Learning about Professional Skepticism – Part 2 of 3

In January 2007, the US Public Company Accounting Oversight Board (PCAOB) sponsored a Forum on Auditing in the Small Business Environment. Kayla J. Gillan, Board Member, gave a presentation on Unconscious Human Nature Affecting “Professional Skepticism.” During that presentation, she observed that: “Because we are human, we are not perfect. Because we are not perfect, we will make errors. But, because the cost of auditor error is so significant, we must try (within the limits of reasonable human capacity) to minimize the frequency, size and severity of errors. To put an even finer point to it: I am speaking of those characteristics of human behaviour that affect “professional skepticism” – not because we want them to, but because we are usually not even aware of them.”

Gillan further observed that: “Over two decades of psychological research has revealed at least one truism: even the most well-meaning person unintentionally allows unconscious thoughts and feelings to influence his or her seemingly objective decisions. We all have what Yale Professor David Armor calls “the illusion of objectivity.” While we obviously do not have time today to even list, in a comprehensive manner, all of the reasons for this, let me describe briefly a few that I have noted that seem most relevant to the work of an auditor in today’s world. [Implicit Prejudice; In-Group Favouritism; Bias Favouring Those Who Can Benefit You; and Bounded Awareness]”

In summary, Gillan offered the following conclusion: “What can we do to minimize risks of unconscious attitudes impairing audit quality? Clearly, we do not have time today for an exhaustive examination of that question. But, I can leave you with a few thoughts, and ask that you further consider these issues as you go back to your offices. Studies show that, when we are mindful of relevant risks, we will be more conscientious about managing them. One way to be mindful of unconscious biases that may affect the way in which we interact with audit clients is to collect data aimed at revealing how these same biases may exist in your own offices or professional relationships. Look at the internal management of your firm: Who do you hire?  How do you reward good performance? How do you define “good performance”? On whom do you tend to place greater trust? With this introspection, then ask yourselves: Does any of this data indicate an unconscious bias that may also impact the way in which you relate to your client and plan and perform audits?”

On August 16, 2011, the PCAOB issued a concept release to solicit public comment on ways that auditor independence, objectivity and professional skepticism could be enhanced. One possible approach on which the Board is seeking comment is mandatory audit firm rotation, which is explored in detail in PCAOB Release No. 2011-006. However, the Board seeks advice and comment on other approaches as well. Comments should be submitted no later than December 14, 2011. The Board will also convene a public roundtable meeting in March 2012, at which interested persons will present their views. Additional details about the roundtable will be announced at a later date.