An Auditor’s Overconfidence in Plausible Explanations Provided by Management: “Let’s Make a Deal”

• In Event: Modeling and Design Science

Abstract

Prior research has examined how auditors’ decision-making is negatively affected by heuristics and biases, including base rate and sample size neglect. The purpose of this paper is to introduce the effects of ‘refuted explanation neglect’, an extension to the ‘refuted selection (door) neglect’ found in the traditional Monty Hall problem. This form of neglect arises when auditors investigating the reasons for anomalous outcomes ignore the existence of alternative explanations which have been refuted by management.

We use the Monty Hall problem, a well-known decision-making problem, as an accessible illustration. We then generalize the scenario to an audit setting by removing the problems base assumptions, moving from alternatives of equal to unequal probabilities, and multiple explanations beyond the Monty Hall three alternative problem. We then develop audit scenarios where management offers alternative, but incorrect explanations for possible material errors and fraud under refuted explanation neglect to analyze its impact on auditor behavior. We find that these scenarios lead to a high level of auditor overconfidence in accepted explanations in the three scenarios examined, ranging from 0.08 to 0.33, with a median of 0.29.

Authors

• Kevin Kobelsky, University of Michigan-Dearborn

• Brian Patrick Green, University of Michigan-Dearborn