Are All Accounting Estimates Auditable? Some Evidence on Estimated Returns in Pension Accounting
58 Pages Posted: 16 Jan 2016
Date Written: July 14, 2015
Abstract
This study empirically analyzes the long term and short term auditability of over 3000 individual firm pension accounting estimates of rates of return on pension assets over ten consecutive years (2001-2010). We find that the point estimates allowed by GAAP create auditability challenges and do not appear to be useful for rational decision making under uncertainty. Moreover, we find that the additional note disclosures of the estimation process may not compensate for the bad accounting that arises from relying on unauditable estimation processes. These findings do not support recent changes to the conceptual framework of financial reporting proposed in the IASB’s May 2015 Exposure Draft. Specifically, the IASB’s proposal to de-emphasize the importance of verifiability and to rely on more note disclosures of the estimation process can reduce the usefulness of financial reporting by adding to estimation uncertainty in the accounting for pension costs. However, our study empirically supports recent concerns about increasing problems with the uncertainties of accounting estimates in the current financial reporting environment (PCAOB 2014, and CPAB 2015).
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