The Effects Of Hindsight Bias On Auditors Confidence In Going-Concern Judgments And On The Audit Opinion Decision

Abstract

This paper examines the extent to which hindsight bias influences auditors confidence in their going-concern judgments and the resulting audit opinion decision. According to auditing standards, auditors are required to determine if substantial doubt exists regarding an audit clients likelihood of continuing as a going concern for one year from the date of the financial statements being audited. If substantial doubt does exist, an unqualified opinion modified with an explanatory paragraph describing the going-concern issue is required. Prior research indicates that auditors are prone to hindsight bias when making going-concern judgments. Hindsight bias is the tendency for individuals who have been provided the outcome of an event to overstate their abilities to have predicted that outcome in foresight. Prior research assumes that the presence of hindsight bias creates overconfidence and that this overconfidence will influence the audit opinion decision and will adversely affect the accuracy of subsequent probability judgments made in foresight. This assumption has never been tested, however, and non-hindsight studies found in the confidence literature suggest that the assumption might not hold true for experienced professionals, such as auditors. Using an experimental methodology, this study finds that auditors are prone to hindsight bias, but finds no evidence that this bias leads auditors to be overconfident in their going-concern judgments, nor does the bias influence their opinion decisions.