Value Relevance of Fair Value Estimates and Audit Quality: A Critical Review

Salem, Hend; Abdelhady, Gehan; Hegazy, Wafaa

doi:10.21608/bjhs.2024.325721.1335

Value Relevance of Fair Value Estimates and Audit Quality: A Critical Review

Document Type : Original Article

Authors

¹ department of accounting , faculty of commerce , Benha university

² Department of Accounting , faculty of commerce , Benha university

10.21608/bjhs.2024.325721.1335

Abstract

Purpose – This study aims to assess value relevance of fair value estimates and investigate the influence of audit quality on their relevance through a comprehensive review of previous literature.
Methodology– Through a thorough review of previous literature, we analyze literature that have explored the relevance of fair value estimates, as well as the role of audit quality in this context.
Findings – The analysis of prior literature shows that the observability of inputs used in fair value estimation plays a crucial role in shaping investor perception. Level 1 estimates, derived from observable market inputs, are typically viewed as the most relevant and reliable due to their transparency. Following that, Level 2 estimates, which involve managerial discretion and the possibility of errors in choosing comparable assets or liabilities, are considered less relevant. Lastly, Level 3 estimates, which heavily depend on company-specific data and management judgment, are seen as the least relevant, as they lead to greater information asymmetry and a higher risk of manipulation. Moreover, the literature found that audit quality positively influences the value relevance of fair value estimates. This supports agency theory, which suggests that higher-quality audits enhance the credibility and relevance of financial information. The findings reveal also that audits performed by Big 4 firms tend to produce more conservative valuations, thereby increasing the relevance of fair value estimates. Additionally, the higher audit fees associated with complex fair value estimates suggest the additional effort and expertise needed to ensure their reliability and relevance for investors.

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