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America under the hammer : auctions and the emergence of market values
This title reveals how, through auctions, early Americans learned capitalism. 'America Under the Hammer' follows this ubiquitous but largely overlooked institution to reveal how, across the eighteenth and early nineteenth centuries, price became an accepted expression of value. From the earliest days of colonial conquest, auctions put Native land and human beings up for bidding alongside material goods, normalizing new economic practices that turned social relations into economic calculations and eventually became recognizable as nineteenth-century American capitalism. Starting in the eighteenth century, neighbours collectively turned speculative value into economic 'facts' in the form of concrete prices for specific items, thereby establishing ideas about fair exchange in their communities.
BOOK
Auditing Challenging Fair Value Measurements
Concern about effective auditing of fair value measurements (FVMs) has risen in recent decades. Building on prior interview-based and experimental research, we provide an engagement-level analysis of challenging FVMs, using quantitative and qualitative data on audit phases from risk assessment to booking adjustments. Challenging FVMs have high estimation uncertainty, high subjectivity, significant/complex assumptions, and multiple valuation techniques. Estimation uncertainty is associated with higher inherent risk assessments, which are, in turn, predictive of client problems identified during the engagement. The use of a valuation specialist by auditors, associated with higher inherent risk and client specialist use, is a key decision: procedures performed by specialists have the highest yield in identifying problems. Auditor-client discussion of an adjustment increases with problem identification and auditors' expressions of residual concern about uncertainty post-testing. However, booked audit adjustments are infrequent; the only factors explaining income-decreasing adjustments are better evidential support and breadth of problems identified.
Journal Article
Value Relevance of FAS No. 157 Fair Value Hierarchy Information and the Impact of Corporate Governance Mechanisms
Statement of Financial Accounting Standards No. 157 (FAS No. 157), Fair Value Measurements, prioritizes the source of information used in fair value measurements into three levels: (1) Level 1 (observable inputs from quoted prices in active markets), (2) Level 2 (indirectly observable inputs from quoted prices of comparable items in active markets, identical items in inactive markets, or other market-related information), and (3) Level 3 (unobservable, firm-generated inputs). Using quarterly reports of banking firms in 2008, we find that the value relevance of Level 1 and Level 2 fair values is greater than the value relevance of Level 3 fair values. In addition, we find evidence that the value relevance of fair values (especially Level 3 fair values) is greater for firms with strong corporate governance. Overall, our results support the relevance of fair value measurements under FAS No. 157, but weaker corporate governance machanisms may reduce the relevance of these measures.
Journal Article
Contractibility and Transparency of Financial Statement Information Prepared Under IFRS: Evidence from Debt Contracts Around IFRS Adoption
We outline several properties of IFRS that potentially affect the contractibility or the transparency of financial statement information, and hence the use of that information in debt contracts. Those properties include the increased choice among accounting rules IFRS gives to managers, enhanced rule-making uncertainty, and increased emphasis on fair value accounting. Consistent with reduced contractibility of IFRS financial statement information, we find a significant reduction in accounting-based debt covenants following mandatory IFRS adoption. The reduction in accounting covenant use is associated with measures of the difference between prior domestic standards and IFRS. Because IFRS adoption changed financial reporting in many ways simultaneously, it is difficult to trace the decline in accounting covenant use to individual IFRS properties, though we report larger declines in accounting covenant use in banks, which have a higher proportion of assets and liabilities that are fair-valued. Our findings are better explained by reduced contractibility than by increased transparency, which would predict reduced nonaccounting covenant use as well, whereas we observe increases. Overall, we conclude that IFRS rules sacrifice debt contracting usefulness to achieve other objectives, such as provision of accounting information relevant to valuation.
Journal Article
Evidence on the use of unverifiable estimates in required goodwill impairment
SFAS 142 requires managers to estimate the current fair value of goodwill to determine goodwill write-offs. In promulgating the standard, the FASB predicted that managers will, on average, use the fair-value estimates to convey private information on future cash flows. The current fair value of goodwill is unverifiable because it depends in part on management’s future actions (including managers’ conceptualization and implementation of firm strategy). Agency theory predicts managers will, on average, use the unverifiable discretion in SFAS 142 consistent with private incentives. We test these hypotheses in a sample of firms with market indications of goodwill impairment. Our evidence, while consistent with some agency-theory based predictions, does not confirm the private information hypothesis.
