Can Auditor-Developed Independent Estimates Reduce Management’s Biasing Influence?

The Public Company Accounting Oversight Board (PCAOB) acknowledges that developing independent estimates likely reduces the influence of management bias when auditing accounting estimates. We test this notion, finding evidence that both confirms and contradicts the PCAOB’s perspective. We find that auditors developing an independent estimate after receiving management’s persuasion tactic are, indeed, less susceptible to the tactic’s biasing influence. However, auditors developing an independent estimate before receiving management’s persuasion tactic remain susceptible to the tactic’s biasing influence. Recency effects explain these results. A supplemental experiment that omits independent estimate development confirms this theory. Without an independent estimate, auditors exhibit primacy effects. Our research informs auditing estimates, regulatory guidance, and the de-biasing ability of independent expectations.