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Commentary on Auditing High-Uncertainty Fair Value Estimates

105 citations0/0 files storedAuditing A Journal of Practice & Theory

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Financial Reporting and Valuation Research

Abstract

SUMMARY: This commentary addresses challenges faced by standard-setters, preparers, users, and auditors pertaining to high-uncertainty fair value estimates. We briefly describe the financial reporting environment and the difficulty of obtaining reasonable assurance for fair value estimates with high levels of inherent measurement uncertainty. We then discuss some characteristics of an effective accountability framework for fair value accounting. We propose that additional disclosures of management's historical estimation accuracy and current levels of inherent measurement uncertainty, accompanied by changes in the audit process and auditors' communications to users, offer the most practical means to address concerns about the transparency and verifiability of high-uncertainty fair value estimates. JEL Classifications: M42; M48.

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2008Financial Accounting Standards Board (FASB)2006Including Estimates of the Future in Today's Financial Statements 2000Discretionary and Non-Discretionary Revisions of Loss Reserves by Property-Casualty Insurers: Differential Implications for Future Profitability, Risk and Market Value

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2017Use of specialists on audit engagements: A research synthesis and directions for future research 2017The unintended consequences of uncertainty disclosures made by auditors and managers on nonprofessional investor judgments 2014Fair Value Measurement in Financial Reporting 2018The Value Relevance of Managers' and Auditors' Disclosures About Material Measurement Uncertainty 2016If You Want My Advice: Status Motives and Audit Consultations About Accounting Estimates 2015The Volatility of Other Comprehensive Income and Audit Fees 2020Fair Value Exposure, Changes in Fair Value and Audit Fees: Evidence from the Australian Real Estate Industry 2015Addressing Information Needs to Reduce the Audit Expectation Gap: Evidence from D utch Bankers, Audited Companies and Auditors

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