Improved auditor skepticism through an examination of cognitive dissonance

• AGA Winter Conference • Nashville, Tennessee • January, 2012 • Art “Bubba” Hayes • Director of State Audit • [email protected]

• 615-747-5397

• Is objectivity a myth?

• How much do we struggle to not have an open mind (by holding onto our assumptions/biases/beliefs) when we profess to have an open mind?

• As professionals, we are expected to employ critical thinking in analyzing information/evidence • This includes weighing conflicting information from various sources • But are we to be totally objective?

• The scientific method is designed to prove that a hypothesis is true??

• What is the main role of attorneys?

• Two main perspectives: • What we tell ourselves to justify what we do..staying off the slippery slopes • Our possible predispositions to whether we think a person or an organization is trustworthy – And how those notions may affect our evaluation of what they say or do • What others tell us to justify what they have done or not done – And whether we buy off on it • If this sounds familiar, it is what we tell friends/family when they have been hurt – It wasn’t your fault/they were jerks/you are better off without him/her/that job • And the basis of cognitive reframing therapy

• What are the two primary types of mistakes we can make in evaluating information?

– False positives – False negatives – Which is worse?

Purpose of this session

• To assist you in recognizing the traps we all can fall into when we are evaluating information and evidence

• When our brains are made up, it is very hard to change them • Cognitive dissonance—a state of tension created whenever a person holds two cognitions (ideas, attitudes, beliefs, opinions) which are psychologically inconsistent. Leon Festinger • Smoking is not a good thing, it can kill me; I smoke two packs a day 6

• It produces mental discomfort – From minor pangs to deep anguish • We don’t rest easy until we find a way to reduce it • Quit smoking • Convince yourself smoking isn’t so bad – Or it is worth the risk because it helps me relax, or prevents me from gaining weight (another health risk)

Three primary applications to auditing and accountability

• Auditors and the need to remain objective in skeptically analyzing audit evidence • Management and those charged with governance who need to remain objective and vigilant to indicators of possible fraud, waste or abuse through designing, establishing and monitoring effective internal controls • All of us as human beings who can trip down that ol’ slippery slope 8

Auditor responsibilities per SAS 99

• Paragraph 14: when responses to inquiries of management, those charged with governance, or others are inconsistent or otherwise unsatisfactory (for example,

vague

or

implausible

), the auditor should further investigate the inconsistencies or unsatisfactory responses.

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• Paragraph 14: maintain the proper questioning mind throughout the audit • Paragraph 15: the questioning mind should include setting aside any prior belief that management is honest and has integrity and consider the risk of management override of controls 10

• Paragraph 15: • Consider known external and internal factors that might: 1.create incentives/pressures to commit fraud, 2. provide opportunities for fraud to be perpetrated and 3. indicate a culture or environment that enables

rationalization

for committing fraud 11

• Paragraph 16: professional skepticism should lead auditors to continually be alert for information or other conditions that could indicate that MMDF may have occurred 12

• Paragraph 16: professional skepticism should lead auditors to

thoroughly probe

the issues, require additional evidence as necessary, consult with other team members and, if appropriate, experts in the firm,

rather than rationalize or dismiss the information

or other conditions indicating that a MMDF may have occurred.

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Requirements of SAS 109

• Paragraph 19: the auditor should plan and perform the audit with an attitude of professional skepticism, which should be exercised throughout the audit engagement – Auditors should be

rigorous

in following up on indications of MMDF or error – Auditors should be alert for information or other conditions indicating a MMDF/E

may

have occurred.

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• We are ingenious in developing ways to reduce the dissonance – But they are usually self-deluding • Albert Camus: we humans are creatures who spend our lives trying to convince ourselves that our existence is not absurd – But to hold onto two ideas that contradict each other is to flirt with the absurd

• Basically we lie to ourselves • We develop “Good Excuses” • How the people erroneously predicting the end of the world justify their error to themselves and their flocks

• So, we strive to lead lives that are, at least in our own minds, meaningful and consistent • Cognitive dissonance is the engine of self justification

Confirmation bias (we are not logical beings)

• If we are forced to look at disconfirming information, we will find a way to criticize it, to distort or dismiss it so that we can maintain or even strengthen our original belief: • If we obtain new information that is consistent with our beliefs, we consider the information useful and well founded • However, if the new information is inconsistent with our beliefs, we will consider it biased, inaccurate or foolish.

