Auditors Can Be Influenced By Management Preferences, Study Says

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The amount of information a company’s management provides its supposedly independent auditors strongly influences the decisions they make, according to a study by the University of Missouri.

In the study, nearly 50 senior auditors from major accounting firms were asked to assess the cost of an explosion at a client’s facility based on memos provided by the company’s finance chief.

One group of auditors was presented with three hypothetical cost estimates that were close to the one that was disclosed to be the one preferred by management. A second group was presented with six estimates covering a broader range of outcomes. The first group was more than twice as likely to approve management’s ballpark cost figure than the second.

Presenting fewer estimates increased the probability that management’s estimate was deemed more credible, according to Nate Newton, an assistant professor of accountancy at University of Missouri and a co-author of the study. The appearance of a bias could have implications for auditing standards, he added.

The Public Company Accounting Oversight Board is considering a new standard on estimates based on standards by the Auditing Standards Board and the International Auditing and Assurance Standards Board.

“Current standards suggest that a review of management assumptions is important,” said Mr. Newton. “But auditors would benefit from coming up with their own estimates.”

Accounting firms could make it mandatory for auditors to come up with estimates that the management did not propose, he said.