Ethical decision-making rooted in the fundamental principles, supported by the decision-making framework known as the conceptual framework, and informed by efforts to address the five sources of bias produces a better result, insulates the decision-maker from questionable conduct, and is superior to an ‘I know best’ approach.
There is a school of thought commonly held that most people can distinguish between right and wrong. Among professionals, there is a more strongly held view that because of a common set of education, learnt competencies and work experience, ‘they should have known that it was wrong’. When faced with those who act in a way that is against the law or ethical conduct, we may observe their actions and describe them as deliberate, or argue that because of some cultural, religious or political conviction, such transgressors are acting the way they do. Which is to say, they act wrong because of some belief system they have or some flaw in their education, competencies or work experience, but I am unlikely to make the same mistake.
But I am really insulated from such risks?
Our Code of Professional Conduct as professional accountants describes fundamental principles (integrity, objectivity, professional competence and due care, confidentiality and professional behaviour) and a conceptual framework premised on a logical approach to identifying threats, evaluating threats, and addressing those threats. But what if due to lack of practice or context or sensitivity, we stumble on the identification of the threats? Well, the rest of the expertly crafted conceptual framework falters and we may end up with no threat evaluation and no response to the threat. It’s a bit like ‘we didn’t stock up on candles because we didn’t expect the lights to fail’, or ‘we didn’t have a reserve goalkeeper because we didn’t know goalies could get ruled out through an on-field injury’. Darkness and a goal-fest would be the outcomes.
It is evident therefore that the starting point is the identification of the threats, and too often these surface during the post mortem instead of early on. What tools are there to better identify threats?
Experts in this area say that bias, in all of its five regularly found forms, in the professional environment dilutes a practitioner’s acuity in identifying threats.
Understanding the presence of bias is the point from which a more comprehensive search and understanding of identifying threats can be achieved.
These biases – availability, confirmation, rush-to-solve, anchoring and adjustment, and over-confidence – are the bane of professional decision-making, whether in operations or to those tasked with governance and oversight.
We understand these biases easily in the context of a parliamentary gathering, where although honourable members may not wear their party regalia, their words and deeds clearly illustrate their bias. This transparency helps everyone who interacts with them to predict their actions and to respond appropriately.
What if a board, a management team, an internal auditor or an independent external auditor are faced with threats they don’t see because of one or other bias? Well, they don’t then assess those threats and don’t respond to them. We then read and hear about blind spots and gaping holes in the balance sheet. Well, the spots were neither blind nor the holes gaping − they were almost always filled by large doses of bias instead of copious quantities of professional scepticism.
With availability bias, I make decisions based on information that is most readily available. If any of my social media feeds have published it, then I am aware of it, but I don’t search beyond my favourite feeds, and I therefore don’t know what other influencers may be saying about my supplier.
The bias of confirmation describes those situations when we make interpretations that support pre-existing beliefs. Remaining committed to an expansion strategy that was successful for a competitor when the evidence now contradicts it, can be a costly mistake for the organisation’s chief strategist.
When I rush-to-solve, I follow my practised approach to decision-making or I try to be helpful by describing the way forward, without giving myself time to reflect on alternatives. The rabbit and the hare had their memorable race so that we would pause-before-opining when faced with a decision to litigate or not.
Anchoring and adjustment is as much a professional competence issue as it is an ethical issue. When faced with changed market circumstances, with new scenarios about interest rates and growth rates, do I force my valuation models to fit my prior assumptions, until they eventually wilt under the pressure of all those assumptions, or do I re-anchor them in the new reality?
Finally, have you ever repeated a wager in the hope that it didn’t fall on red the last time, so this time it must be red? Many a gambler’s over-confidence, over-estimating their abilities to beat the odds, results in almost certain ruin. Thus over-confidence bias leads one to underestimate the risk or to miss the presence of a threat.
AUTHOR | Imran Vanker, Standards Director, IRBA
