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The PCAOB Sticks Its Finger in the Fair Value Jar

peanut-butter-ss.jpgEditor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
You know that annoying roommate you had in college who always stuck his finger in your peanut butter jar? That’s the PCAOB meddling in fair value and it won’t be pretty.
On October 14 – 15th, the PCAOB’s Standing Advisory Group (SAG) is slated to meet to discuss the particulars of fair value and starts off by admitting that “The Board has no authority to prescribe the form or content of a public company’s financial statements.” OK, so WTF are they doing then?


For the past couple of years, regulators have nudged auditors to get more skeptical when it comes to evaluating fair-value measurements. In the meantime, the controversial accounting rules governing how companies apply fair value have been tweaked and companies’ use of judgment for assigning fair-value price estimates to their financial instruments has grown.
The Public Company Accounting Oversight Board is dipping into contentious waters again by suggesting that new fair-value auditing rules are necessary. The board’s staff has long contended that the use of estimates based on market value — rather than historical cost — adds uncertainty and subjectivity to financial reporting and an added risk of material misstatements. At the same time, the regulator has been slow-footed on previous attempts to change its rules when it comes to auditing fair-value calculations.

So what gives, PCAOB? Don’t you trust that auditors are trained to do their damn jobs?
Apparently not. The PCAOB is concerned that auditors lack the technical skill to evaluate complex financial instruments and frankly I could see why they might be a tad concerned.

Regardless of the applicable accounting requirements, it is a fundamental requirement that the auditor obtain sufficient competent audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with the applicable accounting principles.
The staff believes that a standards-setting project to revise its existing standards on auditing fair value measurements and using the work of a specialist may be appropriate for a number of reasons. Information obtained from the Board’s inspection and enforcement programs indicate that some auditors might not be exercising sufficient professional skepticism when performing audit procedures and evaluating results in higher risk areas of the audit.

Well that’s fabulous. Isn’t it already in an auditor’s job description to approach an audit with professional skepticism and to obtain sufficient audit evidence? So, uh, is the PCAOB implying that auditors have no idea what they are doing? Why doesn’t the PCAOB just do all the audits?
It’s a brave new world, kids, and the PCAOB knows it. Perhaps if regulators had done their job in the first place, auditors wouldn’t be facing increased pressure to somehow decode increasingly complex securitization, off balance sheet entities, and absolutely bizarre financial instruments. But since that’s our reality these days, might as well pop a few Xanax and start ticking and tying your way through those billions in derivatives. Quick, the PCAOB is coming!