The Effects of Hindsight Bias on Jurors' Evaluations of Auditor Decisions

Abstract

Hindsight bias refers to the tendency of individuals with outcome knowledge (hindsight) to alter their perception of an event such that, ex-post, one's assumed ability to predict an event is greater than one's ex-ante ability. Auditors must make decisions without knowledge of an eventual outcome, but auditor liability is determined from a perspective that includes outcome knowledge. A behavioral experiment was conducted with 92 prospective jurors. Jurors were presented with a case in which auditors performed an audit of a client company and subsequently issued the standard, favorable audit report. Outcome knowledge was manipulated as: (1) no outcome (control group), (2) negative outcome (bankruptcy and subsequent lawsuit), and (3) negative outcome with a debiasing strategy. Results indicate that outcome knowledge biased jurors' evaluations of the auditor's judgment. Additional analysis revealed that the results are consistent with a cognitive interpretation of hindsight bias. The debiasing strategy was found to be effective in mitigating hindsight bias.