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

by Kyrre Kjellevold, Norwegian School of Economics (NHH), Department of Accounting, Auditing and Law

Management often relies on specialists for valuing complex fair value measurements (FVMs), auditors frequently rely on those FVMs as audit evidence, and the PCAOB has documented persistent problems in the audit of FVMs. Based on in-depth interviews of Norwegian audit partners and company valuation specialists, I provide evidence on how audit teams interact with company specialists, how company specialists view the work of auditors and auditor specialists, and the extent of pressure company specialists’ experience to conform to management measurement bias.

The findings indicate that auditors’ lack of valuation knowledge and auditor specialists’ lack of asset-specific expertise, lead to deficiencies in their understanding of how assumptions used in FVMs are interrelated and result in auditors focusing on the minutia of the individual assumptions at the expense of a “big picture” view. The findings further suggest that company specialists are not immune to management pressure and I document several tactics management employs to inflate their specialist assisted FVMs. Management pressure is highest for non-financial level 3 FVMs. These results corroborate and explain recent findings in financial archival literature on the reliability of FVMs and enhances our understanding of the audit quality deficiencies documented by the PCAOB and other regulators.

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