Indra Wijaya Kusuma

Debiasing the halo effect in audit decision: evidence from experimental study

Purpose - The purpose of this paper is to test the existence of the halo effect caused by the presentation of information scope (holistic/specific), which can eventually lead to an inaccurate risk assessment of material misstatement. Empirical evidence is provided to demonstrate that methods of knowledge acquisition (explanatory feedback and self-explanation) are able to mitigate the halo effect. Design/methodology/approach - This study used an experimental research, which focused on control and experimental groups in order to determine if the halo effect caused by the information scope (holistic/specific) can be mitigated via the explanatory feedback or self-explanation method. Findings - It was found that auditors who received information from the holistic scope tend to experience the halo effect and eventually, their risk assessments of material misstatement also became less accurate when compared to auditors who received information from the specific scope. The explanatory feedback was found to be effective in mitigating the halo effect. However, the self-explanation knowledge acquisition method was not reliable in mitigating the halo effect. Research limitations/implications - This research use self-explanation with a manual technique but, in practice, most auditors use audit tools based on computer. Experimental setting with computer to self-explanation cannot held because there is limitation of seminar setting. This research used individual decision; in practice most of audit decision with discussion in audit team. Practical implications - CPA firms can use explanatory feedback, which comes in the form of managers’ review as a form of knowledge acquisition method as a mitigation strategy for the halo effect. Social implications - The social implication of this research is the halo effect that can influence the decision in many aspects. Individuals must increase their professional values with many trainings that are useful to mitigating the halo effect. Originality/value - The outcome of this paper was derived from the first accounting study that relied on learning methods as a mitigation strategy for the halo effect. In other words, this study used explanatory feedback and self-explanation as methods to test the halo effect. Previous literature on mitigating the halo effect had used audit experiences, implying that CPA firms’ intervention was unnecessary. Moreover, such study periods had been much longer, thereby, deteriorating the effectiveness of the research. Previous studies had only used the learning method to increase human capital quality and this was not related to any method as a mean to mitigate individual bias, for example, the halo effect, and an issue that was covered by this study.