Does emphasizing management bias decrease auditors’ sensitivity to measurement imprecision?

Abstract

Both management bias and measurement imprecision threaten the accurate reporting of complex accounting estimates, yet audit policymakers and practitioners often place a strong emphasis on bias. I examine whether directing auditors’ attention towards management bias can come at the expense of insufficient auditor sensitivity to measurement imprecision, potentially threatening overall audit quality. My primary investigation, Study 1, finds that when managers’ explicit incentives to bias financial reports are relatively weaker, an imbalanced emphasis on bias causes auditor-like participants in a stylized setting to “lower their guard” to a greater extent than when environmental factors place a more balanced emphasis on bias and imprecision. Study 2 indicates that an imbalanced emphasis on imprecision does not similarly distract auditors from bias. Study 3 utilizes a more contextually rich setting and demonstrates that an imbalanced emphasis on bias prompts even professional auditors to neglect imprecision. Accordingly, this paper suggests that a balanced emphasis on both management bias and measurement imprecision can mitigate negative consequences of auditors focusing on the former and neglecting the latter.