Audit Committee Roundup
Good Judgment Requires Discipline, Awareness of Traps and Biases By Dennis T. Whalen and George Herrmann
It used to be that exercising good judgment largely meant “using common sense.” But today, while common sense is still essential, exercising good judgment—consistently— in a business environment that is increasingly complex and dynamic, volatile and uncertain, and under high pressure requires a disciplined process. It also requires an understanding of common traps and biases that can undermine the judgments of even seasoned professionals and boards. Clearly, many audit committee members are attuned to the issue of judgment— particularly as they sharpen their focus on accounting judgments and estimates, to understand how management arrived at a particular estimate, alternatives that were considered and, ultimately, the quality of the decision. Of course, applying a sound judgment process to every key business decision is essential, whether it’s about corporate strategy, acquisitions or risk. Yet, in our surveys, audit committee members continue to cite “groupthink” as a concern, and many express the need to hear more “dissenting views, particularly from down-theline” to support a more rigorous dialogue about the risks facing the company. To this end, highlighted here are insights from Enhancing Board Oversight: Avoiding Judgment Traps and Biases, a new COSO1 paper co-authored by KPMG and Brigham Young University professors Steven M. Glover and Douglas F. Prawitt, on the keys to a robust professional judgment process. A good judgment process followed consistently can help improve decision-making and oversight, but “traps and biases” can undermine the process. Consider using a
formal judgment process as described in the COSO paper (adapted from KPMG’s Professional Judgment Framework): 1) define the problem and identify fundamental objectives; 2) consider alternatives; 3) gather and evaluate information; 4) reach...
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