A neurological basis

• MRI’s have revealed that when people are facing dissonance/information that conflicts with their beliefs, the “reasoning parts” of their brains shut down • And when the consonance was restored, the emotional circuits in their brains lit up

Reactions to opposing scholarly articles

• Subjects who held strong opinions on one side of an issue with two distinct sides were given two scholarly articles which took the two different sides of that particular issue • After reading them, rather than seeing the merits of the other side, they discredited the other side’s article—finding and magnifying minor flaws —and actually became even more committed to their original opinion

Absence of any evidence can become evidence for one’s beliefs

• Confirmation bias can even convince us that the lack of evidence to support our position or belief is evidence that our belief/position is correct – Mere rumors can be enough • WWII internment of Japanese Americans – The “fact” that there was no evidence to support sabotage by this group was seen as evidence of just how sinister, clever, organized and dangerous they were

Sticking with our decisions

• Especially irrevocable decisions – And decisions that involved a lot of cost or emotional commitment • The greater the dissonance the greater to need to reduce it by over-emphasizing the good aspects of it • As a result, realize that testimonial advertising is the least reliable – If I spent a lot of money and time for a particular therapy, I am going to say it has made a great difference in my life (not “sure I wasted ten years of my life and $50,000 on terrible therapy!!”)

• Dissonance can even make us hang onto practices and notions that are not based on conscious decisions, just “feelings” – We may not have a clue why we are holding onto this view or opinion, but – We are too proud to admit that – We are smart and clever people, aren’t we?

• And again, especially if developing/holding onto it involved a lot of pain, cost – Initiation into a fraternity

A common belief it is good to vent your anger

• Based on good old Freud—catharsis • That expressing your anger or acting aggressively gets rid of your anger • Throw something – Yell at someone • Hit that punching bag – You’ll feel much better….or will you??

Justifying our anger —a vicious circle

• If we get angry at someone and do something directly negative towards them, then we have a problem —we have to justify what we did to them.

• and later we might even feel remorse for over-reacting • So, what do we do with this dissonance?

• we may tend to convince ourselves that we were justified in being angry and even getting the person in trouble..

• As a result, rather than finding relief by “venting” our anger, we are committed to continuing our anger to confirm that our actions were right and the other person is a &%$^

When we are generous we reinforce that act as well —a virtuous circle

• If we give them something, even if it is not very expensive or didn’t take much effort, maybe even on a whim – If we had had negative feelings about them before we gave, there is dissonance • Why would I give something to someone so bad?

– so we may tend to start thinking of them in a more positive way • He’s not so bad, actually, she is pretty nice

• The greater the gift or the effort of giving, the greater the dissonance and the more we tend to view the person favorably

Our view of ourselves

• Most reasonably adjusted people have a positive view of themselves as moral, competent and smart – Hence when we do something that is inconsistent with those positive self images, the dissonance is particularly painful to us.

• So if we do something really stupid – (buy into an end of the world hoax) • We must either admit we are stupid…ouch • Or • “Realize” how really heroic we were and smart too – Through our faith, we saved the entire world…too bad everyone isn’t that smart, huh?

The opinions of so-called experts

• Empirical studies show their rates of success are around 50-50 • Our guesses are as good as theirs—the best estimates are based on data and not on experts’ analysis of them, their “experiences” or “opinions” • AND • When they are wrong, they struggle hard to convince themselves and others that they would have been right “if only”..the timing had been different, the “unforeseen mishap” hadn’t happened, yada yada

Dissonance reduction is not limited to those with high self esteem

• Self justification protects how we feel about ourselves, whether it is high or low esteem • Regarding low self esteem, the dissonance occurs when they seem to do something right, rather than when they do something wrong.

