Auditors' Judgment Errors When Working on Multiple Tasks and in Multiple Client Environments: A Research Summary and Practice Implications Free

The pervasive reality for auditors is that they often are simultaneously working on multiple tasks and even multiple clients in the same work sessions. Auditors may work on multiple clients in a single, uninterrupted work session with little time elapsed between them. In fact, data indicate that auditors deal with issues related to two or more audit clients in 75 percent of their work sessions and on a single client in just 25 percent (Bhattacharjee et al. 2007). Research reveals that an important consequence of this audit reality is that working on multiple audit tasks and clients, either simultaneously or in the same work session, can cause auditors to make certain types of information processing and memory-related errors. In particular, research indicates that, when working in such environments, auditors have a tendency to carry over information from a prior audit task or client and inappropriately use it in an audit judgment for a current task or client. It is important to note that, while it often is necessary and functional for auditors to carry the output of one task over as an input to a subsequent task, our focus is on research concerning situations in which the prior output should not be used as an input to the current task.

The purpose of this paper is to summarize the results and practice implications associated with three research studies that have examined auditors' judgment errors when working on multiple tasks and in multiple client environments. Our objective in this review is twofold. The first goal is to synthesize these findings to enhance auditor awareness of these potential problems and their implications for audit practice. We believe that merely making auditors aware of the potential for such errors will play a very important role in minimizing the likelihood of their occurrence. Of equal importance, our second goal is to stimulate interest on the part of audit researchers to investigate tools and techniques that also will help to mitigate the occurrence of such errors.

The first study we discuss, O'Donnell and Schultz (2005), addresses biases that can occur when auditors perform multiple audit tasks for the same client sequentially one after the other. We then discuss two research studies (Lindberg and Maletta 2003; Bhattacharjee et al. 2007) that examine issues related to auditors working on two different audit clients sequentially. All three studies reveal the potential for auditors to inappropriately carry over information, from either prior tasks or prior clients to current tasks, when making multiple decisions one after the other. Ignored, these “carryover” errors can have significant implications for auditor decision-making and, consequently, on the overall effectiveness and efficiency of the audit process.

Several firms require auditors to first conduct a strategic assessment of the client's business model, during which auditors document and assess strategic and business risks. This holistic appraisal can help auditors recognize business conditions that impact audit risk across a variety of dimensions. Based on this risk assessment, auditors plan and execute audit procedures. However, research in psychology and on performance evaluations has demonstrated that evaluative judgments based on holistic characteristics can create a halo effect that influences subsequent judgments about detailed performance measures, even when the holistic judgment is not related to the evaluation of the detailed metrics (Nisbett and Wilson 1977; Murphy et al. 1993). For example, research has shown that rendering a favorable holistic evaluation can cause an individual to provide a positive assessment for information related to detailed performance measures, even when the detailed performance measures may convey less than positive information (Finucane et al. 2000).

Based on this research, O'Donnell and Schultz (2005) predicted that if auditors rendered a favorable judgment about the strategic viability of a client's business model, then it would lead them to unduly disregard analytical evidence of inconsistent fluctuations in the client's cost of sales, even when the holistic assessment had no direct implications for the more detailed, account-level, cost-of-sales evidence. The authors conducted a study in which auditors were divided into four groups based on (1) whether they conducted the strategic risk assessment before or after the analytical procedures, and (2) whether the account-level task indicated inconsistent or consistent information. The authors provided all auditors with background information, financial statements, control risk assessments, and industry data regarding a hypothetical client. Two groups of auditors were initially provided key performance indicators that were suggestive of favorable strategic viability and asked to make an assessment that the company would be able to execute the strategy successfully. Then, these auditors conducted an account-level task where they analyzed information about the client's operations, completed analytical procedures, and provided a risk assessment for cost of sales. For one group of auditors, the account-level case information was indicative of inconsistent fluctuations, while for the other group the fluctuations were consistent. To determine if the strategic assessment would impact account-level task assessments, two additional comparison groups of auditors were given the tasks in reverse order. These comparison groups of auditors first provided the account-level analytical procedures risk assessment and then conducted the strategic assessment. Comparing the analytical procedures risk assessment between the auditors who performed the strategic risk assessment before or after they perform the analytical procedures determined the effects of strategic assessments on account-level tasks. The authors expected the differences between account-level risk assessments, in the presence versus absence of inconsistent fluctuations, to be less for auditors who performed the strategic assessment before analytical procedures than for auditors not performing the strategic assessment before analytical procedures.

