2017B05 – The effects of expert status on the audit of complex estimates

Auditing complex estimates frequently requires input from specialists. However, auditors struggle to assess specialists’ capability and work quality, in part because auditors by definition lack the expertise to precisely evaluate a specialist’s skills and work processes. Specialists can improve the audit of estimates, but any potential improvement first requires appropriate assessments of the adequacy of specialist’s work. Specifically, scholarly literature provides evidence that complex estimates provide client management with leeway to report in a manner consistent with its incentives, and that specialists are often hesitant to challenge these estimates. Thus, overestimating the specialist’s skills or work quality may lead the auditor conclude that an estimate is reasonable based on insufficient evidence, increasing audit risk and reducing financial reporting quality. This study examines whether a specialist’s high status leads to higher auditor evaluations of specialist work quality and greater reliance on this work as persuasive evidence. By status, we refer to prestige indicated by the respect of peers, elite university or company affiliations, and/or membership in exclusive social circles. U.S. and international auditing standards direct auditors to assess specialists based on information such as the specialist’s experience with an audit issue, but also on “softer” factors such as the specialist’s credentials, reputation, and standing among peers. The IAASB has recently expressed concern about auditor “over-reliance on the qualifications of the expert with no further consideration as to their appropriateness.”