Errors in Accounting Estimates and Their Relation to Audit Firm Type

We assess accuracy and bias in the accounting estimate of outstanding claim losses reported in the audited statutory financial statements of 197 property-casualty insurers during 1979-1983. Our analysis shows that claim loss estimation errors exceed materiality in over 90% of our sample. For errors that exceed materiality, the average absolute error, determined with the benefit of hindsight, is over 17 times materiality and over 8% of assets. Regression models generally do not support differences in estimate accuracy or bias across audit firm type, and therefore suggest that estimation error characteristics are not a basis for differentiating among auditors