Question

List 5 to 10 Reasons Why Good Accountants do bad Audits?

Answer 1

A short discussion of the Sarbanes-Oxley Act of 2002 that addresses corporate accountability :
The provisions of the act include new legal constraints on executives and expands the protection for whistle-blowers. It creates a regulatory board to monitor accounting firms and establishes penalties for accounting fraud. George W. Bush even proclaimed that "The era of low standards and false profits is over." A more destructive problem with corporate auditing is unconscious self-serving bias that can cause even honest meticulous auditors to unintentionally distort audits. As a result, the provisions of the Sarbanes-Oxley Act will not solve the problem, and might even make the problem worse. The purpose is to discuss the various causes of unconscious self-serving bias, to provide some supporting evidence from various experiments, and to provide some recommendations related to systemic changes needed to help reduce the problem.

The Roots of Bias

Psychologically people interpret information in ways that benefit their self interest even when they are trying to be objective and impartial. People tend to discount the facts that contradict the conclusions they want and embrace the facts that support their own viewpoints. Some of their experiments is to support the idea of self-serving human behaviour.

Accounting for Bad Accounting

Three structural aspects of accounting that create substantial opportunities for bias to affect judgment and three behavioral aspects that amplify the unconscious bias.

The structural aspects of accounting include:

1. Ambiguity - When the possibility to interpret information in different ways exist, people tend to reach self-serving conclusions. Accounting is full of ambiguity. It can also be mentioned that corporate accounting is full of ambiguous questions related to revenue and expense recognition.

2. Attachment - Two main points. Companies fire accounting firms that deliver unfavorable audits. Audits are frequently used to build relationships that lead to consulting services. Attachment breeds bias.

3. Approval - The bias to approve of a clients accounting methods. Self-serving biases increase when people are endorsing other biased judgments that equate with their own biases.

The behavioral aspects that amplify unconscious bias include:

1. Familiarity - People are much less willing to harm individuals that they know, particularly paying clients.

2. Discounting - Immediate consequences tend to receive more emphasis than delayed outcomes, particularly when the delayed outcomes are uncertain. Critical audit reports produce immediate adverse consequences, but the cost of an unjustified positive report is distant and uncertain.

3. Escalation - Minor indiscretions and errors created by unconscious bias may evolve into conscious corruption.

Thank you.