PCAOB Seeks Input on Auditing Accounting Estimates, Fair Value Measurements

The Public Company Accounting Oversight Board (PCAOB) is interested in what you have to say about auditing accounting estimates and fair value measurements.

The US audit regulator on Tuesday issued for public comment a staff consultation paper on possible standard-setting activities related to those areas. The PCAOB Office of the Chief Auditor is requesting input on the potential need for changes to PCAOB standards, as well as a possible approach for a new auditing standard.

Auditing accounting estimates and fair value measurements has been a challenge to auditors over the past decade, due to changes in the financial reporting frameworks relating to accounting estimates and an increasing use of fair value as a measurement attribute, together with new related disclosure requirements, the PCAOB noted in the report.

PCAOB inspection staff has continued to identify numerous audit deficiencies across various types of estimates, across various sizes of audit firms.

“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,” PCAOB Chairman James Doty said in a written statement on Tuesday. “The PCAOB and foreign audit regulators have identified compliance with auditing requirements related to fair value measurements as an area of continued concern, and I support the staff’s outreach efforts in this important area.”

Accounting estimates are typically derived from an initial measurement, re-measurement, or recognition of a transaction or event in the financial statements. They may be based on subjective or objective information – or both – and involve some level of measurement uncertainty, according to the PCAOB. While some accounting estimates may be easily determinable, others are inherently subjective or complex.

Under US Generally Accepted Accounting Principles (GAAP), a fair value measurement represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Like other accounting estimates, fair value measurement may be based on subjective or objective information and usually involves measurement uncertainty.

While PCAOB staff continues to analyze a number of alternatives, it is considering developing a single standard for the board to consider proposing.

The Office of the Chief Auditor is hoping to receive feedback on current audit practice, the potential need for changes to PCAOB standards, and possible alternative actions related to auditing accounting estimates and fair value measurements, as well as derivative instruments and securities.

“The staff consultation paper raises questions about issues concerning the auditing of accounting estimates and fair value measurements, a matter that the staff have been working on for some time,” said Martin Baumann, PCAOB chief auditor and director of professional standards. “The public comments we receive on this paper will help to properly inform our analysts regarding a potential proposal for a new auditing standard.”

The staff consultation paper includes specific questions for comment and requests pertinent information and related data.

Comments may be submitted by mail or email, and should be sent to the Office of the Secretary, PCAOB, 1666 K St. NW, Washington, DC 20006, or to comments@pcaobus.org.

All comments should refer to “Staff Consultation Paper, Auditing Accounting Estimates and Fair Value Measurements” in the subject line and should be received by the PCAOB no later than November 3, 2014. All comments will be made public.

The PCAOB also announced on Tuesday that it will host a Standing Advisory Group meeting on October 2 in Washington, DC, to discuss matters related to auditing accounting estimates and fair value measurements. The agenda and meeting logistics will be announced closer to the meeting date.

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