The Public Company Accounting Oversight Board (PCAOB) recently released the Report on Observations of PCAOB Inspectors Related to Audit Risk Areas Affected by the Economic Crisis which identified instances where auditors failed to comply with PCAOB standards. The document specifically references a number of fair value-related items including goodwill impairment, intangible assets, contingencies, complex or illiquid financial assets, and other fair value measurements.

Here are some tips for reporting entities to keep in mind through 2011 and 2012:

  • Expect additional scrutiny regarding fair value measurements. The report specifically states that PCAOB inspectors will focus on these identified issues when planning future inspections. Auditors will likely allocate greater time for the review of inputs and methods used in estimating fair value measurements.
  • Be deliberate in preparing financial projections. Financial forecasts are often the input that fair value measurements will be most sensitive to, and they are also often the most difficult to defend. Make sure there is a reasonable basis for each assumption underlying a financial projection, and that inputs are consistent with relevant corroborating evidence such as industry trends, expectations for economic recovery, and historical financial performance.
  • Make sure that valuation assumptions and methods are properly documented. If you use an outside valuation specialist, they should provide a valuation report that clearly explains the valuation methods used in the analysis and thoroughly documents the sources and supporting evidence for assumptions. When reviewing the report, ask for clarification for inputs you don't recognize or explanation for valuation procedures you don't understand.
  • Communicate with your auditors and their valuation team. Particularly for first-time or unusual valuation situations, we always recommend taking the time to communicate with your auditors and the reviewing valuation team on the front end. This practice is now even more important. The review process will be far less painful when all parties have the same expectations regarding selection of valuation methods and specification of significant assumptions.

At Mercer Capital, our goal is to minimize the hassle and disruption of the fair value measurement and review process for all parties involved, including company management, the audit team, and the auditor’s valuation review team.

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