Analysis of Auditors’ Perceptions and Over‐reliance on Negative Information

Abstract

Research in both psychology and accounting indicates that humans, in making decisions, resort to using decision strategies known as heuristics. One heuristic of particular interest in the field of accounting is that of anchoring and adjustment. Empirical research has shown that subjects will sometimes bias judgements towards the anchor even in situations where the anchor is of little value or is irrelevant. Explains that the presence of a primary or recency effect in the context of the anchoring and adjustment heuristic may be the existence of an “internal anchor”. Combining these theories, hypothesizes that auditors would use their initial mindset as an anchor. A laboratory experiment indicated that auditors did employ the anchoring and adjustment heuristic; they did have a negative internal anchor; and the inertia effect could be used to predict whether a primary or recency effect would be present in a particular likelihood estimation. The results gave strong support for the idea that auditors place over‐reliance on negative information. However, the results indicated that students did not have an internal anchor, did not employ the anchoring and adjustment heuristic and that the inertia effect was not useful in predicting whether a primary or recency effect would be present in a particular likelihood estimation.