The problem of management bias in accounting estimates: An investor perspective on root causes and solutions

Selling, Thomas I.; Nordlund, Bo

doi:10.1016/j.bushor.2015.05.003

Cited by 4 publications

(5 citation statements)

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“…Estimations with high management involvement may be identified as significant risks (ISA 701.A14). Management estimates are also subject to management bias for earnings management purposes (Christensen et al, 2012;Jarva, 2009;Selling & Nordlund, 2015). Finally, management estimations are also subject to possible fraud (Jones & Jones, 2010).…”

Section: Fair Value Reporting In the Real Estate Sectormentioning

confidence: 99%

“…However, the effects of challenging the management estimates on the auditor's reputational risk and risk of litigation have not been investigated. Past studies have concentrated on scepticism regarding management estimates on financial statements (Feng & Li, 2014; Niemeier, 2007; Selling & Nordlund, 2015). Sceptical procedure's impacts on KAM reporting have been researched by Asbahr and Ruhnke (2019).…”

Section: Research Questionsmentioning

confidence: 99%

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The homogeneity of BIG4 audit reports after the implementation of key audit matters in the context of fair value accounting

2022

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This study examines the homogeneity of BIG4 audit reports after implementing key audit matters (KAMs) in the context of fair value accounting. We focus on reported KAMs and the procedures related to the fair values of investment properties, particularly those related to challenging management's estimations and valuation specialists' use. Our data consist of 235 individual audit reports from the real estate sector from 2017 to 2018 and cover 60% of the listed real estate companies in the EU, Switzerland, and Norway. We found that the BIG4 audit firms are not homogenous in their audit reports. There is a statistically significant difference among the BIG4 audit firms in reporting the challenge of management estimates and in the number of audit procedures. We also found that a country's legal origin plays a significant role when auditors report KAMs. Our findings contribute to the current audit quality and reporting literature.

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Section: Fair Value Reporting In the Real Estate Sectormentioning

confidence: 99%

Section: Research Questionsmentioning

confidence: 99%

The homogeneity of BIG4 audit reports after the implementation of key audit matters in the context of fair value accounting

2022

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“…In the United States, the Uniform CPA Examination Blueprint (AICPA 2018) identifies competencies related to accounting estimates in several areas of the AICPA competency framework (specifically, the areas dealing with assessing risk and developing a planned response, performing further procedures and obtaining evidence, and financial management). However, Selling and Nordlund (2015) note that programs preparing future auditors for the CPA exam only teach them to verify facts and to recognize when accounting estimates are required in preparing GAAP financial statements. They are not taught valuation skills to assess the reasonableness of such estimates.…”

Section: Introductionmentioning

confidence: 99%

Novice Auditors and Audits of Fair Values: Knowledge and Skill Requirements^*

Boritz,

Timoshenko

2024

Accounting Perspectives

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Novice auditors are increasingly being asked to perform tasks that were not expected of them in the past, including evaluation of fair values (FVs). This study contributes to the auditing literature by investigating novice auditors’ competencies required for correct performance of FV auditing tasks, identifying weaknesses, and suggesting actions that could be taken by educators and practitioners to address those weaknesses. Using the audit of goodwill impairment under IFRS as the exemplar task for identifying FV auditing competencies, we create a normative process table for the task based on accounting and auditing standards and authoritative valuation literature. We analyze the verbal protocols of novice auditors while they perform the task and compare their processes to the normative table to understand weaknesses in their competencies. Our findings are of interest to auditing educators and audit firm personnel responsible for staff training programs, audit program development (e.g., checklists), supervision, and review.This article is protected by copyright. All rights reserved.

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“…A number of studies have described client pressure and management bias in relation to property valuations (e.g. Achu, 2013; Selling and Nordlund, 2015), and questions have been raised about audit quality regarding accounting estimates (see for instance IAASB, 2019; Ahn et al , 2019 and Joe et al , 2017). The International Forum of Independent Audit Regulators (IFIAR) has since 2012 published an annual report that includes a list of the most common findings among its members.…”

Section: Introductionmentioning

confidence: 99%

Practice Briefing A note on auditing fair value of investment properties

Nordlund

Lorentzon

Lind

2021

JPIF

Self Cite

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PurposeThe purpose of this article is to study how fair values in financial reports are audited.Design/methodology/approachThe study is a qualitative case study based on in-depth interviews.FindingsOne important finding is that auditors anchor in the figure presented by the company, and despite the auditing efforts, there is a substantial risk of management bias in the fair values reported. There is a risk for confirmation bias.Research limitations/implicationsRelatively, few respondents were employed in this study, but their background and competence lead to the assessment that the study provides a representative picture of what is being investigated.Practical implicationsAuditors may need to develop ways of performing auditing of fair values to reduce the risks identified in this study.Social implicationsThis study presents a perspective of the auditing process enabling an evaluation of the quality of fair value estimates regarding investment properties in the financial reports. This study also provides users of financial reports as investors, bankers and other institutions with an enhanced understanding of reported estimates of fair (market) values.Originality/valueVery few studies have investigated how auditors evaluate fair values of investment properties. This study contributes by giving users of financial reports an enhanced understanding of the quality of reported estimates of fair (market) values.

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The problem of management bias in accounting estimates: An investor perspective on root causes and solutions

Cited by 4 publications

References 4 publications

The homogeneity of BIG4 audit reports after the implementation of key audit matters in the context of fair value accounting

The homogeneity of BIG4 audit reports after the implementation of key audit matters in the context of fair value accounting

Novice Auditors and Audits of Fair Values: Knowledge and Skill Requirements^*

Practice Briefing A note on auditing fair value of investment properties

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The problem of management bias in accounting estimates: An investor perspective on root causes and solutions

Cited by 4 publications

References 4 publications

The homogeneity of BIG4 audit reports after the implementation of key audit matters in the context of fair value accounting

The homogeneity of BIG4 audit reports after the implementation of key audit matters in the context of fair value accounting

Novice Auditors and Audits of Fair Values: Knowledge and Skill Requirements*

Practice Briefing A note on auditing fair value of investment properties

Contact Info

Product

Resources

About

Novice Auditors and Audits of Fair Values: Knowledge and Skill Requirements^*