COSO explores common judgement traps, lays out five-step decision-maki
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COSO explores common judgement traps, lays out five-step decision-making process 

By Ken Tysiac 
March 03 2012

Many faulty business decisions can be traced to “confirmation bias” that leads people to unwittingly seek information that bolsters what they want to believe, says Brigham Young University accounting professor Doug Prawitt.

“We don’t realise it when we do that, but it’s a very, very powerful human bias,” he said Thursday during a telephone interview.

Prawitt is co-author of “Enhancing Board Oversight: Avoiding Judgment Traps and Biases”, a white paper on business judgement released Wednesday by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Prawitt identified confirmation bias and a phenomenon the white paper calls judgement “triggers” as two particularly damaging “traps” that lead to poor judgement and decisions. He said considering other points of view is essential to avoiding confirmation bias and making good decisions. The white paper speaks primarily to boards of directors in their strategy-setting role. But Prawitt said the process described in the white paper applies to anybody who makes important decisions.

“As you evaluate information, always sit back and take time to make the opposing case,” Prawitt said. “… If I’m [a lawyer who’s] going to go into the courtroom, I want to know my opposing attorney’s case better than he knows it.”

Judgement triggers often result from a possible solution’s being misidentified as a problem that needs to be overcome, the white paper says. When a problem is improperly defined, decision makers sometimes move forward without considering other, better alternatives.

The white paper uses the example of an executive who was asked to oversee the in-house development of customised software to track important projects at his company. The need for custom-developed software was posed as the problem, when it really was just a potential solution. The problem was the need to find an efficient way to track projects. The executive avoided falling victim to a judgement trigger. He did more investigating and found a third-party software product that was more cost-effective.

Prawitt said that, about 2½ years ago, he and co-author Steven Glover, also an accounting professor at Brigham Young, began working with KPMG to create a professional application for their research on business judgement and decision making. What emerged was a professional judgement framework put into practice by KPMG, which also co-authored the COSO white paper. The framework describes a five-step process for decision making:

  • Define the problem and identify fundamental objectives.

  • Consider alternatives.

  • Gather and evaluate information.

  • Reach a conclusion.

  • Articulate and document rationale.

According to Prawitt, the guidance is spreading rapidly, particularly among accounting firms. He said that, as a result of PCAOB reviews of audits, public accounting firm leaders are eager to review decision-making processes undertaken by employees of their firms.

“If you’ve carefully laid out the rationale for your judgement,” he said, “you’re in a lot better position to justify the judgement that you made."

The white paper mentions additional common traps:

  • Rush to solve: The quickest judgements aren’t always the best ones.

  • Overconfidence.

  • Anchoring: This often occurs in negotiation when a faulty initial value is set and decision makers fail to adjust sufficiently far from it.

  • Availability: This is the tendency to consider information that’s easily retrievable from memory rather than the best information.

Solutions mentioned in the white paper include seeking disconfirming evidence, questioning expert opinions and encouraging opposing points of view.

Prawitt said that, although professional judgement is an important everyday task for accountants, they often haven’t received formal training in how it can be improved. But he said there’s now enough research on the subject that it’s gaining popularity.

Ken Tysiac ( is a CGMA Magazine senior editor.

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Art Cunkle

Two points to consider:

Defining the problem correctly is crucial, rush to the next step may result in misdirection of effort.

Avoid group-think, create an environment where brainstorming produces ideas that aren''t what the boss or strongest personality thinks, everyone should offer a point of view.

Mar 9, 2012 10:03 AM
Greville Liburd


In a fast-moving American economy, the appetite for short-term business and financial opportunity often trumps the choice of more prudent strategic thinking and restraints.  On the other hand, the more traditional snail?s pace of accounting recordation, reporting and analytics becomes more and more intolerable as competition demands a more dominant and aggressive management posture in a fluid and dynamic business environment. This fundamental  contrast in focus highlights a crucial flaw in planning and measuring business success in contemporary enterprise: Accountants, in their involvement with the process of accounting recordation, reporting and analytics, have adapted to the imperfect nature of the pertinent metrics that link business operations to analytical study and planning. They continue to struggle with the important task of capturing through art and acceptable precision, relevant discreet measures of business activity and financial position, and associating this information with reasonable expectations and strategic projections for a going concern concept.  

Accounting and auditing were originally practiced from a purely skeptical and conservative viewpoint. Over time, however, under the stress of increasing pressure, business estimates and professional accounting judgment throughout accounting history have tended to become less conservative. The traditional boundaries for accounting, auditing, and business management targets have therefore become weakened, somewhat insidiously invaded by the needs and aspirations of aggressive stakeholders in the marketplace. Government and other regulatory bodies tend to yield to the demands for fewer constraints in order to foster greater growth and progress. And as a result, have allowed dangerous and destructive imbalances to creep into the management system, thwarting a more prudent strategic approach to business management.  

The idea of a human judgmental bias is a natural one, as explained by accounting professor Doug Prawitt, and cited by Ken Tysiac.  But we must also remember that the primary purpose of accounting, and especially of auditing attest and assurance functions, is to reflect the truth in business.  It behooves the profession therefore to first, be skeptical, then analytical, in its judgment. The common whims and human flaws of non-professionals are not expected, and are therefore normally unacceptable. The more practicing accountants are forced to yield to political and other extraneous pressures, the less independent their professional judgment become, and correspondingly, the respect for their professional judgment will continue to diminish.  

Greville G. Liburd, MBA, CPA, CGMA

Mar 9, 2012 8:59 AM
Stephen Johnson

Steven Glover and Douglas Prawitt''s white paper provides an excellent framework for improving Board Oversight of strategic decisions.

Additional resources readers may want to consider include:

J. Edward Russo and Paul J.H. Schoenmaker, "Decision Traps: The Ten Barriers to Brilliant Decision-Making and How to Overcome Them"

David Matheson and James E. Matheson, "The Smart Organization: Creating Value Through Strategic R&D "

Mar 9, 2012 8:23 AM
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