INTHEBLACK September 2024 special edition - Flipbook - Page 49
FIVE TYPES OF COGNITIVE BIAS IN ACCOUNTING
CONFIRMATION BIAS
The favouring of data or information that supports preconceived notions, such as
about a company’s financial health, which could lead to financial reporting errors.
SUNK–COST FALLACY
A tendency to keep investing in something based on how much has already been
invested, such as hesitating to write off certain assets or investments that have lost
value, which could potentially inflate balance sheets.
GROUPTHINK
A phenomenon where a group of people prioritise consensus over critical evaluation
of information, such as the collective failure to critically evaluate financial statements
or audit procedures, potentially leading to incorrect financial reporting.
OVERCONFIDENCE BIAS
The overestimation of one’s beliefs, predictions or ability to perform a task, such as
believing that one can accurately estimate financial values or risks. This can lead to
overly optimistic or pessimistic financial reporting.
ANCHORING BIAS
A tendency to rely too heavily on the initial information, or “anchor”, when decisionmaking, such as assessing financial figures based on previously reported numbers or
industry benchmarks rather than on recent reports. This can lead to errors if anchors
are invalid or irrelevant.
• Authority bias may have led employees
and investors to place undue trust in
the leadership team and CEO.
Today, the WorldCom scandal acts as a
cautionary tale about the importance of
ethical leadership and accountability.
Cognitive biases can be found across
the business world. Unchallenged, they
can have disastrous consequences.
Accounting and finance professionals must
consider the impact of bias in collecting and
analysing data, as well as presenting financial
information, to avoid biased decision-making.
WHAT ARE COGNITIVE BIASES?
Cognitive biases are natural and often automatic
mental processes that help people make quick
decisions and navigate the complexities of the world.
People use them every day, and, in some situations,
they can save time.
However, cognitive biases can become problematic
when they lead to poor decision-making, reinforce
stereotypes or contribute to unethical behaviour.
Diversity Australia director Steven Asnicar says
cognitive biases in accounting can occur when
people unintentionally favour
information that aligns with
their preconceived beliefs
or judgements, potentially
compromising the integrity of
financial statements.
LISTEN
“Cognitive biases can lead
to
this story
to some potential distortions in
terms of how people approach
their decision-making,” he says.
Common cognitive biases
include overconfidence
bias, confirmation bias,
UPSKILL NOW
Behavioural
anchoring bias, sunk–cost
Finance
fallacy and groupthink.
ETHICS ESSENTIALS intheblack.cpaaustralia.com.au 49
