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PCAOB: Can Auditors Handle Fair Value?

Auditor ignorance of valuation techniques used by companies making fair value calculations is a top concern for the PCAOB, says chairman Mark Olson.

Sarah Johnson, | US
June 7, 2007

Auditing Fair Value Accounting

So, the PCAOB is concerned that auditors may not have the technical skills to properly audit fair value accounting under FASB 159 and 157? Like the kids say, "Duh"! The main reason historical costs have been the linchpin of accounting, almost from the beginning of the profession, is that it represents the epitome of the old conservative dictum of "anticipate no profit and provide for all possible losses". Clearly, fair value accounting is appropriate in cases where assets being assessed are traded in active markets of buyers and sellers. In cases where active markets do not exist, methods of estimating and measuring fair values have been developed and, now, under the new economically-oriented accounting standards, have to be implemented by preparers of financial statement who will, of necessity, chose the options most favorable to their organizations. But, as PCAOB and the SEC would say, that's why we have auditors who are now monitored by regulators, rather than their own professional organization. As a CPA, I believe that, properly trained, auditors will be able to accurately assess fair value representations, particularly when they know that the PCAOB and the SEC will be monitoring what they do and how they do it....very carefully. But, everyone, the FASB, SEC, preparers and their auditors need to remember something very, very important. Periodic financial reporting, particularly metrics like Net Income, over time, can never be anything more than interim estimates and indicators of the value of a firm. Only when the Going-Concern assumption has reached the end of the road and the assets and liabilities of a company have to face the stark reality of an unforgiving market place, can the real value or income of a firm be determined. All of us, preparers, regulators, auditors, financial analysts and the investing public need to keep that in mind as we deal with convergence and seek the Holy Grail of periodic financial statement that more accurately reflect the value of assets, liabilies and periodic income.

Posted by Larry CIA | June 08, 2007 07:08 am

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