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What do a fictional courtroom’s perceptions of an eccentric judge from a 1980s situation comedy and a real-world internal auditor’s assessment of the leadership of a business organization have in common?

Admittedly not much, on the surface. But, a ÌđčÏÊÓÆ”app College of Business faculty member’s youthful fascination with the popular sitcom “Night Court” helped plant a seed of curiosity that has led, albeit indirectly, to research into the relationship between archetypes and perceptions of risk in a business setting.

Joe Giordano, assistant professor of accounting in the WCU College of Business, conducted a study of the dilution effect – that is, the impact of superfluous factors – on internal auditors and their judgment of risk factors within an organization.

The findings of Giordano’s study will be published by the Managerial Auditing Journal in an article titled “Not Just the Facts: The Effect of Irrelevant Information on Internal Auditor Judgment.” The article, to appear in Volume 40 of the “A-level” academic journal, was co-authored by Lisa Victoravich from the College of Business and Economics at the University of Idaho.

“In a nutshell, the presence of irrelevant information that contradicts a stereotype about a person decreases the internal auditor’s risk judgment. In other words, they perceive operations as less risky than they otherwise would,” Giordano said.

“As a child, I watched the television show ‘Night Court,’ which was based on the premise that the honorable judge was ‘unusual’ yet extremely competent and compassionate. My research, which does not rely on 1980s-era sitcoms, indicates that the judge is actually evaluated less harshly than his performance would suggest,” he said.

Giordano’s research reveals that a similar pattern holds true in the business world, where internal auditors frequently approach their assessments of an organization’s leadership with preconceived notions about how individual leaders should act. His study found that internal auditors tend to make less skeptical risk judgments when information that is relevant to the assessment is accompanied by irrelevant information that contradicts commonly held stereotypes.

This phenomenon is an example of an old psychological truism termed “representativeness,” Giordano said. “This basically means that individuals hold an archetype such as ‘accountants are stuffy,’ for example, and once that archetype is broken, even if that information has nothing to do with the decision at hand, evaluators have to work harder at the decision and actually moderate their judgment,” he said.

“What is interesting about this is that, intuitively, it seems like if a chief information officer doesn’t act like a chief information officer, the auditor would evaluate the operations to be more at risk,” Giordano said. “But, in fact, the opposite happens, as predicted by theory.”

The theory in play is dilution theory. Behavioral psychologists suggest that humans moderate, or dilute, their judgment in the  presence of nondiagnostic information through mental shortcuts that everyone takes when assessing people or situations.

While previous research has examined the impact of extraneous information on the work of external auditors, Giordano’s study is among the first to look at how such peripheral factors influence internal auditors in their assessment of their own organizations.

“Systemically underrating business risks may, over time, strain the internal auditor’s credibility, ultimately diminishing the function’s effectiveness. Management can justifiably establish weaker internal controls than necessary based on the internal auditor’s assessment, then blame the internal auditor for the resulting negative outcome. As a key duty of internal auditing is ensuring assets are safeguarded, the internal audit profession has a vested interest in ensuring sound judgment,” he said in his paper.

Giordano said he believes this study is particularly timely as the Institute of Internal Auditors has  recently updated its professional standards and as “big data” has expanded the volume of information available for internal auditors to analyze, likely pushing them toward cognitive shortcuts.

For their study, Giordano and Victoravich asked participants, all from the internal auditing profession, to read an interview transcript between a company’s senior internal auditor and its CIO. After reviewing the transcript, the participants performed an “internal control over financial reporting” or ICFR audit to assess risks related to the company’s processes, policies and procedures. They then responded to additional questions measuring participant trait skepticism, social identity, information relevance and professional experience.

A total of 157 participants, including a control group, completed and answered all the questions. Participants also received a variety of different pieces of unrelated information including speaking patterns, entertainment habits and social preferences to gauge how such factors might influence their assessment of risk.

Giordano said he hopes that the study and its findings will lead to additional research.

“Internal auditors are interesting subjects as their multiple roles – attestor, partner and employee – expose them to increased susceptibility to cognitive biases such as the dilution effect. Internal auditors are an important, but poorly understood, part of corporate governance, with scholars calling for additional insight,” he said.

But for now, internal auditors would be wise to keep in mind the following exchange between two characters from “Night Court” when assessing company leadership: “Your honor, this is highly irregular,” egotistical District Attorney Dan Fielding said to eccentric Judge Harry T. Stone. To which Judge Stone replied, “Thanks!”

Just because someone seems “highly irregular,” that doesn’t mean they are not qualified to do the job, Giordano said.