Regulatory Focus Theory proposed two self-regulation systems – promotion focus and prevention focus, that are fundamentally different in how they impact on human cognition, behaviours and emotions. This section of the chapter offers an introduction of the theory and the various effects of regulatory focus dispositions in human cognition and judgment under uncertainty. Thus, it is proposed that Regulatory Focus Theory (RFT) has important value in audit JDM research and that it may help to explain the incidence of unconscious bias in audit judgment.
Firstly, the theory offers new perspectives on existing understanding of cognitive limitation in audit judgment. The distinctive effects of promotion focus versus prevention focus on human cognition can be applied to better account for differences in judgment made among people. For instance, people with promotion focus tend to make risky responses in general,
but in situations of loss, individuals with prevention focus are more likely to take high risk to revert to non-loss situation.
This distinctiveness between promotion focus and prevention focus can also be applied in audit training and education. One objective of audit is to assure the absence of material misstatement in financial statements. It is likely that the confirmatory exercise of audit to check assertions in financial statements is more characteristic of prevention focus with motivation to insure against errors. Since regulatory focus can be stable as a chronic character, prevention focused individuals can be expected to perform better in tasks that require continuous attention to details. However, this does not necessarily suggest prevention focus is more desirable in audit. Promotion focused individuals (who see the task as an opportunity to seek advancement) are, for instance, more ready for challenge and to be prepared to work on a difficult task (e.g., to deal with complex financial instruments and derivatives for the first time) than prevention focused individual who are more concerned with security and safety (Crowe and Higgins, 1997). In addition, paying attention to details and checking for errors can also be promotion focused framed that each error identified is considered as a ‗hit‘ achieved. This can be incorporated in audit training and education so that those auditors who are chronically promotion focused align their pursuit of promotion goals in performing audit tasks. Moreover, regulatory focus can also be momentarily induced / activated, which means individual auditors can be primed with either promotion focus or prevention focus for specific audit task. In some experimental studies, participants are often asked to think (and write) about their ideals and aspirations to activate promotion focus, or about their obligations and duties to activate prevention focus. A possible way to apply this in audit practice may be to ask auditors to think in the avoidance manner (prevention focus) about key points that must not be neglected, versus, asking them to think in the approaching manner (promotion focus) about key points to target on.
Different strategies, eager or vigilant, may be adopted in performing audit tasks. For instance, when unexpected fluctuation in profit of the year is detected in preliminary planning of an audit job, auditors evaluate alternative hypotheses of the cause(s) of the fluctuation. They can adopt eager strategies to ensure inclusion of necessary hypothesis testing of the correct cause in the planning of the audit. Using exploratory approach (i.e., even-handed consideration of alternative point of view) to consider possilbe alternative causes of the fluctuation may represent an eager strategy adopted to hit on the ‗most likely‘
cause(s). Alternatively, a vigilant strategy can be adopted to ensure elimination of
unnecessary procedures of testing incorrect causes. Using confirmatory approach (i.e., one-side attempt to rationlize a particular point of view) to focus on fewer probable alternative causes may represent a vigilant strategy adopted to concentrate on defense of the procedures taken. The adoption of different strategies leads to different numbers of hypothesized causes of fluctuation being generated, which potentially influences the planning of audit work. People often prefer use of particular stratgies and the strategic inclinations are associated with their regulatory focus dispositions (Higgins and Spiegel, 2004; Molden, 2012). Individuals with promotion focus prefer using eager strategies in their goal pursuit whereas individuals with prevention focus prefer using vigilant strategies. Hence, regulatory focus may be applied to study individual differences in preferred strategy in designing and performing audit procedures.
Secondly, empirical findings consistently suggested potential overreaction to loss and negative outcomes associated with prevention focus. Individuals with prevention focus are more likely to be influenced by sunk cost incurred as they refuse to recognize the cost as loss; they tend to be more willing to take risks to recover a loss. Applying this effect to audit judgment, it is plausible that there might be oversensitivity towards loss-related accounting information among prevention focused auditors.
The theory suggests that promotion focused individuals are primarily concerned with, and more sensitive to, the absence and presence of gains and positive outcomes; whereas individuals with a prevention focus are primarily concerned with, and more sensitive to, the absence and presence of losses and negative outcomes. Prior research has revealed a pervasive effect of this sensitivity towards different outcome-related information on individuals‘ information processing. People pay selective attention to information related to gain and positive outcome versus information related to loss and negative outcome (Molden, 2012). In a study by Higgins and Tykocinski (1992), this effect of regulatory focus was examined in a memory recall study in which subjects read about the daily life of a hypothetical person. The daily life information includes both ‗positive‘ events (good news) about attainment of gains or positive outcomes, e.g., finding money on the street, and ‗negative‘ events (bad news) about incurrence of losses or negative outcomes, e.g., being trapped in traffic jam. Promotion focused subjects recall more ‗positive‘ events while prevention focused subjects recall more ‗negative‘ events. Results of the study suggested a relationship between regulatory focus and individuals‘ sensitivity to information about ‗positive‘ and ‗negative‘ events (good versus bad news) so that individuals recall more relevant information from memory. This fundamental effect can be
applied to audit judgment that auditors pay selective attention to good news and bad news about the client‘s financial performance. Promotion focused auditors, being primarily concerned of ‗positive‘ events, can be expected to pay more attention to information indicating good financial performance; whereas prevention focused auditors, being primarily concerned of ‗negative‘ events, can be expected to pay more attention to information suggesting poor financial performance. Hence, auditors‘ regulatory focus orientations may influence their processing of accounting information / audit evidence processed and their retrieval of processed information in the process of making judgment.
Thirdly, there is also a time dimension in judgment under uncertainty. People make trade-offs between value and temporality (i.e., distance in time of its occurrence). Prior literature has largely overlooked temporal discounting on past events. Among scarce studies on regulatory focus and temporal distance, empirical findings suggested association between dominance of promotion focus in situations more temporal distant and dominance of prevention focus in situations more proximal. Hence, it is reasonable to expect effect of regulatory focus on cognition of temporal distance in judgment.
Discussion on plausible implication of regulatory focus in audit judgment is continued in the Chapter Four, where research questions and hypotheses of this thesis are set out.