The Effects Of Hindsight Bias On Experienced And Inexperienced Auditors' Relevance Ratings Of Adverse Factors Versus Mitigating Factors

Abstract

Hindsight bias is the tendency for individuals who have been provided with the outcome of an uncertain event to systematically overstate their abilities to have predicted that outcome in foresight. Individuals also rate cues supporting this known outcome as more relevant than the cues supporting alternative outcomes. In an experiment using the case data of a troubled company, the current study explores the effects of outcome information on both experienced and inexperienced auditors' going-concern judgments (i.e., whether or not they believed the company would succeed or fail within one year) and the extent to which the outcome information influences the auditors' relevance ratings of the case cues and whether this effect is greater for experienced auditors as compared to inexperienced auditors. The current study predicts that in this task, auditors' implicit knowledge of the differential costs associated with alternative audit decision errors, coupled with the nature of auditor training, will influence their cognitive processing, leading to results that differ from prior psychological studies in a systematic manner.

Specifically, the current study predicted and found that despite the outcome information provided, both experienced and inexperienced auditors rated failure cues (i.e., adverse factors) as more relevant than success cues (i.e., mitigating factors); the effect was not greater for experienced auditors. However, the current study also predicted and found that due to hindsight bias, auditors, who are provided with the failure outcome, were more likely to rate the adverse factors as more relevant than the mitigating factors than did the auditors who were not provided with outcome information.