 Auditors and net transfers of Level 3 fair-valued financial instrumentsMark Kohlbeck, Thomas Smith and Adrian Valencia Advances in accounting, 2017, vol. 36, issue C, 27-39 Abstract: Prior research shows that managers use discretion in estimating Level 3 financial instruments to opportunistically manage capital and earnings. We investigate an earlier decision, subsequent classification changes that result in net transfers into the Level 3 classification, to examine whether firms use their discretion to engage in opportunistic transfers. We then investigate whether auditors influence the decision to transfer into the Level 3 classification and/or alter audit fees. Using a hand collected sample of public bank fair value disclosures from 2008 through 2010, we find evidence consistent with firms engaging in opportunistic transfers into the Level 3 classification. We further find evidence that high quality auditors appear to constrain this behavior, consistent with higher quality auditors mitigating some risks associated with Level 3 instruments. We also find evidence that auditors increase fees when managers transfer instruments into the Level 3 classification. Collectively, our findings suggest that auditors manage risks related to Level 3 by both restricting transfers into the Level 3 classification and charging higher audit fees when transfers occur. Keywords: Audit quality; Fair values; Level 3 transfers (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:36:y:2017:i:c:p:27-39 DOI: 10.1016/j.adiac.2016.09.003 Access Statistics for this article Advances in accounting is currently edited by Dennis Caplan More articles in Advances in accounting from Elsevier |
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