Monitoring of Fair Value Reliability by Third-Party Specialists: A Review and Integration of Empirical Research

Abstract

This paper reviews the academic literature on the effectiveness of third-party specialists in monitoring the reliability of fair value measurements (FVMs). Management may lack the necessary valuation expertise for measuring fair values and has been shown to provide biased FVMs. The use of third-party specialists may compensate for these deficiencies. By integrating findings in the accounting, economics, and finance literature, this review provides novel insights into the monitoring role of third-party specialists and suggests directions for future research. Overall, the literature shows that third-party specialists are associated with more reliable FVMs across both financial- and nonfinancial assets or liabilities, supporting the notion that third-party specialists perform a valuable role in improving the reliability of FVMs and reducing investors’ information risk. Furthermore, research suggests third-party specialists monitoring effectiveness interact with corporate governance mechanisms such as independent board of directors, but financial statement audits seem to only marginally affect the reliability of FVMs above the contribution of third-party specialists. Third-party specialists monitoring effectiveness may, however, be moderated by specialists’ economic incentives and by experienced client pressure to inflate FVMs. Future research will benefit from gaining a better understanding of specialists’ economic incentives and how these influence specialists’ monitoring effectiveness, as well as investigate how specialists’ monitoring role interacts with relevant corporate governance mechanisms.