The effects of uncertainty and disclosure on auditors' fair value materiality decisions
Griffin, Jeremy Brian
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This study investigates how auditors decide whether to require their clients to adjust fair value measurements. Using auditor participants, I experimentally manipulate two types of uncertainty, input subjectivity and outcome imprecision, and one reporting choice, supplemental disclosure, to examine how these factors influence auditors’ decisions to require fair value adjustments. As expected, I find that these variables interact. Auditors are most likely to require adjustments under conditions of highest uncertainty, that is, when fair values are both more subjectively-determined and more imprecise in outcomes; however this tendency disappears when clients supplement recognized fair values with additional disclosure. My finding suggests that the SEC’s preference for supplemental disclosure has the unintended consequence of impacting fair values recognized in the body of the financial statements. Finally, although imprecision sometimes makes it more likely that auditors will require an adjustment, the dollar amount of adjustment is smaller.