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    Do Effects of Client Preference on Accounting...
    research summary posted May 7, 2012 by The Auditing Section, last edited May 25, 2012, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction, 11.09 Evaluation of Evidence 
    Do Effects of Client Preference on Accounting Professionals’ Information Search and Subsequent Judgments Persist with High Practice Risk?
    Practical Implications:

    The results of this study should be of interest to audit firms, management, and regulators because high-practice-risk appears to reduce bias in accounting professionals’ judgment and decision-making. The authors’ discussion suggests that similar effects may result from the recent increase in regulatory scrutiny and penalties for aggressive accounting judgments. However, more research is needed in this area. This study also is relevant to companies who must comply with FIN No. 48. Managers certifying the accuracy of the financial statements and their external auditors will want to ensure that tax professionals make unbiased judgments about supportability.


    Kadous, K., A.M. Magro, B.C. Spilker.  2008. Do Effects of Client Preference on Accounting Professionals’ Information Search and Subsequent Judgments Persist with High Practice Risk? The Accounting Review 83 (1): 133-156

    Confirmation bias, information search, practice risk, path analysis
    Purpose of the Study:

    Prior research shows that client preference directly influences accounting professionals’ judgments in ambiguous circumstances. Professionals have incentives to maintain good client relations, so they tend to endorse aggressive client-preferred positions. Client preference also indirectly influences professionals’ judgments because their search processes are biased toward obtaining evidence that confirms, rather than disconfirms, the client’s preferred position. The purpose of this paper is to examine whether increasing exposure to the potential costs of inappropriate judgments (i.e., practice risk) reduces the direct and indirect effects of client preference on accounting professionals’ recommendations.  In particular, the authors investigate whether:

    • High practice risk (relative to low practice risk) causes professionals to engage in more comprehensive and balanced searches for confirming and disconfirming information.
    • High practice risk (relative to low practice risk) causes professionals to provide recommendations that are less consistent th client preference. 

    The authors motivate their expectations with the psychology literature on accountability. This literature suggests that when practice risk is high and potential losses are salient, professionals are more likely to engage in “pre-emptive self-criticism.” In other words, they will anticipate objections that important others (regulators, jurors, etc.) might have to their client’s preferred alternative, consider multiple perspectives, and think in more complex ways.

    Design/Method/ Approach:

    The research evidence was collected in the mid-2000s.  Tax professionals of all experience levels from a broad cross-section of international, national, regional, and local firms participated in the web-based experiment.  Participants completed a simulated task involving the determination of a client’s investor/dealer status with respect to certain real estate transactions and their tax consequences. After reading background information and completing database training, participants searched for relevant court cases to support their judgments. Half of the available court cases supported investor treatment, while the other half supported dealer treatment. Participants reported the strength with which they would recommend investor versus dealer treatment and the likelihood of success in court if the issue were litigated.  

    • The authors find that professionals advising high-practice-risk clients exhibit less confirmation bias than professionals advising low-practice-risk clients.  Specifically, the relative amount of time spent reviewing court cases with positive versus negative precedents is significantly different between the low- and high-practice-risk treatment groups.
    • The authors find that recommendations are biased in favor of the client-preferred position when practice risk is low, but not when it is high.
    • Additionally, the authors present evidence that rules out differences in client desirability as a way to explain the results.
    Auditor Judgment, Audit Quality & Quality Control
    Prior Dispositions/Biases/Auditor state of mind, Management/Staff Interaction, Evaluation of Evidence
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