Disclosure of fair value measurement in goodwill impairment test and audit fees

Recent increases in the occurrence and magnitude of goodwill impairment charges highlight the increasing importance of the role of the auditor in goodwill accounting. This study examines the association between disclosures about the fair value measurement of goodwill and audit fees. We find that goo...

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Bibliographic Details
Published in:Journal of contemporary accounting & economics 2019-12, Vol.15 (3), p.100160, Article 100160
Main Authors: Chen, Vincent Y.S., Keung, Edmund C., Lin, I-Min
Format: Article
Language:English
Subjects:
Audit fee
Audit risk
Fair value
Fair value disclosure
Goodwill
Signaling
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Summary:Recent increases in the occurrence and magnitude of goodwill impairment charges highlight the increasing importance of the role of the auditor in goodwill accounting. This study examines the association between disclosures about the fair value measurement of goodwill and audit fees. We find that goodwill-related disclosures are positively related to audit fees, consistent with the idea that auditors increase their audit efforts to mitigate potential reputational and litigation losses (“audit risk effect”). Additionally, our results indicate that the information asymmetry and investor scrutiny moderate the association between goodwill-related disclosures and audit fees. One possible explanation is that auditors take goodwill-related disclosures as a signal of truthful goodwill accounting and this “signaling effect” partially offsets the “audit risk effect” of goodwill-related disclosures when information asymmetry or investor scrutiny is perceived as high.
ISSN:1815-5669
DOI:10.1016/j.jcae.2019.100160