Auditor Expertise in Initial Goodwill Recognition and Subsequent Impairment Outcomes

Abstract

This study examines whether auditors’ task-specific expertise acquired during the initial recognition and valuation of goodwill influences clients’ subsequent goodwill accounting. Given the complexity of goodwill valuation, the high degree of managerial discretion involved, and the potential for auditor bias, we hypothesize that auditors-in-charge who serve during a client’s acquisition year and thereby acquire client-specific expertise affect the timeliness and magnitude of subsequent goodwill impairments during their remaining tenure. Using data on Swedish auditors and their publicly-listed clients, we find that both the likelihood and magnitude of goodwill impairments increase with the client-level task-specific expertise of the auditor-in-charge. In contrast, evidence for portfolio-level or audit firm-level expertise is weaker and less consistent. However, portfolio-level and audit firm-level expertise are more relevant in homogeneous industries, within the largest audit firm, and among auditors with pre-IFRS regulatory experience. Overall, our findings suggest that audit quality in goodwill accounting is primarily driven by client-level skill acquisition of the individual auditor, whereas the transferability of task-specific knowledge across engagements depends on the industry structure, audit firm scale, and auditors’ regulatory training.