The Effect of Framing on Information Search and Information Evaluation in Auditors’ Fair Value Judgments

Fair values and other accounting estimates (FVOEs) are common in financial reporting (IAASB, 2009) and regulators are concerned that auditors are insufficiently skeptical in their evaluations of FVOEs (PCAOB, 2009, 2015a, b; IFIAR, 2014). Utilizing an experiment with auditors as participants, we examine the effects of different audit guidance frames (i.e., positive: “support” management’s assertions, balanced: “support and oppose” management’s assertions, and negative: “oppose” management’s assertions) on fair value estimates and examine the processes by which these effects occur. Our results indicate that providing a balanced frame (versus a positive or negative frame) influences auditors’ fair value estimates by affecting the manner in which they evaluate information such that they use relatively more evidence opposing than supporting management’s assertions. This, in turn, results in perceptions of a greater risk of material misstatement which thereby results in lower fair value estimates. Because current audit guidance provides a positive frame, our results point to the need to adopt audit guidelines that promote more balanced search strategies and, in turn, potentially could lead to more conservative (i.e., more skeptical) auditor judgments.