Complex Fair Value Measurements and Material Weaknesses: It's Not All Bad News

38 Pages Posted: 28 Dec 2014

See all articles by Nathan H. Cannon

Nathan H. Cannon

Texas State University

Brant E. Christensen

University of Oklahoma

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

David A. Wood

Brigham Young University - School of Accountancy

Date Written: December 26, 2014

Abstract

U.S. and international regulators and standard setters have criticized companies and audit firms for failing to establish and audit internal controls for complex fair value measurements (FVMs). In this study, we examine the association between FVMs and the likelihood of reporting a material control weakness, as well as settings in which this association may be reduced. We find that companies with FVM portfolios concentrated in Level 2 and Level 3 FVMs are more likely to report material weaknesses, confirming regulators’ concerns that the FVMs are associated with lower financial reporting quality. However, we do not find this association for large companies, clients of audit firm industry experts, or clients of audit firms with FVM-specific expertise. These results suggest that despite the inherent complexity of Level 2 and Level 3 FVMs, company- and auditor-specific characteristics can impact companies’ abilities to create an effective internal control structure around some FVMs.

Keywords: Auditing, expertise, internal controls, fair value measurement, complexity

Suggested Citation

Cannon, Nathan Hatch and Christensen, Brant E. and Omer, Thomas C. and Wood, David A., Complex Fair Value Measurements and Material Weaknesses: It's Not All Bad News (December 26, 2014). Available at SSRN: https://ssrn.com/abstract=2538762 or http://dx.doi.org/10.2139/ssrn.2538762

Nathan Hatch Cannon (Contact Author)

Texas State University ( email )

601 University Drive
San Marcos, TX 78666-4616
United States

Brant E. Christensen

University of Oklahoma ( email )

Norman, OK 73019-4004
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

David A. Wood

Brigham Young University - School of Accountancy ( email )

518 TNRB
Brigham Young University
Provo, UT 84602
United States
801-422-8642 (Phone)
801-422-0621 (Fax)

HOME PAGE: http://marriottschool.byu.edu/employee/employee.cfm?emp=daw44

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