Can Preparing an Independent Estimate De-Bias Auditor Assessment of Management’s Estimation Process?

• In Event: Auditor Judgment

Abstract

This study first examines whether management can influence auditors’ acceptance of an aggressive accounting estimate by varying the number of estimate options presented to the auditor. We find that auditors are more likely to support an aggressively low estimate when presented with fewer options. Next, we analyze whether and how auditor development of an independent estimate can attenuate this option-set bias. We find that auditors making an ad hoc, holistic estimate are less susceptible to the bias, leading them to reject management’s aggressive estimate. However, we find that auditors using a decomposition and mechanical aggregation process are susceptible to the bias and accepting of management’s aggressive estimate. Our results suggest that rigorous development of the estimate increased auditors’ confidence in their estimate, allowing them to conclude that the difference between their estimate and management’s was acceptable.

Authors

• Christopher J Wolfe, Texas A&M University

• Brian Fitzgerald, Texas A&M University

• Nathan Newton, Texas A&M University