• Someone who considers themselves unattractive will take the tack that as soon as the person who now seems to find them attractive really gets to know them, they will go away, rather than thinking “how nice, I must be more appealing than I thought”.

crooks

• Similarly, someone who recognizes that he/she is a scam artist or thief will not feel badly when they cheat a retiree out of their life savings.

• It is consistent with their self image.

A Cheating Scenario

• Two students are both facing a critical exam for admission to a graduate program • They are both reasonably honest and have the same attitude towards cheating —it shouldn’t be done – That is, they are very close together in their views of cheating • But they each find themselves stumped by a question on the exam • And they each find themselves with an easy opportunity to cheat by copying an answer from another student which appears to be a very good answer • One cheats and the other does not

• Each gains something very important: – One gives up integrity for a passing grade – The other gives up a passing grade to preserve their integrity • So how do they feel a week later?

– Each has had ample time to consider their choice

• The cheater will decide that cheating is not such a terrible crime – Hey, everyone cheats at least some of the time – It’s no big deal – And I had to do it for my future and the future of my family • The other will determine that cheating is even more immoral than he originally believed – People who cheat should be expelled – We need to make an example out of them

• The outcome: – The two students are now very far apart in their belief systems re cheating • The cheater thinks the other is ridiculously pollyanna • The other thinks the cheater is totally immoral – They have internalized these divergent beliefs to the point that they believe they have always held these view points

Back to the cross roads moment

• At that time, as they stood at the top of the slippery slope, the choices seemed a lot more ambiguous than after they have made their choice and traveled down the slope • The early, almost inconsequential steps, didn’t seem that big – But it starts a process of entrapment • We justify each step to reduce our uneasiness/the ambiguity of the dilemma and it also increases the level of our commitment and the intensity of that committment and takes us further and further away from our original principles and intentions

• People who have been sorely tempted, who battled the temptation, and almost gave in to it but resisted it at the eleventh hour, come to dislike and even despise those who were not able to resist the temptation.

• This dynamic applies to most important decisions we face in life

Gray areas

• At the top of the pyramid, the choices seem to involve gray areas, ambivalent choices, with consequences which are shrouded in uncertainty • And the first steps along the process are likewise morally ambiguous —the correct choice isn’t so clear.

Gray gives way to certainty

• So we make early, apparently inconsequential decisions and we justify each small step to reduce the ambiguity • But each step requires additional justifications and we find it hard to turn back against our earlier justifications – So the intensity of our commitment to the course of action increases

THE SLIPPERY SLOPE Moving from Moral Ambiguity to a Committed Bedrock Certainity One Small Step at a Time

Art Hayes Cheating is wrong, but easy, and a lot is at stake and unlikely to be caught

A

A decides to take one small step and to cheat, just this one time A has to justify his decistion, to reduce his discomfort and the ambiguity A then takes another small step and cheats again—higher dissonance requires more justification Over time, each is entrapped in a position far from the starting point and even further from his colleague and it is impossible to move against the tide

B

B resists the temptation this time B justifies his decision to reassure himself he was right B resists another temptation and has to reassure himself he is not being stupid Over time, each is entrapped in a position far from the starting point and even further from his colleague and it is impossible to move against the tide 42

watergate

• Jeb McGruder—should he have known or drawn the line the first time they asked him to do something illegal? Not so easy..

