Auditing Fair Value: Security-Level Evidence on Auditor Expertise

Posted: 14 Sep 2019

See all articles by Natalie Berfeld

Natalie Berfeld

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: September 4, 2019

Abstract

In this paper, I study whether and how auditors develop domain-specific expertise in auditing difficult-to-audit fair value (FV) measurements. Specifically, by analyzing the dispersion in the FV estimates of the same security held by different insurance clients of the same auditor, I provide security-level evidence that auditors influence their clients’ FV measurements. Importantly, I find that auditors get better at estimating security FV when they observe multiple valuations of the same securities at different clients. I also find evidence that auditors use their built-up competency to curb insurance clients’ incentives to overstate the FV of securities stemming from their regulatory capital levels. Overall, these results shed light on the role of domain-specific expertise in the auditing process, suggesting that auditors develop such expertise through a specific learning mechanism that they apply to curb managerial incentives.

Keywords: auditing; fair value; learning; insurance companies

JEL Classification: G20, G22, M41, M42

Suggested Citation

Berfeld, Natalie, Auditing Fair Value: Security-Level Evidence on Auditor Expertise (September 4, 2019). Available at SSRN: https://ssrn.com/abstract=3447673

Natalie Berfeld (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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