Do “Superstar” CEOs Impair Auditors’ Independence and Professional Skepticism?

The study examines the potential threat to an auditor’s independence in fact which
may result from the extraordinarily favorable personal reputation (superstar status) of an
audit client’s CEO This potential threat to an auditors’ independence is the result of a
halo effect bias which can distort an individual’s judgment and behavior Accounting
firms use a business risk audit approach which involves conducting a strategic risk
assessment which assesses the overall threats to the business model of an audit client
Prior research has demonstrated that the strategic risk assessment can bias the judgment
of auditors pertaining to financial account level risk assessments For example, the Bernie
Madoff Ponzi scheme demonstrated how an extraordinarily well respected individual
with superstar status can distort the judgment of knowledgeable and normally skeptical
individuals An experiment was conducted to examine the potential threat of a superstar
CEO on an auditor’s independence as demonstrated by the ability to distort the judgment of the auditor during the performance of the strategic risk assessment In addition, the
experiment was designed to examine whether the halo cognitive bias can lessen the
impact that an auditor’s professional skepticism has on his or her judgment and behavior
during the audit of a client’s financial statement Unlike other studies which have sought
only to demonstrate that a cognitive bias exist which impairs auditor judgment; the study
also examined whether the influence of a halo effect bias can be mitigated by the formal
rating of audit evidence in a similar manner that was used by Embu and Finley (1977) to
successfully mitigate a framing effect
The experiment did not support the main hypothesis of the study that auditors
assess the strategic risk at a lower risk level for firms that employ a superstar CEO than
for those whom employ a non-superstar CEO This result may primarily be due to the
inability of the scenario used in the experiment to sufficiently differentiate the
characteristics of the superstar and non-superstar CEO Without establishing that the
participants’ judgment was being distorted by a superstar CEO; the other hypotheses
which involved testing a debiasing method to mitigate the halo effect caused by a
superstar CEO and investigating whether a halo effect reduces the impact that auditors’
trait skepticism level has on their judgment could not be properly tested