Tri Ramaraya Koroy, PhD, CPA

Presented at Saturday Student Club (SSC) – Program Studi Doktor

Ilmu Akuntansi (PSDIA) Universitas Udayana
26 February 2022
 Definition: Objective:
“an offspring from the union of accounting
and behavioral science; it represents the “to understand, explain, and predict
application of the method and outlook of human behavior in accounting
behavioral science to accounting situations or contexts.”
problems."

The Accounting Review (1974) "Report of the Committee on the Relationship of Behavioral Science and Accounting,"
Pages 127-139.
▪ Segment of accounting that attends to develop an
understanding of both cognitive (perceived) and
affective (emotional) elements of human behavior that
influence the decision‐making process in all
accounting contexts and settings.
▪ This special area of accounting addresses such
aspects as:
▪ human information‐processing behavior,
▪ judgment quality, accounting problems that are
created by users and providers of accounting
information
▪ accounting information users’ and producers’
decision‐making skills.
▪ Judging and deciding what to do can
involve seemingly simple tasks in some
circumstances,
▪ such as continuing to attend this webinar or • Cognitive aspects
choosing what to eat include the thought,
Judgment opinion, or evaluation
▪ But it also can involve larger life choices,
such as whom to marry or what subject to of a stimulus.
study in college.
▪ Research on judgment and decision making
within the field of psychology has been
devoted to unraveling the way humans
make their decisions on a day-to-day basis.
▪ In the traditional view, the decision-making • Choosing among
process is complex given that one must Decision alternative options.
analyze alternative options, estimate the
consequences of choosing each option, and
deal with conditions of uncertainty.
 Cognitive Functioning

System 1 System 2
• Our intuitive system, which is typically fast, • Reasoning that is slower, conscious, effortful,
automatic, effortless, implicit, and emotional. explicit, and logical.
• We make most decisions in life using this • Following the rational process:
system (which we called heuristics) and it is
quite sufficient, particularly when we are Perfectly define Identify all Accurately weigh
busier, more rushed, and when they have the problem criteria all of the criteria

more on their minds

• However, we are more prone to make
judgmental errors when use this system. Accurately
Know all relevant Accurately assess calculate and
alternatives each alternative choose the
alternative
 Judgments and decisions auditors make:

plan the amount

▪ Judgment and decision making (JDM) determine fraud search for and
and type of
risk factors obtain evidence
research in auditing is undertaken to evidence to collect
understand how individual and group
judgments and decisions in auditing determine the level
are made and how to improve those of professional review the work of make assessments
judgments. skepticism to others of internal control
exercise
▪ References to the need for judgments
are very common in auditing
standards and, in fact, the whole make assessments make assessments make assessments
of materiality of fair value of going concern
process of auditing is permeated by
professional judgment.
make evaluation of the reliance to be
sufficiency and placed on the work determine the audit
appropriateness of of internal auditors opinion
audit evidence and other experts.
evaluates the quality of auditor judgments.

attempts to describe how auditors make judgments and how these judgments are
affected by various factors.

tests theories of the cognitive processes that produce auditors’ judgments and
decisions, including the role of knowledge and memory in audit judgments.

develops and tests decision aids designed to overcome any deficiencies found in
research on auditor judgments.

(Libby, 1981; Trotman, 2014).

▪ The issues include:

The level of
The accuracy of
consensus
auditors’
between
judgments
auditors

the consistency due to the use of heuristics

the level of bias (simplified judgmental rules
of auditors’
in auditor including representations,
judgments
judgments availability, and anchoring
across time and adjustment).
 ▪ In fact, recent professional
publications (e.g., KPMG, 2011: 23)
information on outline potential biases in auditor
provides where judgments including those related to
improvements are anchoring, availability and
Understanding the necessary confirmation.
results of this
▪ For example, a confirmation bias is
research under what
where individuals preferentially collect
circumstances
decision aids are evidence to confirm rather than
likely to be useful. disconfirm their hypotheses (see Smith
and Kida, 1991 for other examples).
 Whether auditors combine
information cues
What information cues do On which of these cues do configurally or non-
▪ The research auditors use in making auditors place the most configurally (linearly) and
judgments? reliance; and under what circumstances
considers such do they process
questions as: configurally?

