Cognitive biases can threaten any individual’s capacity to make good decisions. For internal auditors, audit interviews pose unique settings in which cognitive biases can threaten their professional skepticism. Interviews are conducted to obtain important information in a variety of contexts, including operational audits, compliance testing, and IT audits. Although interviews rarely, if ever, constitute sufficient audit evidence on which to base a conclusion, it is still important that internal auditors maintain their professional skepticism while conducting them. If an internal auditor allows a cognitive bias to impede his or her sense of professional skepticism in an interview, the quality of planning and of subsequent audit procedures is reduced. As a result, extra time is spent following up on unreliable information or, worse, important information is missed. Three biases, in particular, may affect internal auditors’ professional skepticism: truth bias, confirmation bias, and the halo effect.
The assumption that others are telling the truth is necessary on a day-to-day basis to facilitate routine social interaction. If one tried to verify the truthfulness of every statement made by others, routine communication would grind to a halt. However, the tendency to believe others are providing truthful information may prevent internal auditors from employing appropriate levels of professional skepticism, which entails, at a minimum, a belief that sources of information are neither truthful nor untruthful. Truth bias has been documented repeatedly in deception detection research and seems to be a major factor limiting people’s ability to detect false statements in a variety of settings. The assumption of truthfulness is a common bias that may impede effective decision-making and, by extension, professional skepticism.
To combat truth bias, internal auditors should remain aware that the profession requires a questioning mind. By definition, truth bias involves a deficient use of questions and additional procedures just when they are needed most. When relying on information obtained in an interview, it is imperative that internal auditors ask themselves whether they employed a critical mindset in assessing the information they received, in posing follow-up questions, and in obtaining corroborating information. If not, then truth bias may have impeded professional skepticism (see “Description as Truth” below). The findings in Norah Dunbar’s, Artemio Ramirez Jr.’s, and Judee Burgoon’s Winter 2003
Communication Reports article, “The Effects of Participation on the Ability to Judge Deceit,” suggest that interviewers should work in pairs, with one interviewer performing the questioning, while the other member of the team observes. Dunbar and her co-authors find that the observer in such scenarios is better able to judge deceit on the part of the interviewee.
Description as Truth
During an internal audit team’s first day on site at a parts distribution center, it requests a walk-through of the facility to gain an understanding of the intake, storage, inventory, and shipment of parts. A floor manager walks the team members through the facility explaining and answering their questions about each process. Based on the floor manager’s explanations and answers, the team identifies the high-risk processes and develops testing procedures for those processes. On the third day of the visit, the auditors begin testing the inventory process and note that each test is failing. During the results validation meeting with the general manager, the team learns the inventory processes described by the floor manager were incorrect. Because the auditors accepted the floor manager’s description as the truth, they had to recreate and reperform the inventory testing. In hindsight, professional skepticism would dictate that the internal audit team had no basis on which to trust the floor manager’s explanations as credible. Before identifying high-risk processes and designing and carrying out tests, the team should have taken additional steps, such as corroborating the explanations with documented evidence of transactions. Asking themselves if they were comfortable basing several days of work solely on the explanations of one person who they had just met could have saved the team significant time and effort.
When one seeks out or gives too much weight to information consistent with a specific belief, that is confirmation bias at work. It may influence questions asked and how the answers received during an interview are processed. Internal auditors conducting interviews can certainly fall victim to confirmation bias by seeking out information consistent with a specific belief during those interviews. Often, this involves seeking out information that processes are operating as they should. Confirmation bias has the potential to compromise an internal auditor’s professional skepticism by steering the auditor toward a particular conclusion, regardless of the facts.
In their June 2011
Harvard Business Review article, “The Big Idea: Before You Make That Big Decision…” Daniel Kahneman, Dan Lovallo, and Olivier Sibony suggest managers combat confirmation bias by asking teams that are making recommendations whether credible alternatives to their recommendations have been considered. Interviewers should engage in a similar process.
To combat confirmation bias in an interview setting, internal auditors should enter with a conscious openness to learning about or uncovering information that is inconsistent with their prior beliefs. After the interview, they should ask themselves whether they learned anything that was contrary to their prior beliefs and whether they missed any opportunities to ask follow-up questions that would have uncovered such information. In other words, as Kahneman and his co-authors recommend, consider credible alternatives. Such an approach is consistent with professional skepticism. If the auditor in the “Seeking Information as Confirmation” example on this page had entered, conducted, and reflected upon her interview with such an attitude, she would have been more likely to focus on the exception that was apparent in the business finance manager’s response.
