Accounting Estimation Intensity, Auditor Estimation Expertise, and Managerial Bias

Abstract

SYNOPSIS We examine the relation between the accounting estimation intensity (AEI) ingrained in a company’s financial reports and the company’s propensity to meet or beat analyst earnings forecasts and whether this relation is attenuated by the auditor’s estimation expertise at the city-office or national level. Although we find a positive relation between AEI and the propensity to meet analyst forecasts, we find little evidence to suggest that the relation is weakened by auditor estimation expertise. Along the same lines, we find little evidence to suggest that the positive relation between AEI and audit fees is affected by auditor estimation expertise. Our findings are of potential interest to regulators concerned about insufficient auditor skepticism in the audit of accounting estimates, investors interested in better understanding managerial accounting judgments, and academics investigating audit quality. JEL Classifications: M41; M42.