Distributed Fair Valuation:
Alternative View on Fair Value Accounting from a Distributed Cognition Perspective
Discussion by Prof. Kim K. Jeppesen, Copenhagen Business School (kkj.acc@cbs.dk)
Thank you for this chance to comment on your paper. I generally found the paper to be interesting, wellwritten and with a clear exposition of the argument.
The paper explores FVA practices, which I agree are an interesting and timely subject, given the financial
crisis and FVA’s alleged role in this. The area is little researched, and FVA practices clearly deserve more
attention by researchers. What is needed is particularly empirical work, and your focus on FVA practices in
investment funds is thus highly relevant. However, although you label this an “explorative study”, the paper
is based on secondary data and may more rightly be considered a literature review. There is nothing wrong
with this, good literature reviews may provide significant contributions, but using the term “exploratory
study” may create an expectation that you will present a new empirical study based on your chosen
theoretical perspective and thus disappoint the reader. This may also be the reason that the scope of the
paper is limited to provide an “alternative view” or “different understanding” of FVA, instead of exploring
the complexity of the interactions that determine the outcome of FV assessments and developing a theory
on the basis of this.
That being said, I think the paper provide a good and brief introduction to the history of FVA and its present
regulation. There are more details to this history (see my conference paper with Dennis van Liempd), in
particular regarding the politics of FV and the interests of management and auditors in the development of
the concept. Although these details are beyond the scope of this paper, they may have some implications
for the identification of the relevant actors in the distributed cognition model, an issue that I will come back
to later. Having read the paper, the history of FVA and its regulation appears mainly to be used to frame
the problem as the subsequent discussion in section 4 does not refer back to the issue of regulation.
Section 3 proceeds with an analysis of the literature on distributed FV assessments in investment funds,
outside the organization and inside the organization. Here, the “outside” section appears to be better
developed that the “inside” section, perhaps because there is more literature on the subject. The divide
between inside and outside is apparently not founded in the theoretical framework, which probably
consider it all part of the “cognitive ecosystem”, and I am consequently not sure it really helps the analysis.
1
However, my main concern with section 3 is that it comes before the presentation of the theoretical
framework of distributed cognition in section 4. The presentation of the FV assessment examples is thus
not informed by the chosen theory, and the theoretical analysis also comes later in section 4. My
suggestion is to move the theory up front in section three, and then present and analyze the examples
according to the theory. It would also be appropriate with some reflections over the generalizability of FV
for financial instruments in investment funds, in relation to FV for other assets in other types of companies.
Section 3 concludes with a summary, where a model of the “possible distribution of FVA” is presented as
Figure 2. While the figure summarizes the discussion, I miss the role of the auditors in the text as well as in
the model. Auditors are central actors in the social construction of financial reality in the sense that they
bring credibility to managements’ representations of FV (See e.g. Hines, 1988). Without the auditor’s
agreement, a FV assessment would never reach the users of the financial statements, at least not without a
qualified audit report. On page 10 you briefly touch upon the issue of audit evidence, but this discussion
needs to be expanded to include the auditors’ interaction with the other actors to make the model
complete. There is little empirical work on this, but IFAC has provided some guidance a few years ago
(IAASB, 2008) and there are a few recent papers too (Martin et al, 2006; Christensen et al, 2012). In
addition, I also miss a thorough discussion on internal controls related to FV assessments, in particular
when done by the traders of the front office, who may have vested interests in the figures (there are
examples of this in relation to the Enron debacle, see Benston, 2006 and Gwilliam & Jackson, 2008). Again,
internal controls (or the absence hereof) are part of the system that facilitates the coordination of
distributed cognition and needs to be included in the discussion.
Regarding the theoretical model presented in section 4, I do agree that FV assessments take place in a
coordinated effort between human actors, artifacts, and the social environment. The distributed cognition
framework seems to capture this, although from a psychological perspective, and thus with a focus on
individual cognition. According to this perspective, section 4 claims three main “useful points” for the
analysis of FVA. First, you point to the need for an organizational structure that supports collective
judgments. Second, you mention that cognition may be distributed not only to humans, but also to
artifacts. Third, you note that in cognitive systems humans and artifacts interact to produce cognition, thus
requiring an analysis of the dynamics of the system to understand FVA. However, we get little of this
analysis of the dynamics surrounding FV assessments in the paper. What we do get is some good
arguments that persons are inherently fairer when interacting with humans than with machines, and a
following general critique of model based valuation practices. A dynamical analysis involves an assessment
of how the parts of the system interact, i.e. how the various actors and artifacts react to each other’s
2
inputs. This may not be possible without primary data from empirical work, but if you reframe the paper as
a literature review you may argue for this as a research opportunity.
Reading you section 4 and 5 (the conclusion), I sense that you are somewhat more interested in sociological
than psychological explanations. This is evident in your discussions of for instance the impact of
professional autonomy, the social acceptance of FV technologies, and organizational structures. One of the
quoted studies (Hazelhurst) apparently also considers “the activity system, rather than the individual, as
the unit of cognitive analysis” (your page 23). However, being a psychological framework, the distributed
cognition theory is less suitable for a sociological understanding of how various groups interact to produce
social order. A related sociological perspective may be found in Actor-Network Theory and its focus on the
analysis of the formation of networks of human and non-human actors. I suggest you carefully consider
whether you want to contribute with a psychological analysis of individual behavior and sense-making in
social systems, or with a sociological analysis of how traders, management, auditors and investors interact
in networks to produce social order in the financial markets.
To conclude, I think you have chosen a very interesting and timely subject and I encourage you to develop
the paper even further by either framing it as a literature review of existing studies of FV assessments, or
by using it as the foundation for an empirical study of FV assessments in investment funds. Either way, I
believe the paper has great potential and look forward to discuss it at the IPA conference.
References:
Benston, G.J. (2006), "Fair-value accounting: A cautionary tale from Enron", Journal of Accounting and
Public Policy, vol. 25, no. 4, pp. 465-484.
Christensen, B., Glover, S. & Wood, D. (2012), "Extreme Estimation Uncertainty in Fair Value Estimates:
Implications for Audit Assurance", Auditing: A Journal of Practice & Theory, vol. 31, no. 1, pp. 127-146.
Gwilliam, D. & Jackson, R.H.G. (2008), "Fair value in financial reporting: Problems and pitfalls in practice: A
case study analysis of the use of fair valuation at Enron", Accounting Forum, pp. 240.
Hines, R. (1988) "Financial accounting: In communicating reality, we construct reality”, Accounting,
Organizations and Society, 13, 3, 251-261.
IAASB (2008) Challenges in auditing fair value estimates in the current market environment.
Jeppesen, K.K. & van Liempd, D. (2012) “Fair value and the missing correspondence between accounting
and auditing”, Paper presented at the Tenth Interdisciplinary Perspectives on Accounting Conference.
3
Martin, R.D., Rich, J.S. & Wilks, T.J. (2006), "Auditing fair value measurements: A synthesis of relevant
research", Accounting Horizons, vol. 20, no. 3, pp. 287.
4