COMPREHENSIVE INCOME REPORTING: THE IMPLICATION OF AUDITOR’S REPUTATION AND AUDIT COMMITTEE EFFECTIVENESS

Abstract

Both International Accounting Standard Boards (IASB) and Financial Accounting Standards
Board (FASB) require companies to mark-to-market certain financial assets and liabilities and to
recognize related gains and losses as Other Comprehensive Income (OCI). When an active market
(quoted prices) for other comprehensive items does not exist, valuation techniques that employ
observable or unobservable market data are used. Valuation techniques based on observable or
unobservable input require management assumptions and judgments, which has potentials for
managerial opportunism. By calibrating Positive Accounting Theory (PAT) and agency theory,
this paper offers a theoretical explanation of the implications of auditor reputation and audit
committee effectiveness on investors’ pricing of comprehensive income and its components. The
paper believes this to be a distinct improvement over the views expressed in the literature about
managerial discretions involve in the fair value determination of certain financial assets and
liabilities and recognizing holding gains and losses.