@article{b14454201a95427baef9070de831ba2e,
title = "PCAOB guidance and audits of fair values for Level 2 investments",
abstract = "Investments that are classified as Level 2 within the fair value hierarchy account for approximately 92 percent of US banks' fair value assets. We report an experiment that examines how experienced auditors apply current PCAOB guidance when auditing portfolios of these assets. We hypothesize and find that, depending on how overstatement is distributed within a portfolio, current PCAOB guidance leads auditors to make adjustments that are predictably larger or smaller than the aggregate overstatement in the portfolio. Auditors are more likely to follow PCAOB guidance when doing so leads to lower audit adjustments and higher client income. We also predict and find that auditors identify some patterns of overstatement as indicative of management bias, but not others. However, management-bias assessments do not affect auditors' adjustment decisions as standards imply they should, even when auditors are prompted to consider management bias. Together, these results highlight a potential deficiency in current auditing guidance that managers could exploit by strategically locating overstatements within securities with larger book values or by spreading those overstatements across many securities within a portfolio. We suggest changes to current PCAOB guidance which may reduce these effects.",
keywords = "Audit adjustments, Fair value accounting, Management bias, PCAOB guidance",
author = "Scott Emett and Robert Libby and Nelson, {Mark W.}",
note = "Funding Information: We thank the auditors who participated in our experiment and the Big 4 firm that provided access to those participants. Thanks also to Chris Agoglia, Jeremy Bentley, Rob Bloomfield, Shana Clor-Proell, Emily Griffith, Ryan Guggenmos, Erin Hamilton, Bill Kinney, Lisa Koonce, Patricia O'Brien, Chad Proell, Kristi Rennekamp, Aaron Saiewitz, Jason Smith, Ken Trotman, Victor van Pelt, Brian White, and workshop participants at Cornell University, University of Amsterdam, University of Graz, HEC-Paris, INSEAD, CU Leuven, Maastricht University, University of Nevada Las Vegas, Texas Christian University, Tilburg University, University of Texas at Austin, University of Waterloo, Georgetown University, the Penn State Accounting Research Conference and the McCombs Accounting Research Conference for helpful comments. Funding: This work was supported by the SC Johnson College of Business at Cornell University and the W.P. Carey School of Business at Arizona State University . Funding Information: We thank the auditors who participated in our experiment and the Big 4 firm that provided access to those participants. Thanks also to Chris Agoglia, Jeremy Bentley, Rob Bloomfield, Shana Clor-Proell, Emily Griffith, Ryan Guggenmos, Erin Hamilton, Bill Kinney, Lisa Koonce, Patricia O'Brien, Chad Proell, Kristi Rennekamp, Aaron Saiewitz, Jason Smith, Ken Trotman, Victor van Pelt, Brian White, and workshop participants at Cornell University, University of Amsterdam, University of Graz, HEC-Paris, INSEAD, CU Leuven, Maastricht University, University of Nevada Las Vegas, Texas Christian University, Tilburg University, University of Texas at Austin, University of Waterloo, Georgetown University, the Penn State Accounting Research Conference and the McCombs Accounting Research Conference for helpful comments. Funding: This work was supported by the SC Johnson College of Business at Cornell University and the W.P. Carey School of Business at Arizona State University. Publisher Copyright: {\textcopyright} 2018 Elsevier Ltd Copyright: Copyright 2018 Elsevier B.V., All rights reserved.",
year = "2018",
month = nov,
doi = "10.1016/j.aos.2018.05.011",
language = "English (US)",
volume = "71",
pages = "57--72",
journal = "Accounting, Organizations and Society",
issn = "0361-3682",
publisher = "Elsevier Limited",
}