Analyst Characteristics and the Level of Critical Perception of Goodwill Accounting

Abstract

While inputs used in analysts' valuation models have been documented (Brown et al. 2015), it has not been studied how analysts' personal characteristics are associated with their level of critical perception regarding agency conflict manifested in published financial statements. This is important because analysts are, to some extent, substitutes for industry-specialised auditors in monitoring financial reporting (e.g., Sun and Liu 2011). To address this shortcoming, we investigate analysts' level of critical perception concerning current goodwill accounting standards, which provide significant reporting latitude. We use data from a survey of Nordic financial analysts and examine this data with statistical methods, including factor analysis and structural equation modelling. We find two latent constructs, one which reflects a critical attitude to the current goodwill accounting standards and one which reflects an uncritical attitude to the current standards. Our structural equation model suggests that having a background in auditing, as well as general experience and exposure to different industries, is associated with a higher degree of critical perception of current standards. In contrast, having a basic (low) level of formal business (accounting) education is associated with a more uncritical perception than having a high level of education.

Does a leopard change its spots? Auditors and lawyers as valuation experts for minority shareholders in the judicial appraisal of private firms

“…More specifically, our finding that auditors make more conservative valuation estimates than lawyers did is in line with Kausar and Lennox (2017), who document auditors making more conservative valuation estimates when they face uncertainty. To some extent, our findings are also in line with Saastamoinen et al (2018), who argue that an equity analyst's background in auditing manifests itself in his or her preference for conservative accounting policies.…”

“…Third, we provide empirical support to the theory of imprinting by investigating how behavioral patterns acquired in one profession carry over to other tasks. In this sense, our paper also provides empirical support to the auditor's training carrying over to other tasks (Saastamoinen et al., 2018). Finally, we contribute to both the legal and auditing literature as well as to the literature on valuation experts by shedding light on how the representatives of these professions perform as valuation experts.…”

“…Due to the emphasis on skepticism, auditors may be more inclined to exhibit a conservative approach to valuation. For instance, the auditor's skeptical or conservative mindset may carry over to a new profession in a related field (Saastamoinen et al., 2018). In addition, the requirement of objectivity may induce auditors to pursue objective or reliable valuation even though some subjectivity could benefit minority shareholders.…”

“…In this regard, auditing research has mostly examined financial reporting quality in, and the economic effects of, auditing on private businesses (Bar‐Yosef et al., 2019; Vanstraelen & Schelleman, 2017). Some studies suggest, however, that the auditor's training may result in a conservative mindset and behavioral patterns which manifests themselves in other tasks (Lennox & Kausar, 2017; Saastamoinen, Ojala, Pajunen, & Troberg, 2018). Furthermore, to our knowledge, the legal literature is silent on how lawyers perform in tasks involving valuations.…”

Practitioner views of goodwill accounting under US GAAP

“…Pajunen and Saastamoinen (2013;henceforth PS) survey Finnish auditors' perception of goodwill accounting under IFRS and find that while non-Big 4 auditors regard the current standards as conducive to earnings management, Big 4 auditors tend to have a more favorable view. Saastamoinen et al (2018; henceforth SOPT) detect a similar pattern in a survey of Nordic financial analysts, but an analyst's Big 4 auditing background predicts a more critical view of the management's role in goodwill impairment testing. Frey and Oehler (2014) survey German Certified Public Accountants (CPAs) and show that CPAs view that current standards leave room for accounting policy to influence the reported value of intangibles, including goodwill.…”