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Auditors defer more to former colleagues, study suggests

Tammy Whitehouse | February 13, 2018

Auditors will show a little deference to management judgments when the CFO of the client company is an alumni of the audit firm, according to emerging academic research.

A study involving a 140 audit managers finds that 76 percent would defer to the CFO’s call on whether goodwill should be impaired when they knew the CFO hailed from the same audit firm. A little less than half would agree with the impairment call when told the CFO was with another Big 4 firm, and only 39 percent would agree when they had no information on the CFO’s background.

The study tasked audit managers, those with seven to 10 years of experience to reach to a set of facts involving an impairment of goodwill, which is an intangible asset that appears on corporate balance sheets when a company purchase another company for more than the fair value of its individual assets and liabilities. Investors often examine goodwill, and whether it holds up in subsequent periods, as an indicator of whether...

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