I really enjoy reading an audit report or audit working papers because quite often we see the cognitive biases of the auditor at work. Let’s be clear, I am as much a potential victim of cognitive biases as any other auditor. However, being aware of their existence will make you more attentive to them, and perhaps allow you to at least take them into account when doing your work.
I enjoy biases so much that I decided to do a little series, in some kind of alphabetical order. Let’s see how far we can take this.
The first cognitive bias I want to review with you is one called “anchoring”.
Anchoring is a cognitive bias which makes us attribute most importance to the first piece of information we come across and use it as the point of reference for further assessments or judgments. You anchor (yes, like a boat) your perception, and any change in your perception will be an incremental change from that initial starting point, or anchor.
It gets worse: you are more likely to reject out of hand or doubt information which you receive later which is opposed to that initial information. You are more likely to qualify such information as an exception or an outlier.
An anchoring example
Years ago, I was part of a team assessing the functioning of a production plant in the UK. We started by touring the facilities and talking to the blue collar workers on the floor. They provided us with a lot of information on the state of the machines and the maintenance performed on them.
Even before we started our audit, we had already been anchored by the information we had received on the workfloor. We were provided information on the state of maintenance of the machinery, which was contrary to the information we received on the workfloor. Nevertheless, we spent significant time investigating this (ultimately non-)issue further, time we would have otherwise more productively spent on other audit activities.
Research such as referred to in this Wikipedia article appears to indicate that anchoring is very difficult to avoid.
And again, it gets even worse: an intelligent auditee can anchor an auditor, if he wants to. I have a good story about that as well.
An intelligent auditee can anchor an auditor
In the beginning of my career, I worked as an external auditor. Most of those my age did. I had a client who stated the number of intentional errors he had introduced in the accounting. This client, the CFO of this organization, was a former auditor himself, and enjoyed challenging us. We worked very hard until we believed we had found all the exceptions. One year he actually overstated the number of exceptions present. We kept on looking for the exception until the final meeting, where he admitted he had anchored us.
Of course, that works once. But once is often enough to throw your audit in the entirely wrong direction.
Guarding against anchoring
Even though it appears difficult, there are ways to guard against anchoring. It comes down to making sure you anchor yourself prior to the first contact with the audit environment. So it all comes down to proper preparation.
A possible solution would be to baseline and hence anchor yourself as an auditor based on available best practices for the industry. Of course you are then entirely dependent on the quality of information available that define those baselines. In other words, if the entire industry is off, this will not assist you much.
The issue of past anchoring
There is another anchoring risk an auditor can be exposed to, and that’s anchoring that occurred in prior period working papers. We usually review prior period working papers in order to get a feel for the situation we’re going into. Any biases introduced in those working papers may establish an anchor for the current period auditor.
It appears hard to avoid anchoring. Nevertheless, be aware it can happen, and be aware it may skew or even completely direct your audit effort. Make sure you baseline your expectations on as neutral and objective a source you can have, and don’t go into an audit unprepared.
This bias is one of the best examples why it pays to do the necessary preparatory work.