Managerial Miscalibration and Its Effects on the Auditability of Accounting Estimates: Evidence from Pension Accounting

Ulrich Menzefricke and Wally Smieliauskas
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Ulrich Menzefricke: Rotman School of Management, University of Toronto, 105 St. George Street, Toronto Ontario M5S 3E6, Canada
Wally Smieliauskas: Rotman School of Management, University of Toronto, 105 St. George Street, Toronto Ontario M5S 3E6, Canada

The International Journal of Accounting (TIJA), 2019, vol. 54, issue 04, 1-26

Abstract: In this archival study, we report three main findings related to how well pension accounting estimates of practice meet the stated objectives of professional accounting standards. Our evidence on estimated returns in pension accounting used in reporting on defined benefit pension plans in the financial statements indicates the following. First, the financial note disclosures of ranges of estimated returns are miscalibrated and provide low credibility of including either the actual or expected returns. Second, the estimated returns are unreliable estimates of the firms’ actual 10-year averages. Finally, the estimated returns can have significant risk of material misstatement arising from the uncertainty in the estimation process over the short run. The combination of these findings indicates that the estimated returns and related note disclosures on the ranges of the returns used in estimation processes may not be auditable, and may not meet the stated financial reporting objectives of professional accounting standards.

Keywords: Auditable accounting estimates; auditable note disclosures; reasonable ranges; accounting quality; pension asset returns; estimation uncertainty; significant risk; verifiability (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:tijaxx:v:54:y:2019:i:04:n:s1094406019500161

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DOI: 10.1142/S1094406019500161

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