As Professor Bazerman will discuss, in an ideal world, auditors would not be hired by the firms they audit

Third, auditors often form ongoing relationships with the organization they audit, and any deterioration in the audited company is likely to unfold gradually.

In a process sometimes referred to as a slippery slope, auditors may unknowingly adapt to imperfections in the company’s financial practices and not notice when these cumulate into serious problems.

While the proposed rule changes move in the right direction by attempting to eliminate some of the most egregious sources of conflict of interest, they leave impact other features that can continue to produce bias.

One possible objection to this line of the argument and to the applicability of the self-serving bias studies to auditors is that auditors, unlike the participants in these studies, have professional training and experience.

There is no evidence, however, that such training reduces the magnitude of the self-serving bias. Indeed, the self-serving bias has been demonstrated in studies of professionals such as lawyers, judges and union negotiators.

In sum, auditor judgments are likely to be biased in favor of their own and their client’s interest. This bias does not result from deliberate misrepresentation but from judgmental processes that even the most honest, conscientious auditors are likely to exhibit.

Because the bias is unintentional and people are not aware of it, they are unable to eliminate it from their own judgments, and it is also likely to be impervious to attempts at moral suasion or the threat of sanctions.

Most auditors are probably not corrupt, but they are human. The only way to eliminate the self-serving bias and, hence, to ensure auditor independence is to eliminate all explicit and implicit incentives for providing a favorable audit.

MR

BAZERMAN: Commissioner Unger, you requested advice from the panel, as you’ve requested from panels before, and I’m going to try to provide that.

But first, I want to briefly comment on the connection between Professor Loewenstein’s research and the testimony that you’re hearing. Professor Loewenstein is suggesting that any auditor who has any self-interest in a more positive audit is likely to unconsciously be biased in the task of auditing.

I would also suggest that you’ve heard a large number of people who I would assume to be honest today offer a variety of advice on how the Commission should proceed, but I want to suggest that Professor Loewenstein’s research is relevant to testimony given by people who have a vested stake in the advice that they’re giving you.

BAZERMAN: Your comment is interesting, but I’m not sure what Professor Loewenstein’s self-serving motivation would be as a professor who doesn’t do consulting in this industry.

BAZERMAN: That’s interesting, and I think advocating science over advocating the search for a position that helps your own financial position are two fundamentally different things.

If anything, in terms of direct motivation, my testimony before you is likely to do me financial harm

What I would argue is that we are both here advocating what social science tells us about the problem that you’re facing.

I’ve spent a considerable amount of time doing executive education and consulting for three of the Big 5 firms. I don’t think that my testimony that you’re going to hear is going to help gather that work in the future.

The other piece that I want to start with and come back to online title loans Delaware later on has to do with the Commission’s request on is there any evidence of cross-selling affecting any single audit.

And I want to comment on that directly, and I want to comment on it distinctly from a scientific perspective. To put it in perspective, I want to first tell a quick overview of one episode that I would assume that the Commission is familiar with, but I think it will highlight your question of is there any evidence on a single episode by focusing on an episode.

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