What factors affect the
reliance that auditors place
on information cues (e.g.
,source credibility)?
Is it information selection,
hypothesis generation or
information processing that Under what circumstances
has the most effect on do judgment biases occur?
auditors’ judgment
performance?

An understanding of the above factors

provides insights into explaining potential What factors determine
deficiencies in judgments and assists in the whether auditors’ judgments
are biased?
development of possible remedies.
▪ This research examines the role of
knowledge and memory in auditor
judgments including the differences
in knowledge structures between
experts and novices, and more
recently the role of industry
expertise.
▪ It considers the cognitive processes
through which knowledge is
incorporated into judgments.
Some of the questions addressed include:
What is the role of the
What knowledge is needed auditors’ task specific
to make different judgments knowledge and information
and when, how and how well processing in problem
is this knowledge acquired recognition, hypothesis
and later used? generation and information
search?
What factors affect auditor
memory for audit evidence
and what is the relationship
of memory to auditor
judgments?
(Libby, 1995)
 JDM PURPOSE 3: TESTING THEORIES OF THE
COGNITIVE PROCESSES WHICH PRODUCE AUDITOR
JUDGMENTS
▪ The benefits of understanding these
knowledge and memory differences
between experts and novices is to help
practitioners to develop training and new
decision aids to assist novices to make
judgments more like those of experts.
▪ It also provides insights into why particular
organizational arrangements (such as the
review process) are applied in particular
accounting settings (Libby and Luft, 1993;
Libby and Trotman, 1993).
▪ Overall, understanding cognitive processes
better allows us to answer ‘why’ and ‘how’
questions which are an important step in the
ultimate improvement of professional
(Libby and Luft, 1993; Libby and Trotman, 1993).
judgments.
 Changing the
Changing the
format of the
framing of the
Possible methods of improving decision information
question
making that have been addressed provided
include:

Using interacting
Providing
and nominal
feedback
groups
Overall, the ultimate aim of research on auditor
judgments is to improve judgments.
Consequently, this area of research has The
significant scope to impact the practice of Using decision decomposition of
auditing (see Bell and Wright, 1995; Cohen and aids how judgments
Knechel, 2013). are made
▪ Most JDM audit research has been conducted using experiments.
▪ Experiments involve the researcher providing appropriate background material to
participants, manipulating one or more independent variables and measuring the
effect on one or more dependent variables.
▪ Individuals or groups are randomly assigned to the treatments while other factors
are controlled (e.g., background information) or measured (e.g., experience of the
participants).

An experiment addresses the following key questions:

Thus, experiments are
under what how and why useful to see if and
whether there is circumstances is there is an effect
when there is an effect,
an effect; there an effect (e.g., cognitive
(i.e., when); processes). and to identify what
causes that effect.
 The Result of Hypothesis Testing
An Example of Hypothetical Experiment: 5
4,8

Current Proposed 4,5

4,3
Audit Audit 4,1
Method Method 4

Inexperienced
Auditors Cell 1 Cell 2
3,5

Experienced
Auditors Cell 3 Cell 4
3
2,8

2,5

Current Audit Method Proposed Audit Method

Inexperienced Auditors Experienced Auditors
They allow strong causal inferences to be made.

Used to separate out interrelated factors that coexist in the natural environment to
examine which of a number of potential factors cause a change in an auditor judgment

They have the ability to abstract and control other potentially influential variables.

Used to test the effects of conditions that do not presently exist in practice or exist but not in
sufficient volume to examine archivally (e.g., proposed new standards, new audit methods)
 Policy Heuristics and Knowledge
capturing bias and memory

