Mind the Gap: Why Do Experts Have Differences of Opinion Regarding the Sufficiency of Audit Evidence Supporting Complex Fair Value Measurements?

Abstract

Reported deficiencies continue to persist in audits of fair value measurements and other complex accounting estimates (hereafter, “FVMs”), despite improvements in auditor performance observed by regulators. The persistence of reported deficiencies in audits of FVMs suggests that factors underlying this trend may be more complicated and multidimensional than previously suggested by regulators and academic research, which has focused largely on auditors' unsatisfactory performance as the principal source of reported deficiencies. Drawing from the judgment and decision‐making expertise literature, we gather field‐based data from audit experts to identify additional factors that are likely to be contributing to differences of opinion between audit and inspection experts and the persistence of reported deficiencies in audits of FVMs. We find evidence that audit experts interpret standards and evaluate audit evidence differently than inspectors, and thus perceive there to be a gap between what auditors and inspectors regard as sufficient appropriate audit evidence to support audits of FVMs (hereafter, “FVM gap”). Moreover, results highlight several areas in audits of FVMs where differences of opinion exist between auditor and inspector experts regarding what constitutes a reported deficiency. Within the contexts we examine, our results identify additional factors, beyond deficient auditor performance, that may contribute to the FVM gap. We also report audit partners' recommendations for ways to reduce the FVM gap and suggest avenues for future research. Gaining a more complete understanding of sources contributing to reported deficiencies will help regulators, standard setters, audit firms, and academics to identify ways to reduce the FVM gap and reported deficiencies in audits of FVMs.

U.S. Auditors' Perceptions of the PCAOB Inspection Process: A Behavioral Examination

“…Second, our consideration of U.S. auditors' perspectives provides insight into how inspection process characteristics might influence the work performed by auditors in the current environment and, in turn, impact inspection results. 2 In doing so, our study responds to calls for more research on the PCAOB inspection process (Malsch and Salterio 2016) and complements existing studies that provide detailed insights into the regulation of public accounting firms in the United States and other jurisdictions (Malsch and Gendron 2011;Canning and O'Dwyer 2013;Dowling et al 2018;Glover et al 2019;Hazgui and Gendron 2015; 1.…”

“…For example, surveyed auditors claim that PCAOB inspections are less effective in improving audit quality than the prior peer review process (Daugherty and Tervo ) and their own internal quality reviews (Houston and Stefaniak ), particularly as the inspections provide less timely feedback and are viewed as less procedurally fair. Additionally, this research shows that auditors experience an expectations gap between their own interpretations and PCAOB interpretations of standards for auditing fair values (Glover et al ). In a contemporaneous study, Westermann et al () find that, despite substantial negativity surrounding the inspection process, most auditors perceive that the PCAOB inspection process has improved audit quality, albeit at a very high cost.…”

“…We contribute to the literature in a number of ways. First, we extend Glover et al's (2019) examination of auditor challenges in meeting PCAOB expectations for auditing fair values by providing a holistic examination of auditors' perceptions of the PCAOB oversight process. Second, our study provides some evidence as to why auditors might perceive the relation between inspections and audit quality differently than intended by regulation (cf.…”

Overcoming Communication Challenges: Can Taking the Specialist's Perspective Improve Auditors' Critical Evaluation and Integration of the Specialist's Work?

“…The growth and prevalence of complex business transactions and the complexity of the information needed to account for these transactions have increased auditors' reliance on the work of audit firm-employed specialists (hereafter referred to as "specialist(s)") in numerous areas including actuarial, valuation, and information technology services (e.g., Smith-Lacroix, Durocher, and Gendron 2012;Harvest Investments 2015;PCAOB 2015a;Boritz, Robinson, Wong, and Kochetova-Kozloski 2015;Cannon and Bedard 2016;Glover, Taylor, and Wu 2017a ). 1 While financial accounting regulators have expanded and updated accounting standards (e.g., FASB 2006(e.g., FASB , 2008(e.g., FASB , 2011, audit regulators have been less forthcoming in providing detailed guidance to auditors on how they should evaluate and incorporate the work of specialists (e.g., Glover et al 2017aGlover et al , 2017b, and even concede that current guidance is dated (e.g., PCAOB 2015b, 11).…”

“…Second, we investigate one intervention (i.e., perspective taking) that auditors can employ to improve their critical evaluation and integration of the specialist's evidence. Academic studies to date have mostly focused on the problems auditors encounter when evaluating their clients' fair value measurements (hereafter "FVM(s)") and using the specialist's work (e.g., Joe et al 2016;Cannon and Bedard 2016;Glover et al 2017aGlover et al , 2017b, but have given less emphasis to examining effective strategies to improve auditors' use and reliance on FV audit evidence (e.g., Pyzoha et al 2016). Third, we extend the perspective taking literature in accounting by investigating the context where auditors are at an expertise disadvantage and in an advice-taking position.…”