– Courted by Halderman • Not told that perjury, cheating, and breaking the law were required for the job; instead was • Flattered and told he was going to make a difference for the world, not just make money for a company and himself —part of history being made • Erlichman • John Dean—Blind Ambition • Liddy’s wild and crazy plans and then the “toned down one” about the break-in

Stanley Milgram

• “the experiment requires you to continue” • Created a “slippery slope” – Not high voltage charges that could seriously harm someone, but • $20 to participate in a scientific study to determine whether a mild shock with a miniscule amount of voltage (10 volts) can increase people’s ability to learn • He even tries it on you and you can barely feel it • So it’s harmless and interesting (hmm, will spanking the kids make them study?) and you get some money ($20 in 1963)

• Then when you start you are told that if the student gets the answer wrong, you have to nudge the voltage up to 20 volts – No big increase • Then up to 30, 40, 50…to a point on the switch that reads “450 volts—danger” – Those who resisted early were more likely to stop before they got to the higher voltages – But 2/3 of the subjects went all the way—they found it hard to suddenly justify drawing the line and stopping • each new increment had been just a small increase but each increase had committed them a little further

How do we lose our ethical compass?

• Get someone to take one small step at a time • Self-justification will do the rest • To preserve our belief that we are smart, we will all, on occassion, do some things that are dumb – We can’t help it, we are wired that way..the human condition

Fighting hypocrisy

Psychological blind spots

• The biggest one: that we don’t have any • Justify our own perceptions and beliefs as being accurate, realistic and unbiased • Naïve realism: we believe that we perceive objects and events clearly, as they really are – We assume that other people see things the way we do – If they disagree with us, obviously they aren’t seeing things correctly

• 1. people who are open minded and fair ought to agree with a reasonable opinion • 2. any opinion I hold must be reasonable; if it weren’t I wouldn’t hold it.

• 3. therefore, if I can just get my opponent to sit down and listen to me, so I can tell him how things really are, he will agree with me.

• 4. and if he doesn’t, it must be because he is biased.

– Labeling of the source of positions influences our acceptance of the substance of them

Perceptions

• Ideas and opinions that we hold dear through years of introspection due to the need to avoid dissonance, we view as reasoned —a source of accuracy and enlightenment.

• But people with other views developed over years of their introspection we view as biased and inflexible (she can’t possibly be impartial on the topic of xxxxx, because she has held that position for years)

First class versus coach seats

• The blind spot of the privileged – Don’t consider themselves lucky – Something they are entitled to • Born on third base, didn’t hit a triple – Those flying in coach consider the ones in first class as snobs wasting money • But if upgraded, then a new perspective – A self satisfying mix of pity and disdain for those having to troop past them to the coach section

The problem with blind spots

• We can’t find them through introspection – They are unconscious • They are innate and inevitable – Everyone has them • When we are unaware of them, we make foolish decisions and cross ethical lines • They enhance our pride and activate our prejudices • Although we can’t avoid them, we can try to be aware of them

The greatest of all faults is to to be conscious of none..Thomas Carlyle

• These blind spots make us feel that we cannot be co-opted or corrupted – That our dislikes or even hatreds of other groups are not irrational but are reasoned and legitimate

How do we fail?

One step at a time

• Most politicians believe that they are incorruptible through their blind spot – When they begin their career, they accept lunch from lobbyists —how else can they learn about issues? And that’s how politics work. And the lobbyists have a right to free speech just like any other citizen —I’m just listening – Then, I will take his offer to go to a golf course…it’s not that big of a deal..it’s a nice place for a conversation

• Next stop?

• St. Andrews in Scotland?

– Former congressmen and former lobbyist Jack Abramoff • Who would compromise their career and reputation for a trip to Scotland?

• No one..if that was the first such offer – But lots of us, if it was preceded by many, smaller offers we had accepted

The formula

• Self justification—we don’t think that we have any blind spots and we are just doing what needs to be done • Pride—through my blind spot, I think that I, of all people, am above the temptations • Trouble—so, I won’t even see the line when I cross it

That old bell shaped curve

• Although there are many who are at the end where they would never cross the line, there is that other end

Science and profit

• Jonas Salk when asked if he would patent the Salk Vaccine in 1964 – Are you kidding? Would you patent the sun?

