Doug Prawitt discusses maintaining professional skepticism in auditing. Some challenges to skepticism include confirmation bias and misaligned incentives between auditors and clients. There is also a "two-way hindsight problem" where regulators criticize lack of skepticism for problems found post-audit but auditors are not rewarded for extra work without findings. Potential solutions include incentivizing skeptical behaviors, developing ways to document skepticism, aligning auditor and client goals, emphasizing skeptical mindsets, and focusing standards on skepticism over simple compliance. Documentation of skepticism is important but hard to balance with pressures for less subjective judgment.

1. Professional Skepticism—Considerations
for Standard Setters
Doug Prawitt, PhD, CPA
Brigham Young University

2. Fundamental nature of the problem—maintaining
questioning mindset and behavior despite:
•rivers of experience where few problems arise
•where the majority of companies and managements
are “just trying to do a good job”
•where human nature makes one want to be
agreeable with the people with whom one works
• where incentives on the part of the agents (staff)
are usually NOT well aligned with those of the
principal (audit firm owners)
•all in the presence of a powerful human tendency
toward confirmation bias.

3. Difficult Two-Way Hindsight Problem…
•Regulators are always likely to cite lack of PS
when a problem is identified post-audit
•Auditors are not likely to be rewarded when they
do extra work and find nothing

4. Solutions? At broadest level:
• Elicit appropriately skeptical mindset
• Incentivize appropriately skeptical behaviors
• Develop effective ways of documenting skeptical
mindset and behaviors

5. In terms of incentives:
•Tone at the top (all the way to the “top”)
•Evaluations and rewards based on appropriate
exercise of skeptical behaviors (even when nothing
found)
•Less emphasis on meeting time budgets, deadlines
•Better management of busy season pressures
•Alignment of goals/incentives of principals and
agents (partners/staff)

6. In terms of mindset:
•Shared conceptual framework, common
terminology around professional judgment and
professional skepticism (2-way street)
•Emphasize understanding of purposes/objectives
•Encourage appropriate mindset (e.g., avoid
confirmatory language— “concurring partner”)
•Encourage auditors to “make the opposing case”

7. • Write standards so that the focus is not on
compliance with the standards but on the exercise
of PS in the application of PJ!
• Develop guidance/conventions for documenting
appropriate exercise of PS
• Beware of pressures toward less judgment in
auditing—appropriate exercise of PS is harder to
document than is compliance with a procedure!