New academic research suggests audit reviewers in some cases might be giving audit teams the benefit of the doubt, even when they try not to do so.

In a study recently published by the American Accounting Association, Vicky Hoffman, a professor at the University of Pittsburgh, and doctoral candidate Michele L. Frank, say they have spotted a weakness in the audit review process after conducting an online experiment with nearly 120 Big 4 audit managers and senior managers. They asked the managers to take a look at a hypothetical audit situation and conclude whether they concurred with an audit determination regarding an inventory writedown of $1.2 million.

In half the cases, audit reviewers were told the audit manager called for the writedown, and in another half reviewers were told the audit manager concurred with the preparer that no writedown was warranted. The cases were split further so some of those given the favorable writedown determination were also told the audit manager had a contentious relationship with the preparer resulting from a prior work experience, while half were given no information on any historical connection.

The AAA says it would hope such a study would reveal that reviewers discount any bias they might know about in reviewing an engagement, so it found the actual result surprising. The study found reviewers who had no knowledge of any ill feelings on the part of the audit manager were not significantly affected and reached judgments consistent with the audit evidence. However, those who received the same information but were aware of the audit manger’s angst were significantly influenced by it.

For example, among participants who reviewed judgments unfavorable to the client, meaning the $1.2 million writedown was proposed, reviewers with no knowledge of personal likes or dislikes recommended an average writedown of $183,103. Those who were told the controller was extremely unpleasant called for almost double that, or $357,333. “Assurances of client competence notwithstanding, reviewers made widely variant judgments that were apparently influenced by whether the preparer liked or disliked the controller,” the authors wrote.

In a subsequent experiment involving 40 experienced auditors, 38 said there was at least some chance that the auditor’s personal feelings toward clients would lead them to make more favorable or unfavorable judgments than warranted, and 27 of those auditors said the likelihood of such a scenario was better than 50 percent.

Hoffman says more research might be necessary to determine how to improve the review process to mitigate such effect. In the meantime, the audit profession should consider itself warned that the process might not be as effective as believed. "A little alarm bell should go off when personal feelings about client personnel come to light, prompting reviewers to consider what judgment the preparer would likely have reached based on the evidence in the work papers," Hoffman says.

The Public Company Accounting Oversight Board issued a new standard on engagement quality reviews in 2010 and called on firms to do a better job of adhering to it when inspection results were turning up too many errors.

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