Auditors' Role in Fair Value Monitoring: Evidence from Security-Level Data

Abstract

I study the role of the audit firm as monitor of its clients’ fair value (FV) measurements. Specifically, using a setting in the insurance industry where I can identify fair values at the security level, I find that audit firms’ security-specific FV experience is associated with increased consistency in valuations among clients holding the same security, consistent with audit firms developing FV expertise at the security level. Moreover, FV consistency is higher when the audit office is in a more concentrated market, and when the client is economically less important to the audit office, consistent with audit office market incentives affecting FV audit quality. My study sheds light on the mechanisms that shape the role of auditors in monitoring the increasingly important yet subjective FV determination process.