Does Disclosure of Conflict of Interest Increase or Decrease Bias?
32 Pages Posted: 17 Jan 2015
Date Written: August 12, 2014
Corporate governance reforms and the threat-safeguard approach to auditor independence regulations are motivated by the assumption that disclosure by an agent (e.g., auditor) of a potential conflict of interest reduces bias in professional judgment. In this study, we conduct an experiment using experienced Canadian professional valuators to investigate the validity of this assumption. We find that where the nature of the conflict is aligned with the interests of the current client, disclosure of a conflict of interest actually increases bias in participants’ valuation estimates in favor of the current client. However, when there is an incentive to act against the interest of the current client, the valuator signals his/her duty to the current client by moving valuations in favor of (and not against) the current client. In this case, disclosure has no incremental effect in reducing or exacerbating bias.
Keywords: Conflict of interest, disclosure, bias, auditor independence, valuation, client advocacy, nature of conflict
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