Question

Upon adoption of the new revenue standard, a company wrestled with a growth versus net accounting policy judgement and ultimately rationalized that it should likely continue its current position unless there was a compelling reason in the guidance to change.

Identify one or more biases that could be at play, then explain.

Answer 1

Answer

Making interpretations that support preexisting beliefs (confirmation)

Confirmation bias is the tendency for decision-makers to seek or interpret evidence in ways that support preexisting beliefs or expectations. Accountants/management may exhibit this tendency when evaluating the strength of internal controls, selecting accounting standards, or estimating the probability of successfully defending a tax position in court.

The company decided to continue its current policy, when there was an evidence in front of them which said otherwise.

Overestimating abilities (overconfidence)

The overconfidence bias occurs when individuals overestimate their abilities to perform tasks or make accurate decisions. Overconfidence can manifest in other ways such as taking on too many projects, overpromising on deadlines, considering just one possibility when problem-solving, truncating or skipping information searches, and making snap judgments.

The company chose to continue with its current position and decided there was no compelling reason to change in the guidance. The company thought the guidance is not made compulsory ruling out other possibilites and making a snap judgement.