Auditor's Perceptions of Earnings Management in Goodwill Accounting : A qualitative study based inLuxembourg and Sweden

Abstract: In 2005, international accounting standards changed the treatment of goodwill, by replacingannual amortisation with impairment tests of goodwill. This has created a heated debate inaccounting research. Scholars are split whether the switch to impairment tests have increasedor decreased both accounting and audit quality. The subjective nature of impairment tests,deriving from being based on fair values and estimations have resulted in a rise of studiescovering its potential shortcomings.Main issues with impairment tests have been related to its possible impact on increase inearnings management (EM) engagement, dependence on estimations and discretionaryproblems. There are many surrounding questions regarding goodwill and EM, along with thecurrent goodwill rules being subject to criticism. This study aims to investigate further therelationship between goodwill and EM, as well as exploring the perception auditors haveregarding that topic and the related accounting standards. Moreover, we aim to get a betterunderstanding about the role the auditor possesses in both enabling and preventing EMactivities in private firms and public firms.Following a qualitative approach, this study explores previous literature within the field ofgoodwill and EM in addition to using 7 in-depth and semi-structured interviews withprofessionals in the audit industry based in Sweden and Luxembourg. Overall, we find auditorsto clearly be in favour of impairment tests compared to using amortisation of goodwill. Inregards to the risk of EM, the potential benefits of impairment tests outweigh the subjectiveissues according to the interviewed auditors. Furthermore, it seems like the verifiabilityproblem of impairment tests is more an issue in theory than in practice. The majority of theauditors believes the introduction of impairment tests of goodwill increased the accountingquality and did not significantly impact the audit quality, even if it gives auditors morechallenges in the audit tasks. In addition, the importance and prevalence of EM within goodwillbetween private and public firms had inconclusive results between the interviewees. Furtherresearch may investigate using a larger sample whether impairment tests are at the origin of anincrease of EM and comparing private and public firms.