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Lecture 4

MGHC02H3 Lecture 4: Why Good Accountants Do Bad Audits & The Impact of Achievement Goals on Cheating

by Amy

Course Code
Joanna Heathcote

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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
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