If auditors won’t audit, mandatory rotation won’t help. Part 2

I started a discussion here about whether the halo effect on auditors is so strong that mandatory auditor rotation is needed to get good audits.

Let’s take two side trips. First, to look at one other way we can make bad decisions.  Second, I’ll ponder how the halo effect could come into play in other areas.

Another danger – making decisions when hungry

There are lots of things than can lead to poor judgment in addition to the halo effect. One of many outlined in Thinking, Fast and Slow is making decisions when your body is running low on glucose – in other words, its time to eat.

Mr. Kahneman calls this the depletion effect.

A disturbing demonstration of depletion effects in judgment was recently reported in the Proceedings of the National Academy of Sciences. The unwitting participants in the study were eight parole judges inIsrael. They spend entire days reviewing applications for parole. The cases are presented in random order, and the judges spend little time on each one, an average of 6 minutes. (The default decision is denial of parole; only 35% of requests are approved. The exact time of each decision is recorded, and the times of the judges’ three food breaks—morning break, lunch, and afternoon break—during the day are recorded as well.) The authors of the study plotted the proportion of approved requests against the time since the last food break. The proportion spikes after each meal, when about 65% of requests are granted. During the two hours or so until the judges’ next feeding, the approval rate drops steadily, to about zero just before the meal. As you might expect, this is an unwelcome result and the authors carefully checked many alternative explanations. The best possible account of the data provides bad news: tired and hungry judges tend to fall back on the easier default position of denying requests for parole. Both fatigue and hunger probably play a role.

Kahneman, Daniel (2011-10-25). Thinking, Fast and Slow (Kindle Locations 774-783). Macmillan. Kindle Edition.

Oh dear. Your chance of parole is 65% if the judges read your file right after lunch and near 0% if they read it before lunch.

Lesson learned for auditors – hold those critical judgment calls until after lunch.

Lesson learned for judges – you figure it out – I have enough to deal with trying to make good decisions in my company.

Oh, time for a snack.

Halo effect in fields other than auditing

Let’s expand the halo discussion to other areas. 

• Suppose journalists are in danger of a negative halo effect when they listen to yet another politician deny something they are accused of because the last 20 or 50 politicians the journalist covered were crooked? 
• Suppose local cops or federal investigators are at risk of a negative halo effect in their next interview because the last 100 interviews were with crooks who confessed or went to jail after being convicted at trial?  Innocent people might be in jail if you think the answer to that question is yes.
• Suppose tax attorneys think the next inexperienced IRS auditor they deal with won’t know the tax law because 40 of the last 50 arguments they had with an IRS auditor were because the agent didn’t have a detailed knowledge about the specific regulations in dispute?
• Suppose bloggers are in danger of assuming the next fraud or financial disaster is the fault of the auditors since the last dozen situations they researched involved some failure on the part of the CPA?
• Suppose CPAs are at risk of the halo effect over the name of a writer and are therefore likely to enjoy/despise the next article on IFRS they read because they have decided the author is brilliant/clueless?

Yeah, the halo effect applies to a lot of situations.

Is there a danger for auditors?  You bet.  Just like everyone else that uses judgment.

Next post – some ways I see the design of the audit process working to reduce the halo effect.