MGHC02H3 Lecture 4: Why Good Accountants Do Bad Audits & The Impact of Achievement Goals on Cheating
Ethics
Why Good Accountants Do Bad Audits - Bazerman et al.
• Problem with corporate auditing is unconscious bias between accounting firm and clients
• Tight relationships between both can cause auditors to unintentionally distort numbers to
mask company’s true financial status
• The root of bias
o Desires influence how we interpret information to reach a particular conclusion
▪ Self-serving bias
• Different people reach different conclusions with the same info
that favours their own interests
• Distorts how people interpret info when there's unconscious bias
• 3 aspects of accounting create opportunities for bias:
o Ambiguity
▪ Bias thrives when information can be interpreted different ways that can
cause unethical decision-making
▪ Auditors have leeway when defining simple financial questions and
accounting rules such as when should revenues be recognized
o Attachment
▪ Auditors want to remain in good standing/graces with clients so they are
motivated to approve client accounts/ financial benefits
o Approval
▪ People are more willing to endorse an overly generous outcome that
favoured them than they were to make that judgment themselves
▪ Auditors likely to accept what client say than if completed the audit alone
• An audit assesses the judgments made by client so auditor likely
to accept more aggressive accounting from the client
• 3 aspects of human nature that amplify unconscious bias:
o Familiarity
▪ Less willing to harm those you know than strangers
▪ As personal ties deepen, more biased judgment tends to be
o Discounting
▪ People more responsive to immediate consequences than delayed ones
▪ Auditors may fear to issue reports that cause immediate adverse conseq.
like damage to relationship, unemployment, loss of contract with client
▪ However, auditors would rather issue positive reports when its supposed
to be negative since the effects are delayed
o Escalation
▪ People naturally conceal minor indiscretions
▪ Auditors may adapt to seeing minor imperfections overtime
▪ Small imperfections can lead to auditor to realize long-standing bias; thus,
unconscious bias may evolve into conscious corruption
• Radical remedies
o Improve audits by eliminating incentives that create self-serving biases meaning
that new policies must reduce an auditors interest in if client is pleased or not
o Remove threat of being fired for delivering unfavorable audit with a fixed contract
that does not allow client to rehire the auditing firm after contract ends
o Educate auditors on self-serving bias on judgment and unconscious errors they
may make and the reason they make them
