Question

Balance sheets and income statements are supposed to be objective assessments of the financial conditions of a company. But the accounting scandals of the last few years show that certain pressures may be put on accountants as they audit a company’s financial statements. Describe these pressures. To what extent do these pressures make the audit more subjective?

Answer 1

Considering the vast scale of recent accounting scandals and their devastating effects on workers and investors, it’s not surprising that the government and the public assume that the underlying problems are corruption and criminality—unethical accountants falsifying numbers to protect equally unethical clients. But that’s only a small part of the story. Serious accounting problems have long plagued corporate audits, routinely leading to substantial fines for accounting firms. Some of the errors, no doubt, are the result of fraud. But to attribute most errors to deliberate corruption would be to believe that the accounting profession is rife with crooks—a conclusion that anyone who has worked with accountants knows is untrue. The deeper, more pernicious problem with corporate auditing, as it’s currently practiced, is its vulnerability to unconscious bias. Because of the often subjective nature of accounting and the tight relationships between accounting firms and their clients, even the most honest and meticulous of auditors can unintentionally distort the numbers in ways that mask a company’s true financial status, thereby misleading investors, regulators, and sometimes management. Indeed, even seemingly egregious accounting scandals, such as Andersen’s audits of Enron, may have at their core a series of unconsciously biased judgments rather than a deliberate program of criminality.

Unlike conscious corruption, unconscious bias cannot be deterred by threats of jail time. Rooting out bias, or at least tempering its effects, will require more fundamental changes to the way accounting firms and their clients operate.