Auditors told 'unconscious bias' a problem

Proposed reforms of accounting practices do not address some of the fundamental problems in the auditing profession, a leading business academic told a conference yesterday.

Prof Niamh Brennan of University College Dublin (UCD) said that independent studies in the US found that new requirements demanding auditors to reveal potential conflicts of interest could actually increase bias.

She was speaking at the annual conference of the Institute of Internal Auditors in Portlaoise.

The study, details of which were published in the Harvard Business Review, found that these disclosures may make auditors feel less duty-bound to be impartial if investors are going to take their statements into account.

Similar research, carried out by the same group, found that stricter accounting standards would not necessarily prevent auditors from acting according to their own biases.

Prof Brennan told the conference that the studies found the key to reforms lay in eliminating these "self-serving biases".

On that basis, provisions like that in the Sarbanes-Oxley Act (the US Congresses key post-Enron legislation) was a step in the right direction. But a more effective reform would be the removal of the threat of clients sacking their auditing firms.

Fixed, limited contract periods during which auditors could not be fired, would achieve this, Prof Brennan said.

All fees and other contractual arrangements would have to be agreed in advance. At the end of the period, the client would be prevented from rehiring the auditor. This would force clients to rotate audit firms.

US legislation requires rotation only as far as changing each client's lead audit partner within a firm at regular intervals.

Prof Brennan explained that the real problem was not corruption but unconscious bias, which in turn could lead to corruption.

Unconscious bias could lead to minor indiscretions, she said, which are in turn covered up, but this process can escalate to the point where individuals are forced to commit fraud to cover up past indiscretions.

She said that, in this way, people who never intended to commit wrong in the first place would continue doing it rather than admitting mistakes.