Auditing Fair Value Estimates in Developing Countries: The Case of Jordan

Manuscript type: Research paperResearch aims: This study explores the main issues faced by externalauditors in Jordan when auditing fair value estimates, and examinesthe reasons causing these issues, and their effects on the conductof auditing.Design/Methodology/ Approach: This study employs a qualitativeapproach, using semi-structured interviews with a samplecomprising of experienced Jordanian auditors from the Big Fouraudit firms, other internationally-affiliated audit firms, and localJordanian audit firms.Research findings: The findings of this study show that fair valueestimates have been aggressively used by some companies toovervalue their assets, especially in the areas of asset impairmentand business combinations. Factors facilitating this include the lackof reliable fair value information and the weak corporate governancesystem. Auditors face extensive pressure from clients to acceptquestionable fair value estimates in an environment of low demandfor high-quality audits, low audit fees, and the fear of losing clients.Auditors are also under the pressure of regulatory authorities toimprove the quality of their work.Theoretical contributions/ Originality: The auditing of fair valueestimates is an empirically under-researched area in developingcountries. The introduction of International Financial Reporting Standard (IFRS) 13 (Fair Value Measurement) places the demandthat an estimate of fair value has to be reported when needed,regardless of the level of available information or market activity.Conducting a study in a developing country with an environmentthat is characterised by inactive markets, limited availableinformation on fair values, and low demand for high-quality audits,can further contribute to knowledge on how fair value estimatesare audited under different circumstances to those of developedcountries.Practitioner/ Policy implications: The findings of this study showthat there is a need for regulatory authorities to put in more efforts toscrutinise the behaviour of auditors and audit clients when dealingwith fair value estimates. The regulatory authorities also need toimprove the conditions auditors face when auditing these estimates.Such improvements could include increasing the monitoring of fairvalue specialist evaluators, revising audit fee levels, and revisingcorporate governance regulations.Research limitations/ Implications: This study focuses on theJordanian environment. By expanding the research to otherdeveloping countries, and by focusing in detail on some of theissues studied in developed countries (such as how auditorsassess management’s assumptions regarding fair value estimates,and how they develop their own independent estimates), a betterunderstanding of these issues in the developing country contextscan be gained, benefitting the audit profession and contributing toliterature at the same time.Keywords: Auditing, Developing Countries, Fair Value Estimates,Jordan.JEL Classification: M42