Actuarial Objectivity: Why Pension Information Should be Carefully Scrutinized

Abstract

This study investigates whether economic bonding between actuaries and their clients is associated with compromised professional objectivity, echoing concerns that led to auditing reforms under the Sarbanes-Oxley Act (SOX). Using hand-collected data from 1195 observations (2011–2015), we examine the association between actuarial fees and pension assumptions used for financial reporting. We find a significant positive association between expected rates of return (ERR) and fees, particularly among companies with higher pension contributions and capital expenditures. In contrast, discount rates show no such relationship, likely due to regulatory constraints. Further analysis reveals that higher fees are associated with inflated ERRs unsupported by actual investment performance, suggesting that economic ties may influence assumption selection. These findings are consistent with economic bonding concerns that may compromise actuarial objectivity, increasing the risk of earnings management. These results should aid auditors, analysts, and investors when scrutinizing pension accounting information.