Was he biased because of the incentive to produce a more positive report?


Was he biased because of the incentive to produce a more positive report?

Coopers Lybrand, Phar-Mor’s auditors, failed to detect financial manipulations that resulted in $985 million in earnings overstatements over a three-year period. Coopers Lybrand was found liable.

There was a particular partner relevant to the story by the name of Gregory Finerty, and one question is was he dishonest?

And without tapping into his mind I would argue that it is impossible to know for sure whether or not a specific individual was being dishonest in terms of his representation of his own judgment

What Professor Loewenstein’s research does suggest is that under the current system that governs the auditing practice it’s not reasonable to expect that an independent audit was possible in that context or in many other contextsMISSIONER CAREY: Would that be because in this particular instance Mr. Finerty had a motive to be dishonest or a motive to be biased in the outcome he sought?

MR. BAZERMAN: He had benefit, possible benefit in presenting a more positive picture of Phar-Mor. And I’mgoing to assume that Mr. Finerty is an honest man. I do not know him.

What Professor Loewenstein’s research suggests is once he has the incentive of additional work, once he has the incentive of maintaining the client, the possibility of true independence, as the SEC would want, is no longer possible.

And there are at least three direct challenges to this independence. One of them the SEC is currently you can try these out working on, and that is the investor issue.

I believe that that’s quite possibly true, but what the evidence would suggest is that since Price Waterhouse Coopers’ auditors are human, once they have an incentive it’s not possible for them to be purely objective.

Much like the plaintiffs and the defendants in Professor Loewenstein’s studies, it’s not possible to have purely objective judgment when you have a strong incentive in the audit in a particular form.

Similarly, with the issue of consulting services,once a firm has a strong incentive to maintain a positive consulting relationship, as Mr. Bogle was expressing in the last session, it’s no longer possible for their audit to be completely independent and unbiased.

And finally, as long as auditing firms are hired by their clients who can hire and fire and negotiate with them at will, the possibility of true independence no longer exists because a negative report has negative implications for the auditing firm as well.

So we see three conditions, one of which the Commission has already addressed, one of which it’s thinking about addressing, and the issue of the fact that auditing firms are hired by their client is something that we haven’t been reading very much about, and I would encourage, in fact, should be on the table.

Now, I’ve been here since a little after 1 o’clock, and you’ve asked a number of folks about the issue of is there any episode in which we know that an audit has been tainted because of one of these issues, most commonly the issue of consulting services.

And no one has come up with an example, and here’s an easy prediction

If you wait another 15 years, you still won’t get an example. The reason why is you can’t. When we have a biased audit, there are too many factors going on to know that it was the consulting services that, in fact, werethe main cause creating bias in a human’s judgment.

We can’t observe the judgment being affected, so we can’t get comprehensive, clear evidence in any single case. You could also ask the question is there any evidence that cigarettes have killed any specific person.


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