Page 165 - COSO Guidance

Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 17

Summary Observations

COSO recognizes the vital role of consistent, high-quality These tendencies can affect boards as they oversee
professional judgment as management and boards of management’s planning, fraud prevention, ERM, control,
directors execute and oversee an entity’s ERM, internal and execution activities.
control, and fraud deterrence efforts. Professional
judgment is increasingly important as board members Awareness of the common threats to good judgment
fulfill their responsibilities related to effective oversight is the key initial step in improving judgment. Board
of management’s strategic planning, execution, fraud members can use the insights summarized in this thought
prevention, and risk management processes. Even paper to test and improve the consistency and quality
seasoned board members can improve the consistency of management’s judgment processes and outcomes by
and soundness of their judgment by being aware of rigorously challenging perspectives and assumptions via
common judgment traps and by following a good judgment open and frank discussions. Such discussions can include
process. Such a process can help avoid threats to consideration of judgment traps, simplifying tendencies,
good judgment, including the biases related to common and alternative viewpoints. Board members who are aware
judgment tendencies or shortcuts. Exhibit 4 outlines of traps and tendencies that limit the quality of judgment
actions that boards can consider at each of the five steps can use these insights to challenge management’s
of the judgment process presented in exhibit 1. judgments and more effectively fulfill their oversight role.

Many board-level judgments are made in group settings,
and although group judgments are often better than
individual judgment, group judgments can fall victim to
narrow thinking; suppression of divergent views; and,
consequently, shallow judgment processes. Some common
tendencies that exhibit themselves in individual judgment
and that can lead to bias in board-level decisions are the
overconfidence tendency, the confirmation tendency,
the anchoring tendency, and the availability tendency.

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