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Tuesday, August 3 • 9:00am - 10:30am
3B1 Fair Value versus Non-fair Value Discretion and Auditor Size

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Bohan Song, Tulane University

The audit of other-than-temporary-impairment (OTTI) is a challenging task, and persistent audit deficiencies have been identified in this area. Managers can avoid recognizing an OTTI loss on investment securities through two different methods: (1) using the discretion over fair value measurements to inflate the fair value over amortized costs, and (2) exercising the discretion over non-fair value judgment to classify the decline of fair values as temporary. I exploit security-level disclosures in the insurance industry to explore auditors’ role in insurers’ choice between using the two types of discretion to avoid OTTI. Employing within-security analyses, I find that insurers engaging larger auditors, measured as Big 4 and national-level industry specialist auditors are more (less) likely to use non-fair value (fair value) discretion to avoid OTTI and this effect is stronger when insurers have a greater OTTI avoidance incentive. These results appear to be driven by larger auditors’ comparative advantage in the audit of fair value measurements due to their increased access to fair-value-related resources at the national level. This study sheds fresh light on the auditors’ role in managers’ choice between different discretionary options to manage a critical accounting estimate.


Steve Guo

Ball State University

avatar for Bohan Song

Bohan Song

Tulane University

Tuesday August 3, 2021 9:00am - 10:30am EDT

Attendees (2)