Management’s Preference: Can Auditors Stop It from Biasing Accounting Estimates?

• In Event: Auditing Complex Estimates

Abstract

We examine how auditors can mitigate the biasing influence of management’s preference when auditing accounting estimates. Across two different experiments using senior auditors, we find that developing an independent estimate or reviewing relevant estimate evidence before receiving management’s preference mitigates the influence of management’s preference. However, in both experiments, we also find that independently evaluating management’s preference, before reviewing estimate evidence, does not consistently mitigate the preference’s biasing influence. Though we find that approximately 90 percent of the auditors who evaluate management’s preference consider it unreasonable, about half go on to accept the preference’s implementation in the client-preferred estimate. In a final study, we examine this dissonance. We find that auditors low in the personality trait of conscientiousness, or high in the trait of openness, are susceptible to the dissonance of evaluating management’s preference as unreasonable and then accepting its implementation. Likewise, we find that auditors with a weak sense of auditor-client independence are susceptible to such dissonance, as well as auditors making a weak effort to eliminate management’s preference from their judgment. Our findings advance our understanding of factors that influence auditor independence, and are important to practice in terms of both auditor hiring and training.

Authors

• Brian C Fitzgerald, Northeastern University

• Christopher J Wolfe, Texas A&M University

• Kecia Williams Smith, Texas A&M University