Do Effects of Client Preference on Accounting Professionals' Information Search and Subsequent Judgments Persist with High Practice Risk?

Abstract

Audit and tax professionals tend to make judgments consistent with their client's preference, even when that preference is aggressive. Client preference affects judgments directly and indirectly, via information search. In particular, professionals focus their search on information that supports the client's preferred position at the expense of considering information that does not. Biased search is associated with inflated assessments of the likelihood that a client's preferred position will be supported in court and recommendations that are inappropriately aggressive (Cloyd and Spilker 1999). In an experiment with tax professionals as participants, we examine whether high practice risk (i.e., exposure to monetary and nonmonetary costs of making inappropriate recommendations) mitigates these effects. We find that when facing a client with high (versus low) practice risk, professionals perform a more balanced search and this reduces the indirect impact of client preference on judgments. We also find that after controlling for the impact of information search, client preference has a direct, negative impact on recommendations for both high and low practice risk clients, indicating that professionals adjust their recommendations away from the client-preferred position. We interpret this as a conservative reaction to increased environmental risk for all client types. This study sheds light on the direct and indirect paths by which client preference effects occur and demonstrates that high practice risk serves as a boundary condition on confirmation bias and on client preference effects.

Keywords: Confirmation bias, information search, practice risk, path analysis

JEL Classification: M41, D83, H20, K34