The mitigation of hindsight bias in judges' evaluation of auditor decisions

The public accounting profession may be significantly disadvantaged if hindsight bias is manifest through the U.S. civil liability system. Auditors must make decisions without knowledge of an eventual outcome, but auditor liability is determined from a perspective that includes outcome knowledge. Ex post, litigants tend to blame auditors for failing to foresee and anticipate subsequent financial problems of their audit clients. This study was conducted to test the effectiveness of two methods of mitigating hindsight bias in a legal liability context. An experiment was conducted with 157 state general jurisdiction judges serving as subjects. Results indicate that these judges' evaluations of auditors' performance were subject to hindsight bias. More importantly, we found that under one of the mitigation methods, evaluative judgments were significantly more favorable than were judgments in the unmitigated negative outcome treatment, and essentially the same as evaluative judgments in the no outcome control condition. The primary contribution of this study is that it is the first to provide evidence that judges' hindsight bias can be mitigated in an audit legal liability context. Implications for audit legal liability and future research are also discussed.