Kahneman Et Al. - 1982 - Judgment Under Uncertainty Heuristics and Biases
The Dangers of Heuristics and Biases in Audit
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The Dangers of Heuristics and Biases in Audit James Bone President Global Compliance Associates, LLC
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The Dangers of Heuristics and Biases in Audit. James Bone President Global Compliance Associates, LLC. The Dangers of Heuristics and Biases in Audit. What a strange topic for Internal Audit! There can’t be any research or relevance! YOU MAY BE IN FOR A SURPRISE! - PowerPoint PPT Presentation
Transcript of The Dangers of Heuristics and Biases in Audit
The Dangers of Heuristics and Biases in AuditJames BonePresidentGlobal Compliance Associates, LLC
The Dangers of Heuristics and Biases in Audit
What a strange topic for Internal Audit!
There can’t be any research or relevance!
YOU MAY BE IN FOR A SURPRISE!
WE WILL EXPOSE A FEW MYTHS AS WELL………
What is this philosophical hogwash?
Who is the founding father of “Free Enterprise” in America?
Adam Smith What was his occupation and title?
Professor of Moral Philosophy at the University of Glasgow What year was “An inquiry into the nature and causes
of The Wealth of Nations” written? 1776
What year was “The Theory of Moral Sentiments” written?
1759 (17 years earlier)
SOX speaks to Human Behavior but does not address how to audit for it?
Sarbanes-Oxley (PCAOB) Title I, Section 103 Defines auditor independence
Processes & Procedures for compliance audits
Inspecting and Policing Conduct and Quality Control
Corporate Responsibility
Enumerates specific limits on certain Behaviors of Corporate Officers
How does it apply to audit?
Auditing involves judgment and expertise
Judgment is very good most of time
We can be lead astray Heuristic; Greek: "Εὑρίσκω", "find" or "discover") refers to experience-based techniques for problem solving, learning, and discovery that give a solution which is not guaranteed to be optimal.
(EXPERIENCE, INTUITION, INSTINCTS)
How does it apply to audit?
In statistics, sampling bias is a bias in which a sample is collected in such a way that some members of the intended population are less likely to be included than others.
It results in a biased sample, a non-random sample[1] of a population (or non-human factors) in which all individuals, or instances, were not equally likely to have been selected.[2] If this is not accounted for, results can be erroneously attributed to the phenomenon under study rather than to the method of sampling.
"inherent bias" refers to the effect of underlying factors or assumptions that skew viewpoints of a subject under discussion.
Practical examples of Heuristics and Biases
Heuristics Biases Cars Beautiful
woman/man 10,000 hours
(expert) – golf, study, auditing
Do you know everything there is to know?
What You See Is All There Is
Beliefs Exposure Novel
experience/events – we must make sense of strange new things/events/change
How Heuristics and Biases lead us astray
System 1
System 2
Law of Least Effort
Illusions:Priming
Causality(WYSIATI)
Substitution
The Law of Small
Numbers
Bernoulli’s errors Availability, Emotion and Risk
Anchors A bias of confidence over doubt
Detect financial statement fraud
New tools are
Needed to overcome
these errors
Insufficient audit evidence
80%
Failure to
Apply GAAP50%
Failure to assess
risk& adjust
audit plan44%
A lack of sufficientbusinessskepticis
m?
Cognitive BiasCognitive solutions3 common audit weaknesses
Evidence and
evaluating data
Evaluating risks and professional skepticism
Procedural & Process orientation (time crunch)
Law of small numbers
(WYSIATI) What You See Is All There Is
Substitution/Bernoulli’s error
Why “Tone” at the Top Misleads
Very few business leaders start out intent on committing fraud
Enron’s Code of Ethics - "As officers and employees of the Enron Corp.,
its subsidiaries, and its affiliated companies, we are responsible for conducting the business affairs of the companies in accordance with all applicable laws and in a moral and honest manner."
Sam Antar & Crazy EddieMaster’s of Heuristics & Biases
Judgement ErrorsLack of internal con-trolsPoor audit trainingInadequate ques-tions/follow upPoor testing: AP, Inventory, etc.Poor or incomplete analytics
Sam Antar, CFO Crazy Eddie
Why does Heuristics and Biases matter?
http://youtu.be/o0tUZ6lmnls
http://youtu.be/o0tUZ6lmnls
What does science suggest?Building organizational awarenessAudit expectations gap: Use technology to facilitate/enhance data gathering and
analysis Audit as learning – Not punishment Audit as deterrence - Strategically Audit as motivation Audit as process improvement Organizational support for audit Audit as risk awareness
“Switch”How to change things when change is hardChip Heath & Dan Heath
Direct the Rider
Motivate the Elephant
Shape the path
Workshop/Questions
Global Compliance Associates, LLC TheGRCBlueBook.com [email protected] [email protected] Copies of the presentation or references and
publications used
James Bone
