PCAOB Issues Fair Value Auditing Guidance

The Public Company Accounting Oversight Board (PCAOB) on Tuesday issued staff questions and answers providing direction for auditing a company’s estimation of the fair value of stock options granted to employees pursuant to Statement of Financial Accounting Standards No. 123 (Revised), Share-Based Payment (FAS 123R).

This series of questions and answers is limited to addressing auditing the fair value measurements associated with determining compensation cost. In addition to addressing the auditor’s consideration of the process for developing a fair value estimate, significant assumptions used in options pricing models and the role of specialists in fair value measurements, the guidance highlights risk factors that auditors should be aware of, including:

  • Reducing the fair value below what it would have been by using an assumption based on adjusted historical information.
  • Excluding a historical period of time from the inputs to the valuation model when the effect of the exclusion is lowering the expected term or expected volatility.
  • Adjusting the historical exercise behavior or historical share price volatility.
  • Not applying adjustments to historical exercise behavior or historical share price volatility consistently to each option grant.

“I appreciate that many firms currently are auditing the fair value of share options and have developed their auditing approaches using the general principles in the existing auditing literature,” Tom Ray, PCAOB Chief Auditor and Director of Professional Standards, said in a prepared statement announcing the availability of the guidance. “The staff’s questions and answers were developed to help auditors apply the existing auditing standards to this area appropriately and consistently, and I encourage auditors to review this guidance as they plan for the calendar year-end audits.”

You may like these other stories...

Remember the old joke about the devil showing a guy around Hell? There were great parties, swimming pools, and sumptuous food. The guy liked what he saw, lived a bad life and went to Hell when he died. Upon arrival the devil...
Due to fierce competition in the accounting industry, some CPAs may feel pressure to compete for business using pricing alone. However, this is a losing battle in the long run: Competing on price will lead to the need for...
If the thought of blogging makes you as nervous as an executive facing an IRS audit, stop worrying. You can overcome your challenges with these tips.1. Blogging is good for business. You'll benefit as your blog displays...

Already a member? log in here.

Upcoming CPE Webinars

Aug 26
This webcast will include discussions of recently issued, commonly-applicable Accounting Standards Updates for non-public, non-governmental entities.
Aug 28
Excel spreadsheets are often akin to the American Wild West, where users can input anything they want into any worksheet cell. Excel's Data Validation feature allows you to restrict user inputs to selected choices, but there are many nuances to the feature that often trip users up.
Sep 9
In this session we'll discuss the types of technologies and their uses in a small accounting firm office.
Sep 11
This webcast will include discussions of commonly-applicable Clarified Auditing Standards for audits of non-public, non-governmental entities.