Insights from Company Experts in Valuing Complex Estimates

Abstract

This study examines how company experts and their interactions with management and the auditor affect the fair value measurement (FVM) process. We conduct detailed interviews with 19 Norwegian company experts who possess expertise in financial instruments, investment property, oil & gas reserves, and shipping and 8 audit partners with extensive valuation experience to investigate theoretical predictions derived from agency theory and the monitoring role of company experts. Overall, the results support our predictions. Company experts: (1) have incentives to build and maintain their reputation, (2) face management pressure, and management uses several tactics (i.e., reappointment and multiple company experts) to influence their FVM, (3) are aware that providing multiple services (e.g., brokerage and trading) can affect their FVM but believe that there are adequate safeguards in place, and (4) differ by type of expert in allowing auditor access to their models and data. We also find variation by type of company experts' interaction with the audit team and their perceptions of the audit teams’ narrow focus on individual model assumptions. These findings inform researchers, regulators, and practitioners about the role company experts play in the FVM process.