Answer: In its Professional Judgment Framework published in 2011, KPMG identified five frequently occurring biases that can affect business judgments—availability, anchoring and adjustment, overconfidence, confirmation, and rush to solve.
Explanation: The availability bias occurs when individuals’ decisions are unduly influenced by information that is most memorable or easily accessible. This occurs when accountants are influenced by the most easily retrieved data as they generate hypotheses for account fluctuations, seek information, evaluate evidence, and assess risks. For example, when hypothesizing the cause of account fluctuations, managers may readily recall the types of events they have personally experienced but will have a harder time generating new ideas. This tendency may also bias analysts’ forecasts and investors’ predictive earnings judgments. Interestingly, the availability bias can also contribute to members of a team feeling as though they have done more work than others since individuals often find their own contributions more accessible and memorable than those of their teammates.
Anchoring and adjustment -When estimating a value, individuals often anchor on a preliminary amount and then make adjustments to arrive at their final estimate; however, they often make insufficient judgments to arrive at the true value. For accountants, this type of bias may occur during the budgeting process, when making capital allocation decisions, or when conducting a cost-variance analysis. It may also affect analytical review procedures and sample assessments. Auditors are particularly vulnerable to this bias since they typically begin their process with management-provided anchors (i.e., financial statements).
The overconfidence bias occurs when individuals overestimate their abilities to perform tasks or make accurate decisions. Accountants may overestimate their ability to prepare and audit fair value estimates, assess risks in enterprise resource planning systems, and evaluate the accuracy of their performance as well as the performance of others.
Confirmation bias is the tendency for decision-makers to seek or interpret evidence in ways that support preexisting beliefs or expectations. Accountants may exhibit this tendency when evaluating the strength of internal controls, selecting accounting standards, or estimating the probability of successfully defending a tax position in court. In reality, for an individual to know something is true, he or she must test to see how it may be false. If accountants want to increase their professional skepticism, it is important for them to change their mindsets to seek or interpret evidence in ways that disconfirm prior beliefs or expectations.
The rush-to-solve bias occurs when decision-makers form a judgment without fully considering all available data. This may occur if a management team reaches an early consensus without deliberating on an issue, or if auditors rely heavily on the perceived trustworthiness of a client when evaluating the likelihood of fraud. The rush-to-solve tendency may be exacerbated by external factors, such as time and budgetary pressures, and may inadvertently lead decision-makers to fall into other biases such as those listed above.
The professional judgment framework developed by the CAQ, which is affiliated with the AICPA, includes five steps: (1) Identify and define the issue; (2) gather the facts and information and identify the relevant literature; (3) perform the analysis and identify potential alternatives; (4) make the decision; and (5) review and complete the documentation and rationale for the conclusion.