ACC4320- Week 10 Assignment

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Northeastern University *

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100

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Management

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Feb 20, 2024

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docx

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Uploaded by SuperHumanWillpowerHeron34

Objective and Realistic Forecasts A forecast is a method for making predictions about the future using past outcomes. Foreseeing future events requires a thorough analysis of current and historical trends (Singh, 2022). Financial analysts would attempt to be objective and realistic in an ideal environment, but in the real world, there exist biases like inherited risk, fraud, favoritism, etc. These biases have different causes depending on each person's role and interests. Financial analysts often work for a certain industry or sector, and they create a hypothesis that allows them to concentrate on the data that supports it. Following are some of the different biases when forecasting: First, inheritance risk is one risk that leads to bias when forecasting. It is the level of risk already present to fulfill an entity's goals before steps are made to reduce the risk's impact or possibility (Tennessee State Government, 2022). Former employees basically create it. For instance, there is a possibility that a vendor with several transactions is not recorded as a buy transaction or that the transaction is recorded with the incorrect amount (Nigam, 2022). So, the financial records and data may be impacted by inherited risks that are not specifically identified. This risk can lead to analysts tampering with the data in the forecasting model and avoiding being involved in problems with the management. There can be instances where the anticipation doesn't match the forecast, and then questionable information, like files, books, etc., gets involved by the administrators. Thus, to avoid such instances, it is clear that inheritance risk can lead to bias. Second, another risk can be fraud risk, which encourages managers, accountants, and analysts to bias. Fraud risk is a state and resiliency brought on by ineffective or failing internal processes or systems, human error or misbehavior, or unfavorable outside occurrences (Office of 1

the Comptroller of the Currency, 2019). For example, the personnel may possibly steal funds from the business, which is a concern. Thus, like inheritance risk, the financial books and reports will also be impacted by this risk to cover fraud. Third, one of the risks that can result in bias in forecasting is risk optimization. Risk optimization is a risk-related procedure that reduces negative effects while enhancing positive ones (NIST, 2022). The leaders and managers made their decision based on a good situation. It can be problematic if things go differently and the good scenario doesn't happen. For example, a large investment can cause a negative spiral and bury the managers in sunk costs. Therefore, optimism bias will be unable to control risk and cannot objectively forecast the unpredictable consequences. This bias is prevalent in typical businesses nowadays because managers deal with and invest based on their theories and expect that the marketplace will flourish. Forth, bias can also arise from incentives like favoritism. This happens when choices are based on personal partialities, such as when a financial analyst's previous experiences/relations impact him or her. For instance, it will be challenging for an analyst who loves Samsung products to write that the company is in trouble and on the verge of shutting down. Additionally, it will be challenging to take harsh action against a company when many managers have long- standing connections with it or analysts who have previously worked there. They might not make outrageous predictions because they don't want to end their personal connection. To conclude, existing biases from inherited risk, fraud risk, risk optimization, and favoritism are discussed. These biases seem to have different triggers depending on each person's role and interests. References 2

NIST. (2022). Risk Optimization. Retrieved from https://csrc.nist.gov/glossary/term/risk_optimization on November 12, 2022. Nigam, R. (2022). Inherent Risk. Retrieved from https://www.wallstreetmojo.com/inherent-risk/ on November 11, 2022. Office of the Comptroller of the Currency. (2019). Operational Risk: Fraud Risk Management Principles. Retrieved from https://www.occ.treas.gov/news-issuances/bulletins/2019/bulletin-2019-37.html on November 10, 2022. Singh, G. (2022). Forecasting types and their Various Methods. Retrieved from https://www.xenonstack.com/insights/what-is-forecasting on November 12, 2022. Tennessee State Government. (2022). Inherent and Residual Risk. Retrieved from https://www.tn.gov/content/dam/tn/finance/accounts/Inherent-vs-RisidualRisk.pdf on November 12, 2022. 3

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ACC4320- Week 10 Assignment

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