The results show that, regardless of when they perform the strategic assessment indicating favorable strategic viability, auditors' account-level risk assessments were the same when there were no inconsistent fluctuations in the clients' cost of sales. However, when the client had an inconsistent fluctuation in cost of sales, auditors who performed the favorable strategic assessment first assigned an average risk assessment that was lower than that of auditors that performed the strategic assessment after the sales analysis. These results are important because the experiment was designed such that the strategic risk assessment had no direct implications for the account-level analytical procedures task for cost of sales. A second experiment demonstrated that, even when strategic risk assessments were inherited from an audit partner, the assessments altered auditors' tolerances for expected fluctuations and influenced judgments about the risk associated with account-level changes. These findings suggest that favorable risk assessments during the initial phases of the audit may cause auditors to disregard unfavorable evidence in subsequent audit tasks.

Some audit firms believe that a strategic assessment of the client's business can help identify important risk factors. O'Donnell and Schultz (2005) show that, given complexity, time pressures, and the multi-tasking nature of the audit environment, global assessments can inadvertently bias auditors' subsequent judgments. Specifically, the overall perspective acquired during the strategic risk assessment stage can alter auditors' tolerances for inconsistent fluctuations in account-level evidence.

Lindberg and Maletta (2003) examined the extent to which working in multiple client audit environments creates the potential for auditors to commit memory-related errors. The authors argue that, given the magnitude of evidence typically involved in an audit examination, auditors generally rely on their memories in making audit judgments and decisions. Lindberg and Maletta (2003) examined memory-conjunction errors, which are errors that occur when memories associated with one event are incorrectly attributed to another. For example, a memory-conjunction error would occur if an auditor mistakenly attributes audit evidence from one audit client to another when recalling information from memory.

Lindberg and Maletta (2003) conducted an experiment in which actual auditors were asked to read inventory memorandums for two hypothetical companies and make a series of audit and memory-related decisions. The memos provided brief descriptions of the results of audit work performed on the inventory accounts of the two companies. Three cases were developed depicting (1) a company with strong controls in the inventory area, (2) a company with relatively weak inventory controls, or (3) a company with neither strong nor weak controls (a neutral company). To determine the impact of working on multiple clients on auditors' memories, auditors received two inventory cases in one of the following combinations: a strong/weak set of companies, a strong/neutral set, or a weak/neutral set. The order of the presentation was randomized among the participants to ensure that the results were not attributable to order effects. After reviewing the memos, the auditors were asked to assess the likelihood of material errors from memory and indicate whether certain information items were contained in the evidence related to each specific company. That is, the authors wanted to determine if auditors would inaccurately associate audit evidence with a target client rather than the source client to which it was actually associated. The authors expected that auditors would inaccurately identify information from the source client as being associated with the target client, particularly if the evidence from the source client was consistent with the target client (e.g., the target client had strong controls and the evidence from the source client was indicative of strong controls). The authors also expected that these results would be exacerbated if the evidence from the source client (e.g., evidence indicating strong controls) was not consistent with the source client's overall internal controls (e.g., source client had overall weak internal controls).

Consistent with their expectations, Lindberg and Maletta (2003) found that auditors are generally susceptible to memory-conjunction errors. Their results reveal that, on average, auditors inaccurately identified evidence from the source audit client as being associated with the target client 40 percent of the time. They also found that the extent to which the evidence from the source client was consistent with the target client affected these errors. Specifically, when an information item was consistent with the target client (i.e., the target client had strong inventory controls and evidence for the source client was indicative of strong controls), the likelihood of the item being attributed to the target client was significantly higher than when the item was inconsistent with the target client (48 versus 32 percent). The consistency of the information with the source client also affected auditors' memory errors. Specifically, when the information item was not consistent with the source client, the likelihood of it being mistakenly attributed to the target client was found to be significantly higher than when the information item was consistent. For example, if the source client had overall weak controls, and an evidence item for the source client was indicative of strong controls, then auditors were more likely to associate this evidence item with a strong target client than if the source client had weak controls.

