Unconscious bias: The auditing profession’s big flaw - PART 1

On 12 January 2006, President Thabo Mbeki, signed into law the Auditing Profession Act 26 of 2005, addressing the conduct of registered auditors, a response to the accounting scandals that had begun to erode confidence in South African business. This all-embracing piece of legislation flew through parliament in record time. Given the enormous scale of the accounting scandals globally and their devastating effects on workers and investors, it's was not unexpected that the South African government and the public assumed that the underlying problems were as a result of auditors protecting their unethical clients. As George Bush proclaimed when signing the Sarbanes-Oxley Act of 2002 into law “The era of low standards and false profits is over”. Accounting scandals have over a long period of time plagued the auditing profession leading to the closure of a large “black” auditing firm, which impacted the very essence of the transformation process in South Africa, to the removal of auditor’s from the “auditor’s role” and to substantial fines for the auditing profession. However, to attribute most of the problem to the auditing profession would be to believe that the auditing profession is rife with crooks a conclusion that anyone who has worked with auditors knows is untrue. The deeper more harmful but subtle problem with auditing, is its vulnerability to unconscious bias. Due to the frequent subjective nature of the interpretation of financial reporting standards and the incestuous relationships between audit firms and their clients, even though an audit is properly planned and performed, auditors can unemotionally interfere with a company’s true financial health thereby misleading investors, regulators, and management. Unconscious bias cannot be deterred by the constant change to the codes of professional conduct and threats of substantial fines. Rooting out unconscious bias will require more fundamental changes to the way auditing firms and their clients operate. If the South African government is really interested in restoring trust in the auditing profession in South Africa they will have to go beyond the provisions of the Auditing Profession Act. The necessary “sea change” will have to recognise the existence of bias and temper its effects.