Company Valuation Specialists’ Interactions With Management and Auditors: A Field Study

• In Event: 5.03 Behavioral Management Accounting Research

Abstract

Management often relies on specialists for valuing complex fair value measurements (FVMs). These specialists, referred to as company specialists, can either be engaged or employed by companies. Auditors frequently use FVMs prepared by company specialists as audit evidence. Limited research exists on how company specialists affect the preparation of FVMs and their audits, while PCAOB documents persistent problems related to overreliance and lack of professional skepticism of company specialists’ FVMs in the audit process. Based on in-depth interviews of Norwegian audit partners and company valuation specialists in the field of investment property, shipping, financial instruments, and oil and gas reserves, this field study provides evidence on how audit teams interact with company specialists, how company specialists view the work of auditors and auditor specialists, and company specialists’ experience of pressure to conform to management measurement bias. The findings indicate that company specialists are not immune to management pressure, and document several tactics management employs in order to inflate specialist assisted FVMs. The results also document that management pressure is highest for nonfinancial FVMs at level 3 of the fair value hierarchy. Furthermore, the findings indicate that auditors struggle with understanding how FVMs are developed from a set of interrelated assumptions, leading them to focus on the minutia of the individual assumption at the expense of a “big picture” view. According to the company specialists, such detail orientation may lead auditors to improperly evaluate FVMs and possibly providing assurance on inflated fair values. The paper corroborates and explains recent finding in financial archival literature on the reliability of FVMs, and strengthen our understanding of the audit quality deficiencies documented in this area by the PCAOB and other regulators.

Author

• Kyrre Kjellevold, Norwegian School of Economics