• How naïve now… • The culture of science back then valued the separation of research and commerce • Scientists were paid by the government, universities and foundations for their research and they were free to conduct research for years investigating a problem that may or may not pay off • In 1980 the supreme court ruled that patents could be issued on genetically modified bacteria, independent of the process for developing them • The pharmaceutical industry became unregulated

• The rush was on for new drugs, even if they weren’t that much of an improvement over older ones • Conflicts of interest between scientists and their roles on boards and jobs with companies • Correlations shown between their interests in the companies and drugs and the results of clinical tests of drugs

• Much scientific research has ambiguities in the results —creating gray areas that a conflicted scientist might exploit • VIOXX—bury negative findings • Autism and vaccines—Andrew Wakefield had a conflict but denied it (he earned $ 800,00 for research for lawyers in such cases and gave them the results before they were published)

Wakefield’s statement

• A conflict of interest is created when involvement in one project potentially could or actively does, interfere with the objective and dispassionate assessment of the processes or outcomes of another project. We cannot accept that the knowledge that affected children were later to pursue litigation, following their clinical referral and investigation, influenced the content or tone of our paper. We emphasize that this was not a scientific paper but a clinical report.

• He had no incentive to look for disconfirming information • Five subsequent studies found no causal correlations – There was a temporal correlation due to the fact that children tend to get the vaccinations about the same age when they are diagnosed with autism

• We can’t be bought with trinkets or free lunches • But, being given a gift evokes an implicit desire to reciprocate and your blind spot makes it seem to be no real challenge to your morals… – The key is for the other person to just start the process • Then self-justification kicks in to minimize the impact of the gift you received – It is only a flower – I always wanted a copy of ___ – It’s only a pizza

• At first you just give up your attention, you listen • Then you will try the product – It might help my patients • And your own view of your intellectual and professional integrity remains the same (blind spots and self-justification) even though your behavior has changed

Objectivity is a myth

• A dissonance reducing rationale • When did the prostitution begin?

• The big drug companies have underwritten the AMA’s council on ethical and judicial affairs, regarding the rules on taking gifts from drug companies!!

Bigotry/hypocrisy

• Thanks to our ego-preserving blind spots, we don’t believe that we could possibly have any prejudices • Because we are not irrational or mean-spirited, any negative feelings we might have about a particular group is justified —our dislikes are rational and well-founded • When people have a slip of the tongue, they don’t see they are biased on that one issue – Rather, it’s the bigotry of others that we feel we need to suppress

memory

• What we refer to as memory is really a form of storytelling that goes on continually in the mind and often changes with the telling – William Maxwell

Do we always lie when we don’t telll the whole truth?

• When two people tell completely different stories of the same event • There are direct, conscious lies, intended to manipulate or deceive: – James Frey…A Million Little Pieces • But many of us are just self-justifying – Neither telling the whole truth nor intentionally deceiving

• We add details and omit inconvenient facts • We add a small, self-enhancing spin • If that spin goes over well, the next time we embellish a little more, give it a little more drama – We aren’t lying, just making the story a little better and clearer • Until the latter version might be something that didn’t happen at all

• Our “selves” are ruled by totalitarian egos – Which ruthlessly destroy information that it doesn’t want to hear and • Rewrites history from the view point of the victor – Anthony Greenwald • We do so to justify our actions – To make us look and feel good about ourselves • And what we did and failed to do – If mistakes were made, they were made by others • We were little more than innocent bystanders

• Memory irons out the dissonance we might feel – Enables the confirmation bias to roll right along – Selectively letting us to forget about disconcerting and disconfirming information about beliefs we hold dear

• We conveniently forget good arguments raised by the other side • As well as foolish arguments by our side • And remember the good arguments for our side and the foolish arguments for the other side

• What drives us to self distort?

– The need to be right • To keep our self concept consistent • To preserve self esteem • To excuse failures and bad decisions/mistakes • To find an explanation, preferably one in the safe and distant past, of current problems

Nietzsche

• “I have done that” my memory says • “I cannot have done that” says my pride, and remains inexorable.

