Valuators’ judgment and decision making is currently unexplored. This study provides preliminary evidence on how valuators act in the presence of conflict of interest, and the need for conflict disclosures. The results of this study have implications for public accounting firms to the extent that they provide either fairness opinions and associated valuation judgments or are involved in some audit aspects related to mergers/acquisitions. This study contributes to accounting and psychology literature on conflict of interest disclosures and is the first study to test the biasing effects of conflict disclosure specifically targeting professionals performing familiar tasks. Further, this study extends existing literature of the topic by documenting that bias arising from disclosure of conflict of interest depends on whether the conflict of interest is aligned or misaligned with the client’s interest. This study provides the first evidence that disclosure of conflict of interest causes bias in Client-Aligned, but not in a Client-Misaligned, conflict of interest setting.

 Jamal, K., E. Marshall and H. Tan. 2016. Does Disclosure of Conflict of Interest Increase or Decrease Bias? Auditing: A Journal of Practice and Theory 35 (2): 89-99.

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The results of this study are important for audit firms to consider when outlining best practices for their technical department.  They highlight the role and limitations of in-house consultation and advice in enhancing auditors’ decisions, and suggest that the nature of advice sought by, and presented to, auditors matters. Technical advice that merely reduces ambiguity may not be sufficient to counteract auditors’ bias toward accepting client-preferred methods. In fact, such advice could lead to an unintended consequence of bolstering auditors’ support for client-preferred methods. Explicit recommendations to use the most appropriate methods and reference to QAS should be included as well.

Ng, T.B. and P. G. Shankar. 2010. Effects of Technical Department’s Advice, Quality Assessment Standards, and Client Justification on Auditors’ Propensity to Accept Client-Preferred Accounting Methods. The Accounting Review 85 (5): 1743-1761.

By treating worse justified advice as though it were better justified advice, auditors are likely to overestimate the defensibility of their conclusions that are based on this advice. It also is worrisome that specialists appear to defensively resist well-justified, contrary advice from stronger social bond advisors. In response to a stronger social bond advisor’s better justified advice, specialists assess advisor competence to be higher and they assess the advice itself to be of higher quality, but they assign relatively low weight to the advice. This inconsistency implies that specialists may have difficulty accepting good advice even when they recognize its high quality.

Kadous, K., J. Leiby, and M. E. Peecher. 2013. How Do Auditors Weight Informal Contrary Advice? The Joint Influence of Advisor Social Bond and Advice Justifiability. Accounting Review 88 (6): 2061-2087.

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This study documents successful resolutions to actual self-identified audit challenges. Auditors can use this information to be proactive in minimizing future audit challenges and resolving any challenges that do arise in a timely manner. Additionally, the list of unresolved challenges can aid firms in making wise client acceptance decisions as unresolved challenges represent potential liability.

Bobek, D.D., B.E. Daughtery, and R.R. Radtke.  2012.  Resolving Audit Engagement Challenges through Communication.  Auditing: A Journal of Practice and Theory. (31) 4:21–45.

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In cases where fraud risks are high or time pressures are severe, auditors are more likely to consult a fraud specialist regarding the presence of fraud indicators when the requirement to do so is mandatory and the advice received is binding.  The authors indicate that a strict requirement is more likely to cause auditor compliance with the policy than a more lenient policy that merely suggests consultation and where the advice from the specialist is nonbinding.  Additionally, the auditors’ perceptions of fraud risks increased when a more strict consultation policy was in place which may indicate that the mere presence of a strict policy increases assessed fraud risks.

For more information on this study, please contact Anna Gold.
 

Gold, A., W.R. Knechel, and P. Wallage. 2011.The Effect of the Strictness of Consultation Requirements on Fraud Consultation. The Accounting Review 87 (3): 925-949.

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