Seeking Information as Confirmation
An inexperienced internal auditor meets with a business finance manager to understand how payments are received from clients and processed. In preparation for the interview, the auditor creates an agenda containing a list of questions. During the interview the auditor asks, “What do you do with checks you receive from clients?” The business finance manager replies, “I deposit most of the checks into the company account.” Without hesitation, the auditor asks the next question on the agenda. She likely has a bias toward finding that the checks are all deposited in the correct bank account. By ignoring the phrase “most of the checks,” the auditor fails to detect that the business finance manager is depositing some checks in inappropriate accounts. In fact, during the course of the audit, it becomes apparent that the finance manager and other persons are depositing some of the checks in their manager’s personal account for department parties and outings. The account owner and the persons making the deposits are ultimately terminated. By seeking out information consistent with what she knew should happen, the internal auditor who conducted the interview initially missed the fact that some checks were processed inappropriately, increasing the possibility that the audit could have missed this fact entirely.
The Halo Effect
In the book
Thinking Fast and Slow, author Daniel Kahneman describes the
halo effect as the “tendency to like (or dislike) everything about a person — including things you have not observed.” Internal auditors should be aware of the biases created by the halo effect. If they like someone or view him or her favorably, they might tend to weigh their opinions and estimates on all topics more heavily than they should. On the other hand, if they do not like a person, they may have a bias in the opposite direction. Either way, they are checking their professional skepticism at the door.
Kahneman suggests fighting the biases created by the halo effect by verifying information using independent sources. In “The Weight of Credentials” example below, had the halo effect not compromised the auditors’ professional skepticism, they might have been able to corroborate the information provided by the gemologist with independent sources. Such sources should have included additional interviews, as well as documentation. By taking such steps, they could have identified the error instead of relying on the statements from someone perceived as having a halo. There were likely others involved in the processes described by the gemologist who could have discredited his statements. Although there is no guarantee the auditors would have detected the gemologist’s scheme if they had sought out independent sources, they certainly would have increased their chances of detecting information that would have prompted them to take additional steps to further investigate the processes.
The Weight of Credentials
An internal audit team was auditing the jewelry return process at a merchandise return center. When the team inquired about the smelting and gemstone procedures, it was referred to the director of jewelry, who also was a licensed gemologist. During the interview, the gemologist was knowledgeable, friendly, and eager to share everything that was working well and everything needing to be improved. As a result, the team viewed him quite favorably. Although some of his process descriptions did not make sense, the team members took the gemologist’s descriptions as accurate because he appeared happy they were there to help him fix all of his processes and, after all, he was a licensed gemologist. Nine months after the audit, the gemologist was arrested for selling gemstones to overseas buyers and depositing the money into his personal account. The auditors should have gathered additional evidence to corroborate the gemologist’s explanations about the jewelry return process, but they were blinded by his credentials and knowledge of jewels. They fell prey to the halo effect.
Knowledge Is Power
There are several concrete steps auditors can take to fight the negative effects cognitive biases have on audit interviews. In addition to conducting interviews in pairs, auditors should ask follow-up questions. This can help auditors gain valuable information during interviews. Next, they should obtain corroborating interview evidence by speaking to multiple individuals separately, rather than relying on the sole verbal representations of one person. Finally, and most importantly, auditors should not rely only on evidence gained from interviews during audit planning or testing. They should obtain corroborating evidence by walking through transaction processes or by testing transactions using documented evidence.
Professional skepticism is vital to an internal auditor’s mindset, whether he or she is gathering initial information to plan an audit or concluding on audit findings. Cognitive biases — such as truth bias, confirmation bias, and the halo effect — can compromise an internal auditor’s professional skepticism. When this happens, it can lead to an overreliance on oral evidence, misinterpretation of answers received during audit interviews, and failed audits. Being aware of cognitive biases and the importance of professional skepticism can help internal auditors guard against these outcomes.
Cliff Nuxoll, CIA, CFE, ACDA, internal audit manager at Arthur J. Gallagher and Co. in Rolling Meadow, Ill., contributed to this article.