– Eventually my memory yields

The truth about memories

• How disorienting it is to learn that a vivid one is indisputably wrong • That even being absolutely, positively sure a memory is correct does not mean it is • Errors in memory support our currently held beliefs and feelings

Complex memories are reconstructive

• We may learn and remember some simple things by rote training but complex past information is shaped to fit into a story line • Because such memories are reconstructed, they are fallible and subject to mistakes • In reconstructing memories, we draw on many sources • We weave them together into one, integrated account

Source confusion

• When recalling an event, even under hypnosis, we can’t always distinguish between our actual memory and information that crept in, over the years, from other sources

Leaving ourselves out of the story

• When we tell a story about the past, we tend to leave ourselves out of it • My father was a disciplinarian because that was his nature (not because I was a brat)

The Parent Trap

• Make your child take piano lessons and they blame you for ruining their love of music because you forced them to study the piano • Don’t make them take piano lessons and you blew it…you should have forced her because now she can’t play at all and it’s all your fault.

• In parent blaming we only focus on what the parent did and not our role in it • Mistakes were made…by THEM!!

They aren’t lying they are self-justifying

• When two people produce entirely different memories of the same event we usually presume one of them is lying – That can happen, for sure—James Frey and “A Million Little Pieces” • But for most of us, we aren’t telling the whole truth nor are we intentionally deceiving – We are self-justifying • What we refer to confidently as memory is really a form of storytelling that goes on continually in the mind and often changes with the telling

Memories as story telling

• All of us, as we tell our stories, add details and omit inconvenient facts – Give the tale a small, self-enhancing spin – That spin goes over so well that the next time we tell it, we add a slightly more dramatic embellishment • Its not a lie, I’m just making the story better!! And even clearer • In the end, the story we are telling may not have happened that way, or even have happened at all!!

Our memory is our personal, live in, self-justifying historian

• It is like a dictator that ruthlessly destroys information that it doesn’t want to hear and re writes history from the standpoint of the victor!!

– Like other victors, we rewrite history to justify our actions and to make us look good to ourselves and what we did or failed to do – If mistakes were made, they were made by someone else – If we were even there, we were innocent bystanders

misremembering

• Memory is reconstructive • Our mistakes aren’t random when we mis remember • They have a purpose to protect our self esteem and to downplay the positive arguments/ideas of our enemies

False memories

The ends justify the means

interrogators

• The most powerful piece of evidence is a confession • And interrogators can lie to get them • Why is this? Most of us can’t imagine admitting to something we didn’t do.

• Reid course “none of these steps is apt to make an innocent person confess, it is all legal and moral” • The natural human reaction is for the innocent to push even harder and become more angry if accused of something they didn’t do

Wrong

• The natural human reaction would be confusion and hopelessness • Dissonance because the person would not expect the interrogator to be lying • In an interrogation, the interviewer is already biased —an interrogation, unlike an interview, is designed to get the confession from the person the interviewer reasonably certain is guilty.

• And the person doesn’t even realize the difference.

• And once the interrogator has that reasonable certainty, there is nothing the person can do to change that perception • Anything the person does will be interpreted as denial, lying, evading the truth.

• “don’t lie, we know you are guilty” • There is no such thing as disconfirming evidence.

• The interrogator is convinced the person is guilty so the harder the person tries to resist, the more the interrogator doubles down on him.

• Signs of stress are not necessarily signs of deception – Body language: – Trying to remain calm but nervous and his eyes roam, he would not make direct eye contact and he cried and acted sporadic – Could be anxiety about being falsely accused

• Training does not increase accuracy – It does increase confidence – This is a deadly factor

• Why don’t more people who are falsely accused ask for lawyers?

• They don’t believe they need one…and they trust the police to be honest.

• Dissonance will require them to make sense out of the evidence they are told by believing they must have done it.

• “Is it possible that I could have done this terrible thing and blanked it out?” cop “oh yeah, it happens all the time”

Lao Tzu

• A great nation is like a great man • When he makes mistakes, he realizes it • Having realized it, he corrects it • He considers those who point out his faults as his most beneficial teachers

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