I'm Not Biased, Am I? Avoid 5 Common Judgment Biases That Can Affect Accounting and Auditing Decisions

[ILLUSTRATION OMITTED] CPAs pride themselves on performing their duties with ethics, integrity, and due professional care. But even the most conscientious preparers and auditors need to be aware of hidden biases to which humans are susceptible. Could the financial statements you prepare or audit be affected by unconscious biases even if there is no intentional manipulation? Before you continue reading this article, the authors suggest you complete the decision-making quiz on the next page. FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, discusses important characteristics of accounting information, including relevance, reliability, neutrality, and comparability. FASB defines reliability as "[t]he quality of information that assures that information is reasonably free from error and bias and faithfully represents what it purports to represent. " In accounting, the term "bias" is often equated with intentional manipulation of the financial statements, yet FASB's discussion of reliability includes the possibility that accounting information may be affected by bias that is "not necessarily intended. " This concept is also incorporated into AU-C Section 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, which states that "accounting estimates are imprecise and can be influenced by management judgment. Such judgment may involve unintentional or intentional management bias. " To what type of unintentional bias could these standards be referring? In its Professional Judgment Framework published in 2011, KPMG identified five frequently occurring biases that can affect business judgments--availability, anchoring and adjustment, overconfidence, confirmation, and rush to solve. The following year, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) incorporated this list of biases into its white paper Enhancing Board Oversight (available at tinyurl.com/pe337e8), which provided suggestions for improving decisions made by boards of directors. Many of the biases referenced in these papers are based on a type of decision-making process known as a heuristic. Heuristics, or mental shortcuts, allow people to make decisions quickly and efficiently. This type of decision-making is often beneficial, saving individuals the time and effort of thoroughly evaluating each point of data in the world around them. Many times, the heuristic process results in a high-quality decision. The problem arises when individuals rely on these shortcuts unwittingly or when the shortcuts lead individuals astray. In those cases, decisions may be systematically biased. Each of the five biases identified by KPMG and COSO may affect decisions CPAs make, both personally and professionally. AVAILABILITY The availability bias occurs when individuals' decisions are unduly influenced by information that is most memorable or easily accessible. This occurs when accountants are influenced by the most easily retrieved data as they generate hypotheses for account fluctuations, seek information, evaluate evidence, and assess risks. For example, when hypothesizing the cause of account fluctuations, managers may readily recall the types of events they have personally experienced but will have a harder time generating new ideas. Similarly, auditors may be tempted to easily consider the explanation provided by management, but it may be more challenging for them to generate additional possibilities. Likewise, tax professionals may form judgments regarding the defensibility of tax positions based on the ease with which they recall similar cases, without fully considering the outcome of the cases. This tendency may also bias analysts' forecasts and investors' predictive earnings judgments. Interestingly, the availability bias can also contribute to members of a team feeling as though they have done more work than others since individuals often find their own contributions more accessible and memorable than those of their teammates. …