The Joint Effects of Industry and Fair Value Expertise During Periods of Extreme Uncertainty

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 1: Audit Risk I

Abstract

Using sensemaking theory, we investigate the joint effects of auditor industry and fair value specialization on managers’ fair value related reporting decisions during periods of extreme uncertainty. We first document that firms with higher fair value exposure are more likely to exercise an option to reclassify certain financial assets and potentially avoid significant fair value related losses. Second, we find that while firms who employ auditors with industry (fair value) expertise are more (less) likely to exercise the reclassification option, auditors with expertise in both are most effective at mitigating managers’ opportunistic use of the standard change. Third, we link the reclassification decision to two traditional proxies of management opportunism, the likelihood of high discretionary accruals and benchmark-beating behavior. Our findings are robust to these alternative measures. Collectively, our results show that during periods of extreme uncertainty, broadly defined measures of auditor expertise may not reflect the competitive advantage that specialists generally have over non-specialists. Moreover, in an international setting, our study can be regarded as documenting an important external monitoring mechanism in addition to previously identified international institutional factors and monitoring factors that constrain (do not constrain) opportunistic behavior.

Authors

• Helen L Brown-Liburd, Rutgers Business School

• Dereck D Barr-Pulliam, University of Wisconsin-Madison

• Stephania Mason, DePaul University