Delegating the Monitoring of Fair Value Measurements: A Field Study of Company Specialists and Audit Partners

Abstract

Company specialists engaged by management may be delegated a monitoring role by auditors, creditors, or investors, and reduce information asymmetry present in fair value measurements (FVMs). Utilizing in-depth interviews with Norwegian company specialists and audit partners this study investigates factors potentially impacting company specialists’ effectiveness as monitors of the reliability of FVMs and how such factors challenge auditors’ reliance on their monitoring. The findings suggest that company specialists are not immune to management pressure and several influence tactics are documented. Furthermore, as company specialists strategically guard their private information (e.g., valuation models or non-client specific information) auditors are forced to rely on external, and potentially biased, information sources to evaluate the objectivity and reliability of the company specialists. While auditors often request that clients engage several specialists to alleviate concerns about conflicts-of-interest, management seems to anticipate this and strategically controls information flow between the specialists to create more persuasive evidence. The findings provide support for theoretical predictions from agency theory and financial economics and enhances our understanding of specialists’ delegated monitoring effectiveness.

Keywords: Fair value measurements, auditors, company specialists, auditee management, various types of FVMs