audit. It should be reported to the industry association within a week after the signing of the project. Secondly, the audit fee of the listed company that changes the accounting firm and the annual audit fee is less than that of the previous year, and the amount, proportion and reasons should be disclosed. Third, although the company has not changed its accounting firm, but the audit fee has been reduced by more than 15% over the previous year, the listed company should disclose the amount, proportion and reasons for the reduction. The non-listed company audit should be reported to the industry association within a week after signing the project.

5. to prohibit certified accountants from being audited to serve clients.

When a certified public accountant tries to please a client in order to get a job opportunity in a client company, he or she can not be fair.

Therefore, a freezing period of at least two years can be set up, that is, a certified public accountant shall not serve in a client company within two years after the completion of the audit.