Lindberg and Maletta (2003) also found that, when the inherent risk associated with the audit clients was relatively high, auditors' memory errors increased. That is, when the audit evidence was consistent with the target client and inconsistent with the source client, the average rate at which auditors committed errors was significantly higher when inherent risk was high versus low (69 versus 47 percent). Consequently, the results show that increases in risk can actually exacerbate memory errors, particularly those involving multiple clients and memory-conjunction errors.

In summary, Lindberg and Maletta's (2003) results indicate that addressing multiple audit clients simultaneously can cause memory-conjunction errors that have the potential to seriously affect the audit. For example, if such errors result in auditors incorrectly associating positive audit evidence from one client to a subsequent client, a more positive impression of the client may be developed than is warranted, threatening the overall effectiveness of the audit. On the other hand, if auditors recall more negative information than is accurate, unnecessary, additional audit work may be performed, resulting in audit inefficiencies.

Bhattacharjee et al. (2007) examine how contrast effects impact auditor decision-making in a multiple client audit setting. Contrast effects occur when individuals do not independently process information when performing evaluation tasks (Slovic and MacPhillamy 1974). Instead, they use similar information from, for example, a previous task as a basis against which to compare information for the current judgment task. The result is that the outcome of the information evaluation for the current task will be affected by how it compares to the information in the prior task (Manis et al. 1988; Higgins 1996).

To determine the potential for such effects, Bhattacharjee et al. (2007) examined whether auditors' judgments regarding a current client are affected by their immediate, prior exposure to and work on similar audit judgments for a different audit client. The study also examines whether exposure to a prior client will affect judgments on a current client for unrelated tasks. Given the propensity for individuals to rely on comparisons, the authors argue that for evaluative decisions where no immediate comparative information is available, decision-makers will incorporate information from the most readily available, related comparison. As such, this study examines how comparisons of judgments on tasks for a prior client can influence judgments for a current client for related tasks where the data are similar and unrelated tasks where the data are not similar. In so doing, they investigate how comparisons to a prior client can create spillover errors for numerous tasks for the current client.

In the study, practicing auditors were randomly divided into three treatment conditions involving the evaluation of the strength of a client's internal audit department. The current client, which was indicative of a moderate-quality internal audit department, was paired with either a prior client with a strong internal audit department, a prior client with a weak internal audit department, or no prior client. The strong (weak) prior client version of the case contained information indicative of a strong (weak) internal audit department for the prior client. The current client version of the case contained information indicating a moderate-quality internal audit department. The auditors were required to evaluate the strength of the internal audit department of the prior client (in two of the three conditions) and then the current client. This evaluation was followed by an evaluation of the current client's inventory to assess the potential obsolescence risk of one of its items and the extent of testing in the inventory area. After each assessment, auditors were required to document the evidence that influenced their assessments. The authors predicted that auditors who received information on a prior client with a strong (weak) internal audit department would rate the current moderate client as having a lower- (higher)-quality internal audit department. In addition, the authors predicted that these contrast effects would spillover to an inventory obsolescence task for the current client. Specifically, they expected that auditors who received information on a prior client with a strong (weak) internal audit department would rate the risk of obsolescence higher (lower) for the current client.

The results indicate that auditors are highly susceptible to contrast effects when making internal audit quality assessments. Auditors assessing the internal audit quality of a current client after evaluating a prior strong internal audit department rated the quality of the current client's internal audit department as being significantly lower in quality (48 on a 100 point scale that ranges from 0, very low, to 100, very high) than when auditors first evaluated a client with a weak internal audit department (71) or no prior client (57). The results also show that auditors documented a significantly greater (smaller) number of positive (negative) evidence items when the prior client was negative than when the prior client was positive, even though the information being evaluated was for the same moderate current client. Thus, the same audit information for the current client was evaluated differently depending on the quality of the prior client.

The findings also reveal that contrast effects from auditors' initial internal audit evaluations spilled over to the subsequent, inventory obsolescence judgments. The more favorable that the current client's internal audit department compares to the prior client, the lower (higher) the auditors' assessments of inventory obsolescence risk for the current client and the more positive (negative) the information documented. Thus, prior client information not only directly affected auditors' judgments for similar tasks on the current client, but also indirectly (and similarly) affected subsequent unrelated audit tasks. From a practice perspective, Bhattacharjee et al. (2007) show that recognizing the potential for contrast effects is critical to accounting judgment processes in multiple client environments because the information associated with a given audit task will be evaluated differently depending on the nature of the information from a prior client. The results also demonstrate that the impact of these errors can have pervasive implications for the audit as subsequent, unrelated tasks also can be impacted.

