New PCAOB Consultation Paper Addresses Fair Value Auditing Standards

On August 19, 2014, the PCAOB issued a staff consultation paper on standards for auditing accounting estimates and fair value measurements. The paper is part of the PCAOB’s ongoing efforts to evaluate whether existing audit standards could be improved. The staff’s concern is partly driven the fact that many PCAOB inspections have resulted in deficiency findings (subscription required), particularly in the area of fair value accounting. Approximately 10% of total deficiencies in audits reviewed from 2012 were related to asset-valuation problems and over 40% of those issues were related to business combinations in merger and acquisition accounting. Auditors have faced challenges over the last decade as the financial reporting framework related to fair value estimates and disclosure requirements has changed.

“Accounting estimates and fair value measurements can be subjective and complex, yet they can be an important part of a company’s financial statements and critical to investors’ decision-making,” said PCAOB Chairman James R. Doty.

The guidance for auditing fair value measurements and disclosures in financial statements is found in AU 328. This standard addresses the audit considerations related to accounting estimates and fair value measurements as well as the disclosure of assets, liabilities, and specific components of equity presented or disclosed at fair value in financial statements.

The PCAOB has performed research in regards to replacing or amending accounting estimates and fair value measurements since 2007. Between 2007 and 2012, the PCAOB issued six audit practice alerts addressing these topics. The staff has also met with the Pricing Sources Task Force on two occasions in 2011 in order to discuss fair value topics including the use of third-party valuation sources and valuation of financial instruments in an illiquid market. The PCAOB will continue to assess its research on this topic, review PCAOB inspection findings related to audit deficiencies in these areas, as well as solicit additional outreach from the public in response to the consultation paper. Currently, the staff is exploring recommendations to the PCAOB Board including the option of a single standard. This “potential new standard” could be designed to 1) align with the Board’s risk assessment standards; 2) include guidance for accounting estimates and fair value measurements; 3) create more specific audit requirements for use of third parties in developing accounting estimates and fair value measurement; and 4) create a more comprehensive and consistent standard.

We will continue to monitor the status in this ongoing process. For more information, refer to the PCAOB Staff Consultation Paper: Auditing Accounting Estimates and Fair Value Measurements.

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