When Does Developing an Independent Estimate Reduce the Biasing Influence of Management Preferences

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 preference are, indeed, less susceptible to the preference’s biasing influence. However, auditors developing an independent estimate before receiving management’s preference remain susceptible to the preference’s biasing influence. Recency effects explain these results. A supplemental experiment that omits independent estimate development confirms this theory. Without an independent estimate, auditors switch processing modes and display primacy effects. Our research informs auditing estimates, regulatory guidance, and the de-biasing ability of auditor-developed expectations.