A lack of neutrality by an entity’s management as to the process and outcomes of the preparation and fair presentation and faithful representation of its financial statements and accounts (broadly, financial information).

Financial reporting frameworks often call for neutrality or freedom from bias. However, accounting estimates may lack precision and can be influenced by management judgment. Such judgment may involve a degree or form of unintentional or intentional management bias (e.g., as a result of seeking to achieve a desired outcome or result).

Management bias is reflected in the judgments and decisions made by management in reaching at certain accounting estimates. Such a bias may be difficult to detect at an account level and may only be identified by the auditor when examining groups of accounting estimates. In principle, it is the responsibility of auditors to identify the extent to which indicators of possible management bias exist. The review process involves an examination of a specific set of indicators (indicators of possible management bias), though such indicators, per se, may not represent misstatements for the purpose of drawing conclusions on how certain accounting estimates are reasonable.

Examples of possible management bias include 1) changes in accounting estimate, or the method applied for that purpose, where management has made a subjective assessment that there has been a change in circumstances, 2) use of an entity’s own assumptions for fair value estimates though the same is inconsistent with observable marketplace assumptions and 3) selection of significant assumptions that produce a point estimate favorable for management objectives or targets.

If auditors apply their own assumptions in establishing a range to evaluate the degree to which a management’s point estimate seems to be reasonable, an auditors’ view might need to be developed about the possibility that management’s judgements in selecting the significant assumptions used in making the accounting estimate create certain indicators of possible management bias. Professional skepticism is particularly necessary here.