Making judgments in the audit profession: critical and objective

Judgment is at the heart of the auditing profession. Judgment is necessary to make a conclusion about the degree of control and to provide assurance. Not for nothing is objectivity considered a fundamental principle in the professional rules (IFAC, 2018). Yet such judgments do not always go well. For example, in 2010, the Financial Markets Authority found that "external auditors in too many audits base their judgments on inadequate audit information and, moreover, have an insufficiently professional-critical attitude" (AFM, 2010). The Public Interest Steering Committee noted, based on a joint root cause analysis by the four major accounting firms, that auditors must possess a 'professional-critical attitude and critical judgment'; if this is not met, audit quality may be at stake (Public Interest Steering Committee, 2018). But what exactly is professional-critical? In this article, we take a closer look at the concepts of judgment and skepticism, what is known about them in the scientific literature, and how auditors can put those insights into practice.

In practice, judgment turns out to be less rational than might be expected beforehand. For example, there are numerous biases to which people are susceptible (De Visser, 2007). One well-known one is anchoring: people are guided in their reasoning by the chosen starting point, even if it is irrelevant to the problem situation. Another is recentness: later information outweighs earlier information in the final judgment. If the most recent information is positive, then the final judgment will be more positive than if the most recent information is negative in nature. Unfortunately, auditors are not immune to bias (Knechel and others, 2013). Moreover, Bazerman and others (2002) believe that bias is a more important explanation for poorly performed financial statement audits than unethical behavior by auditors.

A good auditor is a critical auditor. In the academic literature, this is referred to as professional skepticism: an increased risk assessment that a claim is false, depending on the information available, as evidenced by judgment and decision-making (Nelson, 2009). In other words, a more skeptical auditor will assess risk higher based on the same information and want to see more evidence than a less skeptical colleague.

Auditors appear to be more skeptical in their judgments as they hold higher positions (Quadackers, 2009), identify more with the profession (Bauer, 2015), are more knowledgeable and more ethical as well as more conservative in their judgments (Knechel and others, 2013). Lower interpersonal trust (Quadackers, 2009) and skepticism as a personal trait (Knechel and others, 2013) also contribute to higher professional skepticism. Not conducive to skeptical judgment are ambiguous rules and economic dependence on audit clients (Bazerman and others, 2002). That negative influence of economic dependence on skepticism can take several forms. For example, audit clients may promise auditors a lucrative follow-up engagement, after which they are less critical (Moreno and Bhattacharjee, 2003). Rate pressure (Houston, 1999) and the fear of losing an audit client (Farmer and others, 1987) do not help either. As auditors identify more with the audit client, they are more likely to judge in their favor (Bauer, 2015). Finally, auditors may be pressured within their own organization, for example, if efficiency and meeting deadlines are being driven, so that judgment may suffer (Knechel and others, 2013).

It is tempting to conclude that auditors should be as skeptical as possible, for example, by making them aware of biases, not allowing them to be exposed to pressure by audit clients, and emphasizing professional values. But are those audit clients waiting for that? Audit clients appear to stay with the current auditor primarily if it is responsive to their needs and has sufficient knowledge (Butcher and others, 2013). Moreover, there must also be a certain level of trust if auditors are to do their work in a normal way (Guénin-Paracini and others, 2015). Skepticism is thus an essential trait of auditors, but not the only one.

By: Wout Schiphorst

Source: auditinfo.eu

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