Empirical Analysis of Accounting Estimates When Predictions are Poor

42 Pages Posted: 10 Mar 2013

See all articles by Uli Menzefricke

Uli Menzefricke

University of Toronto - Rotman School of Management

Wally Smieliauskas

University of Toronto - Rotman School of Management

Date Written: November 26, 2012

Abstract

This study empirically analyzes the reliability of a significant class of accounting estimates by focusing on forecast errors in estimated pension returns for the period 2001-2010. These estimates have a major impact on the reporting of pension costs and income for even the largest and most solvent of plan sponsors, and hence they are a good example of the effect of accounting estimates on financial reporting. We find substantial evidence that these estimates are frequently not a faithful representation of actual returns in a given year, management’s reasonable ranges concerning them are poorly calibrated, the resulting accounting risk from forecast errors is unacceptably high in many instances, and, consequently, auditors cannot provide reasonable assurance on them. This has major implications for the use of these and similar estimates in financial reporting and accounting standards, and their verification by auditors.

Keywords: accounting estimates, forecast error, accounting risk, calibration of ranges, audit of estimates, financial reporting framework

Suggested Citation

Menzefricke, Uli and Smieliauskas, Wally, Empirical Analysis of Accounting Estimates When Predictions are Poor (November 26, 2012). Rotman School of Management Working Paper No. 2230691, Available at SSRN: https://ssrn.com/abstract=2230691 or http://dx.doi.org/10.2139/ssrn.2230691

Uli Menzefricke

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Wally Smieliauskas (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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