An Empirical Study of Auditor Judgment and Bias in Fair Value Accounting Assessments

Posted: Jan 20, 1974

• Vera Douglas
• Anderson Perry
• Piper Graham

Abstract

The increasing prevalence of fair value accounting in financial reporting has elevated the importance of auditor judgment in valuation assessments, particularly for complex financial instruments and intangible assets. While extensive research has examined various aspects of audit judgment, the cognitive processes underlying fair value assessments remain inadequately understood. This study addresses this gap by investigating the manifestation and mitigation of cognitive biases in auditor fair value judgments through an innovative multi-method approach that integrates physiological, behavioral, and computational analysis techniques. Fair value measurements, especially for Level 3 assets where inputs are unobservable, require significant auditor judgment and create substantial opportunities for cognitive biases to influence assessment outcomes. Previous research has primarily relied on self-reported data or outcome analyses, which provide limited insight into the real-time cognitive processes that generate biased judgments. Our research introduces a novel methodological framework that captures both conscious and unconscious aspects of auditor decision-making during fair value assessments. The primary research questions guiding this investigation are: How do confirmation bias and anchoring effects manifest differently across various levels of fair value measurement