Harvard Professor: Audit Fraud Not the Real Problem

Cambridge, Mass. (Dec. 4, 2002) – Although requiring audit firms to check each other’s work might prove useful in reducing outright fraud, it won’t address the “unconscious bias” of auditors dependent on clients for non-audit work, a new study has found.

Harvard Business School professor Max H. Bazerman and some colleagues conducted psychological research which they claim shows that when auditors want to reach a certain conclusion, their independence is compromised. In an experiment with full-time auditors at one of the Big Four accounting firms, Bazerman said he found that accountants were much more likely to approve a hypothetical company’s questionable accounting proposals when told the company was their client.

“In real life, auditors who want to be rehired by the client firm, sell other services to the client and even seek employment with the client cannot disregard their own self-interest, even when they try hard to do so. Even the most honest auditors may be biased in favor of their clients. Forensic audits won't change this fact,” Bazeman said in an opinion piece in USA Today.

Bazemen made recommendations that go beyond the Sarbanes-Oxley provisions of rotating lead auditors every five years, suggesting that entire auditing firm rotation is necessary. He added that he believes auditing firms must all sever their consulting arms and that individual auditors should be prohibited from seeking jobs with the companies they audit.

“Without these major changes, future catastrophes are likely,” he said.

Related Articles

Back to top button