Environmental Group
and motivation decision Decision aids
factors making
 ▪ The main issues addressed by policy
capturing research are:
▪ consensus among different auditors,
▪ the relative importance of individual
cues to auditors,
▪ the stability of auditor judgments over
time and the extent of self-insight
The aim of policy This is generally The relationships auditors have into their own judgment
capturing research is achieved by among the cues policies.
to develop a providing presented and the
mathematical participants with a judgments made are ▪ whether auditors combine information
representation of the series of judgment derived using configurally, that is, does an auditor’s
judgment policies of situations in which statistical methods reaction to one piece of information
auditors to determine various combinations such as ANOVA depend on the presence or absence of
judgment strategy of cues (i.e., (analysis of variance) other pieces of information.
(‘policy’). information) are to infer an
presented. individual’s judgment
strategy.
 These heuristics
The psychology
A number of decision reduce the cognitively
literature in the early
heuristics, which were complex task of
1970s suggested that
considered to be assessing
individuals do not
more accurate probabilities and
always act
descriptions of human predicting values to
normatively and that
judgments, were simpler judgmental
they often use a range
developed and operations. While
of heuristics (that is,
formulated by these heuristics can
simplified judgmental
Tversky and be useful, they can
rules) → System 1
Kahneman (1974). lead to severe and
Thinking
systematic errors
 The Representativeness
Heuristic
• When making a judgment
about an individual (or object
or event), people tend to look
for traits the individual may
have that correspond with
previously formed stereotypes.
• Events which are more
representative tend to be
judged as having an increased
likelihood of occurrence than
do less representative events.
• However, these judgments
often ignore relevant
information such as base rates,
reliability of data (Joyce and
Biddle, 1981) and source
credibility (Bamber, 1983).
The Anchoring And
Adjustment Heuristic
• In many situations individuals
make estimates by starting
from an initial value (e.g.,
suggested by the formulation
of the problem or by the result
of a partial computation) and
then adjusting this number to
yield a final answer.
• The adjustment from this
anchor, although it may be in
the appropriate direction, is
often insufficient.
The Availability Heuristic
• The frequency of certain
events occurring is impacted
by how easy it is for similar
events to be brought to mind.
• Experimental research has
shown that auditors use these
heuristics, but the effects were
often less than in general
psychology studies where
participations are not dealing
with professional decisions
(Smith and Kida, 1991).
▪ The fact that many general psychology
findings only hold under limited
circumstances when decision makers are
dealing with professional issues is
reasonably common within the audit
literature.
▪ Probably, it is because auditors, as
professionals, emphasize using System 2
Thinking.
 • Experience
• Memory
• Knowledge structure
• Managerial, technical and Knowledge Environment
problem-solving knowledge
• Industry specialist

Ability Motivation

Performance
The research on knowledge allows us to better understand
the knowledge structures of an expert auditor, and how that
knowledge is acquired.
In turn, this assists in the development of training and
decision aids which improve the performance of novices
(Libby and Luft, 1993)
 • The need for justification of
decisions
• Accountability
• Prior involvement in the audit
Knowledge Environment • Time pressure,
• Source credibility
• Precedents

Ability Motivation • Monetary incentives

• Efforts
• Auditors’ incentives
Performance
 Additional gains to the interacting
group related to the hierarchical
iterative nature of the review process.

Additional
interaction effect Audit Teams
Performance
The benefit from (the audit judgments
group decision Nominal Interacting made in a
making (i.e., a Group Groups hierarchical,
Performance Performance sequential and
diversification effect)
(Group members iterative audit review
(Group members
interact with each process)
combine their
judgments other)
Individual statistically and there
Performance is no interaction
between group
members)
▪ Studies on decision aids have examined
the performance of decision aids that
were developed to overcome the
deficiencies found in auditor judgments
in policy capturing research and
heuristics and biases research.
▪ A significant proportion of this research
addresses whether a particular decision
aid improves performance or not, how
this effect varies with environmental and
motivation issues and what are the
cognitive mechanisms leading to those
effects.
Audit Tasks
• Risk assessments (including the audit risk model and audit
planning),
• Analytical procedures and evidence evaluation,
• ‘Correction’ decisions
• Going concern judgments.
Interpersonal Interactions
• Auditor–client negotiations;
• Fraud brainstorming discussions;
• Auditors’ interactions with other parties including juror
decisions in matters concerning auditors.
• Relationships between auditors and the audit committee.
▪ Much of the current research arose Changing expectations of auditors and
because of changes in the audit changing audit standards have resulted in
environment include: greater attention to such fundamental
audit issues:

Audit quality Audit evidence

Decision aids related to fraud identification Materiality

and industry specialization,
Professional skepticism
New audit standards on internal control
over financial reporting (ICFR) Fraud judgment

Independence Audit reporting model

CONCLUDING REMARK
▪ “I expect a bright future ahead for
JDM research in auditing. There is no
shortage of important questions and
new researchers are well trained and
enthusiastic. Audit firms face
challenges and opportunities from
cost pressures, regulatory pressures,
new products and a changing
expectation from society. The
opportunity is there for greater
cooperation between practitioners and
researchers in addressing the
important issues”
▪ (Trotman, 2014).