Professional Scepticism and Professional Judgment Partner Audit October
Professional Scepticism and Professional Judgment Partner, Audit October 15, 2013 1
Agenda 1. Definitions 2. A model for critical thinking 3. A look at judgment biases 4. Applying critical thinking to manage biases
Professional Judgment and Skepticism § Professional judgment – Application of relevant training, knowledge and experience, in making informed decisions about the courses of action that are appropriate. § Professional skepticism – an attitude that includes a questioning mind, being alert to conditions which may indicate possible error or fraud, and a critical assessment of evidence. FOR INTERNAL USE ONLY. © [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country]. 3
The KPMG Professional Judgment Process ENVIRONMENT Influences / Biases Coaching Reflect on Previous Experience Reflect on Lessons Learned 5 Articulate & Document Rationale Coaching 1 Mindset Clarify Issues and Objectives 4 2 Reach Conclusion Consider Alternatives 3 Gather and Evaluate Information Strategies for Avoiding Traps and Mitigating Bias Knowledge / Professional Standards 4
Critical Thinking Process 1 Clarify Issues and Objectives 2 Consider Alternatives 3 Gather and Evaluate Information 4 Reach Conclusion 5 Articulate & Document Rationale What is being solved? How can we achieve our objectives? Sufficient appropriate evidence. After evaluating the information gathered and considering our objectives, we reach a conclusion. Highlights the equal importance to articulating and documenting the rationale to support the conclusion. FOR INTERNAL USE ONLY. © [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country]. 5
Can You Recall… What are three judgment biases? • Confirmation bias • Overconfidence bias • Anchoring bias FOR INTERNAL USE ONLY. © [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country]. 6
Illustration 1 - Who do you listen to? § A man who got hit by a car while at an ATM and sued the bank instead of the driver of the car. Why did he sue the bank? – Deep pockets – Easy target – Some people are just out looking for a payday § But are those all the facts? FOR INTERNAL USE ONLY. © [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country]. GO TO INSERT--> HEADER & FOOTER TO EDIT THIS TEXT 7
Confirmation Bias § Tendency to seek for and put more weight on information that is consistent with our initial beliefs of preferences. FOR INTERNAL USE ONLY. © [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country]. 8
Illustration 2 – What do we believe? § 2006 Performance study of investment managers – 74% believed they are above average – 26% believe they are average § What’s wrong with this picture? FOR INTERNAL USE ONLY. © [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country]. GO TO INSERT--> HEADER & FOOTER TO EDIT THIS TEXT 9
Overconfidence Bias § Tendency for decision makers to overestimate their own abilities to perform task or to make accurate diagnoses or other judgments and decisions. § http: //www. youtube. com/watch? v =o 4 wv 4 RYFu. E 4&feature=player_ detailpage FOR INTERNAL USE ONLY. © [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country]. 10
FOR INTERNAL USE ONLY. © [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country]. GO TO INSERT--> HEADER & FOOTER TO EDIT THIS TEXT 11
Illustration 3 § Write down the number of citizens in the European Union? § Is it less than, greater than or around 200 million? FOR INTERNAL USE ONLY. © [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country]. GO TO INSERT--> HEADER & FOOTER TO EDIT THIS TEXT 12
Anchoring Bias § Tendency to make assessments by starting from an initial numerical value and then to adjust insufficiently away from that initial value in forming a final judgment. FOR INTERNAL USE ONLY. © [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country]. 13
The Key to Mitigate the Impact of Biases… § § AWARENESS!!!! Add structure to your decision process Explore, before coming to conclusions Look for objective facts, test the guesses or at least highlight them § Encourage participation § Consider dissenting voices, alternative views § Don’t be afraid to ask SILLY questions FOR INTERNAL USE ONLY. © [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country]. 14
The KPMG Professional Judgment Process ENVIRONMENT Influences / Biases Coaching Reflect on Previous Experience Reflect on Lessons Learned 5 Articulate & Document Rationale Coaching 1 Mindset Clarify Issues and Objectives 4 2 Reach Conclusion Consider Alternatives 3 Gather and Evaluate Information Strategies for Avoiding Traps and Mitigating Bias Knowledge / Professional Standards 15
Thank You The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International Cooperative ("KPMG International"). 16
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