Using Unconscious Thought to Improve Evaluations of Complex Accounting Estimates

Complex accounting estimates are increasingly important to financial statements. However, evaluating the appropriateness of these measures can be quite difficult, due to the high levels of subjectivity and complexity involved. For example, although management review controls around accounting estimates can help ensure recorded estimates are free from error and bias, inspection findings suggest that management’s evaluation and review of their estimates is often deficient. Likewise, at times, auditors fail to identify patterns of bias within management’s estimates. Drawing on Unconscious Thought Theory, we predict and find across three experiments that engaging in unconscious thought can improve individuals’ evaluations of biased estimates. In Experiments 1 and 2, we provide evidence that prompting managers to engage in unconscious thought improves their recognition of patterns of bias within subordinates’ accounting estimates. In Experiment 3, we find that prompting unconscious thought improves auditors’ ability to recognize patterns of bias that they might otherwise be prone to overlook (i.e., patterns of income-decreasing bias). However, we observe this effect only among less-experienced auditors, as those with more experience are better able to recognize patterns of bias regardless of the directional impact on income and regardless of whether they use conscious or unconscious processing. Our findings demonstrate how a practical, theory-driven intervention can improve judgments around complex estimates and thereby increase financial reporting quality.