Journal Article
The development of international accounting and auditing standards for fair value accounting in the Arab Middle East, Jordan: a systematic review
A comprehensive literature review and analysis of auditing and \"fair value accounting (FVA)\" growth in Jordan and the \"Arab - Middle Eastern (ME)\" region are presented in this paper. It determines fair value implementation criteria and their impact on auditing pricing and application status. This paper reviewed relevant academic literature extensively. We used PRISMA principles to formulate questions and use systematic and explicit methods to identify, select, and critically evaluate relevant papers. More than 155 top accounting journal papers from 2000 to 2023 are reviewed. Qualitative content analysis of FVA literature revealed two main themes. The first theme, institutional factors on FVA application decisions in the region, has three main topics: theoretical underpinning, local factors, and accounting system heritage. The second theme is FVA’s effects on auditing. The first theme found that institutional isomorphism drives FVA practices in Jordan, and the second theme shows that complex asset and liability estimates make FVA application difficult in Jordan. This review is the first to examine FVA and auditing. The identified subjects and subtopics’ theoretical underpinning and practical applicability are reviewed. The analysis concludes with research recommendations and limitations.
Journal Article
A Convenient Scapegoat: Fair Value Accounting by Commercial Banks during the Financial Crisis
Critics argue that fair value provisions in U. S. accounting rules exacerbated the recent financial crisis by depleting banks' regulatory capital, which curtailed lending and triggered asset sales, leading to further economic turmoil. Defenders counter-argue that the fair value provisions were insufficient to lead to the pro-cyclical effects alleged by the critics. Our evidence indicates that these provisions did not affect the commercial banking industry in the ways commonly alleged by critics.First, we show that fair value accounting losses had minimal effect on regulatory capital.Then, we examine sales of securities during the crisis, finding mixed evidence that banks sold securities in response to capital-depleting charges. However, the sales that potentially resulted from the charges appear to be economically insignificant, as there was no industry-or firm-level increase in sales of securities during the crisis.
Journal Article
Fair Value Accounting and Debt Contracting: Evidence from Adoption of SFAS 159
We examine how fair value accounting affects debt contract design, specifically the use and definition of financial covenants in private loan contracts. Using SFAS 159 adoption as our setting, we find that a small but significant proportion of loans (14.5%) modify covenant definitions to exclude the effects of SFAS 159 fair values. Only a limited number of these modifications exclude assets elected at fair value (less than 7%), while all exclude liabilities elected at fair value. Notably, we document that covenant definition modification is unassociated with ex ante fair value elections. We find that covenant definition modification positively varies with common incentive problems attributed to fair value accounting and negatively varies with benefits attributed to fair value accounting. Our results suggest that fair value accounting is not uniformly detrimental for debt contracting and fair value adjustments are included when they are most likely to improve performance measurement.
Journal Article
Auditor Mindsets and Audits of Complex Estimates
Auditors experience significant problems auditing complex accounting estimates, and this increasingly puts financial reporting quality at risk. Based on analyses of the specific errors that auditors commit, we propose that auditors need to be able to think more broadly and incorporate information from a variety of sources in order to improve audit quality for these important accounts. We experimentally demonstrate that a deliberative mindset intervention improves auditors' ability to identify unreasonable estimates by improving their ability to identify and incorporate into their analyses contradictory information from diverse parts of the audit and improving their ability to think critically about the evidence. We perform additional analyses to demonstrate that our intervention improves auditor performance by causing them to think differently rather than simply to work harder. We demonstrate that critical thinking can improve the identification of unreasonable estimates and, in doing so, we provide new directions for addressing audit quality issues.
Journal Article
Did Fair-Value Accounting Contribute to the Financial Crisis?
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the 2008 financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive write-downs of banks' assets. If anything, empirical evidence to date points in the opposite direction, that is, toward the overvaluation of bank assets during the crisis.
Journal Article