Do fair value audit woes impact M&A?

BVWireIssue #239-3
August 17, 2022

fair value for financial reporting
fair value, fair value measurements, impairment, mergers and acquisitions (M&A)

A new study suggests that firms avoid obtaining intangibles via acquisition because they don’t want to face scrutiny from the PCAOB over impairment matters. The alternative would be to invest internally in corporate innovation for the intangibles. The paper, “The Effect of PCAOB Inspections on Corporate Innovation: Evidence From Deficiencies About the Valuation of Intangibles,” examines the economic consequences on corporate innovation when PCAOB inspections cite auditors for insufficient procedures in auditing the valuation of intangibles. The study found that audit deficiencies in fair value measurements trigger larger and timelier impairment of intangibles. But this dampens managers’ discretion to delay the recognition of losses. Of course, the timely recognition of impairments is the goal of the regulators, but managers may not want to admit that an acquisition fell short of expectations. But to think that accounting optics would materially alter overall corporate strategies may be a bit of a stretch by the study’s author. A “build or buy” option may not be feasible for certain intangibles, such as intellectual property.
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