As the Chair said, I’m a professor in economics and psychology at Carnegie Mellon University
Let me begin my testimony by noting that I’m not an expert in accounting or auditing. Instead, my expertise is in the psychology of human judgment.
The research on human judgment is relevant to debate over changes in policy because, ultimately, the proposed rule changes are designed to influence the judgmental processes of auditors.
In a series of experiments examining a self-serving bias that I believe present a close analogy to the situation of auditing reference, my colleagues and I presented research subjects with diverse materials from a lawsuit resulting from a collision between an automobile and a motorcycle
The rule revisions being discussed today are intended to mitigate problems associated with a lack of independence and auditor judgments. There appears to be a growing concern that some auditors are not scrutinizing the accounts of their clients with sufficient objectivity to ensure that the public is supplied with high-quality impartial judgments of companies’ financial health.
By eliminating some conflicts of interest, the proposed rule changes are intended to reduce some of the incentives that auditors would otherwise face to submit audits that benefit the firms they audit rather than the general public.
Arguments for accounting reform have often been based on the assumption that auditors are intentionally biased; that is, that they deliberately misrepresent information for their own benefit.
A lot of the testimony that we’ve heard in the session before the last one from the Big 3 of the Big 5 accounting firms was premised on this kind of assumption.
If this interpretation were correct, then the bias might be potentially rectifiable by more suasion and/or the threat of sanctions.
While it is true that some auditors may deliberately misrepresent information the research conducted by myself and my colleagues suggest that a more fundamental challenge to auditor independence results from the existence of unintentional bias.
This research shows that bias typically enters unconsciously when people process information to arrive at a judgment. When people are called upon to make impartial judgments on the basis of complex information, those judgments are likely to be unconsciously and powerfully biased in a manner that is commensurate with a judge’s self-interest.
When people would like to believe that some assertion is true, they sift through the data looking for information that supports what they want to be true. They systematically ignore or react skeptically to information that contradicts the conclusions they want to hold. This is what the psychological research shows.
These included depositions, police reports, doctors’ reports, and so on
Parents, for example, can be amazingly blind when it comes to noticing problems with their children that they wish did not exist. Doctors and psychotherapists — they come into play again — are adept at figuring out why patients need just the procedures that they have to offer. Psychologists call this the self-serving bias.
While the idea that auditor bias is unintentional and thus not due to corruption, which is what I’m proposing, may be appealing, the less happy implication of this assertion is that auditor bias is likely to be pervasive because it will not be limited to corrupt individuals but results from psychological processes that are common to allpeople.
We randomly assigned subjects to either the role of plaintiff or defendant in pairs of plaintiffs and defendants, attempted to negotiate a settlement in the form of a payment from the defendant to the plaintiff.
If the pairs were unable to reach upon a settlement amount, they paid substantial penalties — this was all done with real money, although it was scaled down from the actual lawsuit — and they were told that the amount paid by the defendant to the plaintiff would be determined by an impartial judge who had earlier read exactly the same case materials and reached a judgment.