Concept of management bias

Management bias is typically defined as 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, though such indicators, per se, may not represent misstatements for the purpose of drawing conclusions on how certain accounting estimates are reasonable.

Indicators of management bias

The judgments and decisions made by an entity’s management shall be checked by the auditors, particularly in their connection with the making of accounting estimates. This process aims to identify whether there are indicators of possible management bias. Indicators of possible management bias do not themselves represent misstatements for the purposes of drawing conclusions on how reasonable individual accounting estimates might be.

Examples of possible management bias with respect to accounting estimates include:

• 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,
• use of an entity’s own assumptions for fair value estimates though the same is inconsistent with observable marketplace assumptions
• selection of significant assumptions that produce a point estimate favorable for management objectives or targets.
• selection of a point estimate that may indicate a pattern of optimism (nonconservative approach) or pessimism (conservative approach).