If there is one positive to come out of the malaise that hit the accounting profession like a side-impact crash, it's that the public, who couldn't discern the difference between an audit and an Audi, are suddenly paying closer attention to numbers.
They’ve learned, sometimes painfully, that an audit doesn’t necessarily carry a Hyundai-like warranty against fraud. Fraud is an unwelcome and eternal component of business, and like a nest of cockroaches in a crumbling tenement, very tough to exterminate.
And while there has been months of finger pointing within the profession of where exactly blame lies in the recent spate of accounting scandals, a Harvard professor has drafted a position paper that links inherent human bias to bad audits.
Max Bazerman, a professor of business administration at Harvard Business School along with co-authors George Loewenstein and Don A. Moore — both professors at Carnegie-Mellon — opine that human bias is inevitable in audits.
In "Why Good Accountants Do Bad Audits," Bazerman contends that accountants generally act with self-serving bias. As proof, he gave 139 auditors five auditing vignettes each of which the authors described as "ambiguous."
Fifty percent of the controlled group were instructed to assume they had been hired by the client, the other half were told to assume they were hired by another company that was doing business with the company that was being audited.
The study found that the auditors working under the supposition that they had been hired by the client were 30 percent more likely to find that the company’s numbers complied with GAAP.
Bazerman, Loewenstein and Moore’s conclusion was that even a hypothetical relationship with a client distorts an auditor’s judgment. Now, as Bazerman points out, imagine the degree of distortion that must exist in a "long-standing relationship involving million in revenues."
Interesting, but I doubt many in the profession needed a Harvard professor to explain that pre-determined bias exists in audits especially when a lot of money is at stake.
The troika takes their findings one step further by stating that despite the passage of Sarbanes-Oxley, legislation alone will not address the fundamental problem of bias.
As a remedy, they suggest a full divestiture of audit and consulting services and giving auditors fixed contracts for predetermined periods of time in which they cannot be fired for rendering adverse opinions.
Again, not exactly splitting the atom in terms of trailblazing solutions, but certainly worth a discussion or two.
The bottom line is this. While it’s true no legislation will ever eradicate bias, strict rules governing auditing and consulting can make it very difficult.
Sarbanes-Oxley is a good start. And perhaps a year down the road we’ll be able to quantitatively measure the effects good or bad without the need for yet another white paper explaining what many have known since the day they sat for the CPA exam.
