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 Johnson, CFO.com
June 22, 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.
advertisement 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.
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.
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