Auditor Fair Value Expertise
58 Pages Posted: 12 Jun 2018
Date Written: June 7, 2018
Under the premise that auditors develop specialized knowledge, we propose that auditors can gain expertise in auditing fair value (FV) estimates. PCAOB inspections repeatedly indicate deficiencies in audits of FV estimates, resulting in efforts by regulators to improve the related guidance and auditing standards (PCAOB 2017). Nevertheless, regulators cannot fully resolve the complexity and inherent subjectivity in auditing fair value estimates, and thus, other solutions may be needed. We surmise that domain-specific auditor FV expertise, gained from work experience during the audit of FV measurements, can contribute to higher audit quality. Utilizing FV-related restatements and comment letters, we find that expertise in auditing level 3 FV estimates at the office level is associated with greater FV audit quality. Level 2 FV expertise or national level FV expertise are not associated with higher FV audit quality. Following the receipt of a comment letter, we further find that auditor FV expertise is associated with lower comment letters’ remediation costs and higher FV disclosure quality. Finally, we find that the value relevance of level 3 FV disclosures increases with the extent of auditor FV expertise. Collectively, our results highlight that auditor fair value expertise contributes to the credibility and usefulness of FV disclosures.
JEL Classification: M41, M42
Suggested Citation: Suggested Citation