Does Fair Value Measurement Provide Satisfactory Evidence for Audit? The Case of High Tech Valuation

24 Pages Posted: 19 Sep 2008

See all articles by Cécile Carpentier

Cécile Carpentier

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Lille II - European Center for Corporate Control Studies

Réal Labelle

HEC Montréal - Stephen A. Jarislowsky Chair in Governance

Bruno Laurent

Ernst and Young

Jean-Marc Suret

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); European Center for Corporate Control Studies

Date Written: September 17, 2008

Abstract

Fair value measurement (FVM) of assets for which no liquid market exists has stimulated debate in the accounting profession. Two solutions to this brainteaser have been proposed: 1) recourse to outside experts and 2) development of valuation standards or guidelines by practitioners' associations. Despite these adjustments to FVM, one question remains unanswered: Do skilled experts using these standards and guidelines provide accurate and homogeneous valuations? We analyse the consistency and quality of the valuations provided by a sample of 43 business valuation experts. These experts were asked to value the same closed small high tech firm preparing an initial public offering (IPO), according to a common set of hypotheses and guidelines. Our experimental study shows that, even when they rely on the same guidelines, skilled experts use different methods and multiples. The variations found in FVMs for the same investment are very significant, and a comparison of these FVMs with the actual market value following the IPO indicates that the FVMs were biased upward. The effective usefulness of the guidelines for FMVs and the ability of experts to provide consistent valuations are therefore questionable, at least in the case of highly challenging valuation engagements.

Keywords: Fair Value, Measurement, Audit, Valuation, Standards, Experts

JEL Classification: M41, M44, M47, C91

Suggested Citation

Carpentier, Cécile and Labelle, Réal and Laurent, Bruno and Suret, Jean-Marc, Does Fair Value Measurement Provide Satisfactory Evidence for Audit? The Case of High Tech Valuation (September 17, 2008). Available at SSRN: https://ssrn.com/abstract=1269743 or http://dx.doi.org/10.2139/ssrn.1269743

Cécile Carpentier

Laval University ( email )

Pavilion Palasis Prince
Quebec, Quebec G1V 0A6
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th floor
Montreal, Quebec H3C 3J7
Canada

University of Lille II - European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

Réal Labelle

HEC Montréal - Stephen A. Jarislowsky Chair in Governance ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514 340 6374 (Phone)

Bruno Laurent

Ernst and Young ( email )

Switzerland

Jean-Marc Suret (Contact Author)

Laval University ( email )

Accounting School
Quebec, P.Q. G1K 7P4
Canada
418-656-7134 (Phone)
418-656-7746 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

1130 rue Sherbrooke Ouest
Bureau 1400
Montreal, Quebec H3A 2M8
Canada

European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

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