Evaluation of auditor decisions: Hindsight bias effects and the expectation gap

Abstract

Hindsight bias is said to exist when individuals overestimate the extent to which an outcome could have been anticipated prior to its occurrence. Ex post, litigants tend to blame auditors in hindsight for failing to foresee and anticipate subsequent financial problems of their audit clients. However, it is not known whether the blame attributed in hindsight is due to hindsight bias or other factors such as the generally hypothesized user-preparer expectation gap. A behavioral experiment was conducted with 65 federal and state general jurisdiction judges and 58 auditors from one of the Big-Six public accounting firms. Results indicate that judges provided significantly lower evaluations of auditors' performance than did auditors, reflective of an expectation gap. Of greater importance, our results reveal that evaluative judgments of auditors' performance are subject to hindsight bias. Additional analysis revealed that our results are consistent with a cognitive interpretation of hindsight bias.