The Auditor-Valuation Specialist Coopetitive Alliance in the Fair Value Audit of Complex Financial Instruments

We analyze interviews with valuation specialists (specialists) employed by audit firms (in the Asia-Pacific region, Europe, and the U.S.) to understand how they work with auditors to evaluate the reasonableness of fair value measurements (FVMs) for financial instruments. The rapid growth of FVMs and complex estimates reported on financial statements requires that auditors increasingly rely on specialists to perform these evaluations. Informed by coopetition theory from management and organizational science, we develop a framework to examine the tensions in the auditor-specialist alliance (the coopetitive alliance) and how those tensions can impact FVM audit quality. Our framework considers five factors that contribute to tensions in the coopetitive alliance – organizational structure, economic independence and stressors, project goals, group identity, and knowledge sharing. We find that tensions around the economic independence of the specialist unit, auditor delays in engaging the specialist, and specialists' perceptions that auditors do not respect their expertise and contribution to the FVM audit, lead specialists to distrust auditors and respond in ways that threaten audit quality. Further, we show that firm-level choices in the organizational structure and policy governing the use of specialists can impact the perceived quality of the specialist unit and the quality of audited FVMs. Our research complements recent studies examining the role of specialists in audit engagements with significant complex estimates and provides new insights to academics, regulators, and professionals