Auditing Goodwill in the Post-Amortization Era: Challenges for Auditors

Posted: 2 Aug 2014 Last revised: 24 Jun 2018

See all articles by Douglas Ayres

Douglas Ayres

Ball State University - Department of Accounting

Terry L. Neal

University of Tennessee

Lauren C. Reid

Wake Forest University - Schools of Business

Jonathan E. Shipman

University of Arkansas

Date Written: December 13, 2017

Abstract

The elimination of goodwill amortization in 2001 brought about significant change in how companies are required to account for goodwill. This change in accounting also brought with it new challenges for auditors, namely evaluating the reasonableness of management’s assumptions related to goodwill valuation. In addition to introducing technical challenges, this task is particularly difficult given the misalignment in incentives it creates between managers who likely prefer to avoid recording an impairment and auditors who seek to minimize the bias in management’s impairment testing. This study focuses on the consequences of the misaligned incentives that auditors face under the current goodwill assessment process. We find that the decision to record a goodwill impairment is associated with an increase in the probability of auditor dismissal. Consistent with the presence of significant friction with clients, our results also indicate that the likelihood of auditor dismissals is negatively related to the favorability of the impairment decision. Furthermore, we find that companies impairing goodwill prior to dismissing auditors subsequently employ auditors that are, on average, more favorable to clients in their impairment decisions.

Keywords: auditing; goodwill impairment; auditor dismissals

JEL Classification: M41, M42

Suggested Citation

Ayres, Douglas and Neal, Terry L. and Reid, Lauren C. and Shipman, Jonathan E., Auditing Goodwill in the Post-Amortization Era: Challenges for Auditors (December 13, 2017). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2474674 or http://dx.doi.org/10.2139/ssrn.2474674

Douglas Ayres

Ball State University - Department of Accounting ( email )

United States

Terry L. Neal (Contact Author)

University of Tennessee ( email )

639 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-2664 (Phone)
865-974-4631 (Fax)

Lauren C. Reid

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

Jonathan E. Shipman

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

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