Fair Value Stumps Auditors, PCAOB Told

Auditors won't feel at ease about dealing with fair value for another 20 to 30 years, the PCAOB's advisory group predicts.
Sarah JohnsonJune 21, 2007

The Public Company Accounting Oversight Board’s advisory group discouraged the board from creating a new auditing standard to deal with companies’ growing use of the fair-value method of accounting.

Rather than revise the existing rules, the PCAOB and the audit industry should tackle auditors’ lack of education in the various valuation methods for calculating estimates of assets and liabilities marked to market, the group’s members said.

Accounting students aren’t learning fair-value concepts, and the audit industry isn’t likely to be up to speed for another 20 to 30 years, predicted Arnold Hanish, chief accounting officer of Eli Lilly, during a meeting of the PCAOB’s Standing Advisory Group (SAG) on Thursday.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The SAG members suggested that CPA programs should incorporate training on fair-value accounting so that the industry doesn’t have to rely solely on valuation specialists as companies expand their use of fair value. For its part, the PCAOB could revisit its standard for using the work of experts and issue guidance addressing the points made in the Financial Accounting Standards Board’s FAS 157, which gives a framework for measuring fair value, some SAG members said.

For Thursday’s meeting, the PCAOB staff had asked the SAG to discuss whether the board should modify its rules or meld its standards for auditing accounting estimates and fair-value measurements into a single rule. In making the change, the PCAOB could converge its rules with a proposed international standard — a goal lauded by SAG members.

With companies starting to apply FASB’s other new fair-value accounting standard, FAS 159, for measuring certain assets and liabilities, some SAG members fret about adding compliance burdens to the audit industry. They echoed the concerns expressed by PCAOB chairman Mark Olson earlier this month that auditors lack enough technical know-how to properly deal with complex estimates for those assets and liabilities that are thinly traded or not traded at all.

While auditors have been dealing with fair-value assumptions for some time, their exposure hasn’t been as widespread as the extent that FASB is increasingly allowing. FAS 159, for instance, will become effective for most companies on November 15, and it applies to measurements for stocks, bonds, loans, warranty obligations, and interest-rate hedges.

Ed Trott, who is leaving FASB on June 29, wants the PCAOB to incorporate an educational element into their standards to address the dearth of expertise. However, a PCAOB staff member voiced concern that it would be inappropriate for the board to interpret accounting standards.

Still, the PCAOB staff could work with FASB to boost the accounting board’s grasp of the accounting standard-setter’s thinking and draw up examples for a guidance document, suggested Hanish. “That in my view, would make the interaction between auditors and the preparers of financial statements more effective in getting to the right answers,” he said.

In the meantime, how are audit firms compensating for their employees’ lack of expertise? SAG members said audit firms will likely rely too heavily on junior-level auditors and specialists. Such staff members aren’t in a position to challenge management’s assumptions for their fair-value calculations, cautioned Zoe-Vonna Palmrose, SEC deputy chief accountant for auditing and professional practice issues.

KPMG partner Sam Ranzilla assured the group that audit firms are giving auditors extensive training in fair value and assigning knowledgeable staffers to help auditors who are uncomfortable in the use of fair value or not ready to make judgment calls on issues involving it. He acknowledged that the current system of audit firms’ relying on specialists for this area of auditing isn’t sustainable.

The idea of loading on more work onto accounting students’ course-loads worries Joseph Carcello, director of research for the Corporate Governance Center at the University of Tennessee. As it is, he said, current education programs are missing information on anti-fraud systems and ethics. Adding yet another topic such as fair value could mean another year for accountants’ higher education — and most likely higher demands for salaries in a profession already plagued by a talent shortage.