How Does Accountability and Role Drive Valuation Specialists’ Determination of Fair Value?

Abstract

We interview valuation specialists (specialists) employed by accounting firms (in North America, Europe, and the Asia-Pacific region) to understand how their felt accountability to internal (auditors) vs. external clients (managers) influence the estimation and financial reporting and audit quality of complex financial instruments reported in audited financial statements. Specialists are integral to determining the fair values reported in audited financial statements because managers and auditors lack the necessary skill to do so and seek specialists’ assistance to fulfill their financial reporting responsibilities. Thus, the same specialists, at different times, act as either preparers (helping managers estimate fair values) or evaluators, supporting auditors’ assessments of their client’s fair value estimates. Our interviews reveal that differences across the specialists’ roles activate different types of felt accountability to managers and auditors. These felt accountability differences can result in lower commitment to ensure the adequacy of the specialist’s scope of services when evaluating versus preparing fair estimates. Specialists also exploit the subjectivity in fair value estimates to support balances that meet management’s preferences and complete valuations that avoid material audit differences. Importantly, such specialists’ behaviors and the consequences of their actions impact the amount of the fair values reported in financial statements yet are unobservable. Thus, financial statement users do not have access to potential bias existing in the estimates.