Industry Specific vs. Task Specific Auditing Expertise: The Case of Goodwill Impairment

• In Event: Auditing Accounting Estimates

Abstract

There is growing interest among academics and auditing regulators on the role of auditing on the quality of accounting estimates including impairment of goodwill. Prior research has shown that managers exercise discretion by either delaying the decision to record goodwill impairment, and/or conditional on the decision, understating the amount of impairment leading to overstatement of earnings. This study examines the extent to which auditor expertise mitigates managerial discretion in the context of goodwill impairment. We focus on two types of expertise: industry expertise, measured as within-industry market share, and task specific expertise, measured as the extent to which the auditor has prior experience with goodwill impairment. We find that auditor industry expertise is not associated with either the likelihood of goodwill impairment, or the amount of the impairment. We find strong evidence that prior experience with goodwill reduces managerial discretion related to goodwill impairment. Specifically, prior experience with goodwill impairment is positively associated with both the likelihood of impairment and the amount of impairment. Our findings have implications for the ongoing discussion related to auditor characteristics that affect reporting quality of accounting estimates.

Authors

• Monika Causholli, University of Kentucky

• Giulio Greco, University of Pisa

• Silvia Ferramosca, University of Pisa

• Giuseppe D’Onza, University of Pisa