How to Mitigate Auditor’s Conscious and Unconscious Bias? An Experimental Study

Abstract

Increasing evidence of auditors’ failure to provide an independent opinion on true and fair view of financial position of firms during the financial crisis has reopened the debates about effective measures to ensure auditor’s independence. The purpose of this paper is to examine two prominent determinants of auditor’s biased opinion – financial incentives and personal relationship with a client that cause conscious and unconscious auditor’s bias. We hypothesise that contingent financial incentives elicit predominantly conscious bias, whereas personal relationship induces mainly unconscious bias. We conjecture that oversight, intended to mitigate biases, is effective only for conscious bias. To analyze the hypotheses we conduct a two period two-by-two between and with-in subject experiment with 176 students involving a choice task. We find that financial incentives have a significant effect on an auditor’s choice. While personal relationship appears to have no such overall effect, we find it significantly related to unconscious bias. Our results show that oversight can effectively mitigate auditor’s bias, because most of it is conscious. Unconscious bias is persistent throughout both rounds of the experiment and is unaffected by oversight. The results suggest that while oversight may effectively mitigate conscious bias it does not affect the unconscious one. The findings contribute to the recent regulatory discussions on measures to increase auditors’ independence. They show that in addition to oversight alternative solutions are needed to mitigate the unconscious bias. Audit firm rotation may prevent the effects of unconscious bias by terminating the long-term auditor-client relationship.