Auditing Fair Value : Security-Level Evidence on Auditor Expertise

In this paper, I study whether and how auditors develop domain-specific expertise in auditing difficult-to-audit fair value (FV) measurements. Specifically, by analyzing the dispersion in the FV estimates of the same security held by different insurance clients of the same auditor, I provide security-level evidence that auditors influence their clients' FV measurements. Importantly, I find that auditors get better at estimating security FV when they observe multiple valuations of the same securities at different clients. I also find evidence that auditors use their built-up competency to curb insurance clients' incentives to overstate the FV of securities stemming from their regulatory capital levels. Overall, these results shed light on the role of domain-specific expertise in the auditing process, suggesting that auditors develop such expertise through a specific learning mechanism that they apply to curb managerial incentives