Mind the Gap: Why do Experts Have Differences of Opinion Regarding the Sufficiency
Contemporary Accounting Research
Ambiguity in auditing standards coupled with the high degree of professional judgment inherent with auditing of complex accounting estimates and fair value measurements (FVMs) have often resulted in disagreements between audit firms and the PCAOB, suggesting a gap between auditor performance and regulators’ expectations. We obtain audit partners’ views regarding the PCAOB inspections and the auditability/reporting on FVMs with extreme estimation uncertainty. Our results suggest that the current regulatory inspection culture may have unintended consequences for audit quality and that the extreme estimation uncertainty exacerbates the FVMs expectation gap and raises serious concerns regarding whether the PCAOB’s expectations regarding precision are attainable. Audit partners suggest that inspectors utilize a more risk-based approach within an engagement and at account levels and they would welcome specific guidance from regulators regarding evidence, procedures, and documentation necessary to audit FVMs. Our findings are especially relevant to the PCAOB in light of the Board’s recent initiative to reorganize and revise auditing standards related to FVMs.