Does Fair Value Measurement Provide Satisfactory Evidence for Audit? The Case of High Tech Valuation

Abstract

Fair value measurement (FVM) of assets for which no liquid market exists has stimulated debate in the accounting profession. Two solutions to this brainteaser have been proposed: 1) recourse to outside experts and 2) development of valuation standards or guidelines by practitioners' associations. Despite these adjustments to FVM, one question remains unanswered: Do skilled experts using these standards and guidelines provide accurate and homogeneous valuations? We analyse the consistency and quality of the valuations provided by a sample of 43 business valuation experts. These experts were asked to value the same closed small high tech firm preparing an initial public offering (IPO), according to a common set of hypotheses and guidelines. Our experimental study shows that, even when they rely on the same guidelines, skilled experts use different methods and multiples. The variations found in FVMs for the same investment are very significant, and a comparison of these FVMs with the actual market value following the IPO indicates that the FVMs were biased upward. The effective usefulness of the guidelines for FMVs and the ability of experts to provide consistent valuations are therefore questionable, at least in the case of highly challenging valuation engagements.

Keywords: Fair Value, Measurement, Audit, Valuation, Standards, Experts

JEL Classification: M41, M44, M47, C91