Verifiability, Hardness, and Information Asymmetries about Verifiability and Hardness

1 When fair value cannot be measured by reference to matters that are directly observable, and if the measure represents little more than the measurer's state of mind, neither the measurement nor the measurement method are verifiable. In those circumstances, the independent auditor has a scope limitation and should not express an unqualified opinion on the financial statements that are materially affected by such a measurement (Douglas Carmichael, Chief Auditor of the PCAOB, 2004). Balance sheet practice as to goodwill is highly inconsistent. Perhaps it should be—perhaps the auditor should allow corporations to write goodwill up or down as the fancy dictates or stock market considerations incline them. But in the absence of uniform practice, the auditor cannot afford to certify a balance sheet in which this item or any other is so stated that it can be misunderstood (Montgomery, 1934).