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    Does Disclosure of Conflict of Interest Increase or Decrease...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments 
    Does Disclosure of Conflict of Interest Increase or Decrease Bias?
    Practical Implications:

     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.

    Conflict of interest, disclosure, bias, auditor independence, valuation, client advocacy, nature of conflict
    Purpose of the Study:

     Professional valuators are increasingly called upon to supply inputs that form part of the financial statements and the audit report. However, criticisms of potential conflicts of interest relating to valuators’ reports abound. One concern is that professional valuators provide expert opinions in circumstances where they are required to act in the public interest, yet are hired and paid by a client who has self interest in the outcome of the valuator’s report. This study seeks to investigate, in a valuation setting involving professional valuators, the efficacy of disclosure in curbing biases stemming from conflict of interest. Further, this study investigates whether the effect of disclosure of conflict of interest depends on the nature of the conflict of interest—specifically, whether the conflict of interest is aligned with or threatens the current client’s (seller or auditor’s) interest.

    Design/Method/ Approach:

     The authors recruited 90 experts with business valuation experience and sent these participants research instruments via courier mail. On average, participants had 13.3 years of work experience, 6.7 years of work experience in business valuation, and had worked on 38 valuation engagements. These individuals were asked to make a valuation judgment in the context of a larger fairness opinion engagement on the sale of a subsidiary. Conflict of interest was manipulated as either Client-Aligned (valuators’ interest aligned with auditors) or Client-Misaligned (valuators’ interest aligned with audit client). The results were also examined in the presence and absence of disclosure (No Disclosure, Disclosure).


     The study resulted in the following conclusions. • In a Client-Aligned conflict situation, disclosure of conflict of interest induces bias toward the current client (auditor), and does not produce the intended result of reducing or preventing bias. • In a Client-Misaligned conflict of interest setting where the valuator has potential future business opportunities with the buyer (audit client), the authors found evidence that valuation estimates are still biased toward the current client (auditor), regardless of disclosure. • In the Client-Aligned conflict situation, disclosure magnified bias. In contrast, in the client-misaligned conflict setting, disclosure of conflict of interest did not cause any incremental bias.

    Audit Team Composition, Auditor Judgment
    Impact of Consultation on Judgments, Use of Specialists (e.g. financial instruments – actuaries - valuation)