The research summarized in this paper reveals the potential for auditors to carry over information, from either prior tasks or prior clients to current tasks, when making multiple decisions within relatively short time periods. Given that information is becoming more, rather than less, standardized across audits, such carryover effects appear to be somewhat inevitable. While these carryover effects may not always negatively impact audit effectiveness or efficiency, the research summarized indicates that the potential does exist for these effects to have significant negative consequences. Consequently, a critical first step is for auditors to be made aware of the potential for information from a prior task to inadvertently impact a current task, and ultimately how it could impact the effectiveness and efficiency of the audit process.

The research studies discussed in this paper should be of interest to practitioners because they suggest that important tasks performed on every audit are particularly susceptible to these errors, and that these errors may have far-reaching implications for other parts of the audit. Consider O'Donnell and Schultz's (2005) paper that addresses strategic risk assessments, which is a critical audit planning task. These assessments are functional because they allow auditors to plan account-level tests based on observed strategic weaknesses. However, the results show that auditors need to be aware of the potential for the inappropriate carryover of effects from unrelated holistic decisions into subsequent audit judgment tasks.

In the second study, Lindberg and Maletta (2003) demonstrate that information in memory from a prior client can be incorrectly carried over and associated with a current client. Findings from this study have potential implications for improving our understanding of auditor expertise. Research in psychology and auditing shows that, through training and professional experience, auditors, like other professionals, develop mental frameworks to assist them in collecting, organizing, and interpreting information. Similar to stereotypes, these frameworks provide auditors with expectations regarding the characteristics that clients, in certain categories or industries, will possess. Prior research has shown that as auditors gain experience, these frameworks become better developed. It is these mental frameworks that actually cause auditors to carry over information from a prior client or prior task to a current client task. The more the information items from the prior client fit the mental framework that an auditor has for the current client, the greater the likelihood that the misattribution of information will occur. In addition, the more developed the auditor's mental framework, the greater the susceptibility to memory errors. Thus, while experience provides auditors significant advantages in the audit environment, it also has the potential to cause errors. Stated differently, enhanced mental frameworks, which are critical to making good decisions, also can play a dysfunctional role in the audit process.

Bhattacharjee et al. (2007) show that, like other expert decision-makers, auditors are inclined to recall information against which they can compare current information to meaningfully evaluate whether the information is favorable or unfavorable. However, in the search for such comparative data, auditors contrasted current client information with data from a previous client. Further, the outcomes of these inappropriate comparisons also were used as inputs in subsequent decision tasks, thus exacerbating the impact of the inappropriate comparisons. This study reveals that the effectiveness and efficiency ramifications of contrast effects occur early in the audit process and may be far reaching.

Given these findings, auditing firms can benefit from additional research studies that examine the exact conditions under which the observed effects will be increased or decreased. For example, studies need to investigate if the carryover effects are reduced or exacerbated by working on two different clients in the two different clients' offices, or if the auditor works on both engagements while at one client's office. What would the effects be if an auditor spends all day on one client and then the next on another? Finding when these carryover effects are the most salient can help firms better design auditors' workflow arrangements. In addition, researchers can also try and assist in developing interventions and/or training techniques that will serve to minimize the frequency of these carryover effects. Different techniques can be examined by which auditors can clear their mind in-between working on different clients. For example, this could involve performing administrative tasks, such as completing travel reimbursement forms, to clear the auditor's mental palette before moving on to another client.

The audit practice community should consider several mechanisms to address the issues highlighted in the summarized studies. When responding to queries related to a prior audit (e.g., a follow-up question regarding the prior audit from the engagement partner), auditors need to be aware that this could have an inadvertent impact on tasks that they are performing in the current audit. Training exercises, perhaps, could be developed to increase auditors' awareness of their potential to commit these errors. Such exercises could increase the salience of these issues to auditors and potentially limit their occurrence. Further, notifications could be built into the standardized audit programs to warn auditors against accidently carrying over information and committing errors such as those addressed in this summary.