Accounting & Auditing | Legislative / Regulatory

SEC says fair value still meaningful, needs work

ToolsFinally, in an insane world, we find a little sanity.

Despite calls for its removal and efforts to make it the scapegoat for the current financial crisis, fair-value reporting likely isn't going anywhere, SEC Chairman Christopher Cox indicated in a Dec. 8 speech at an American Institute of CPAs gathering. Improvements are needed, to be sure, but doing away with fair-value reporting altogether would "risk the integrity of the entire economy," Cox said.

"(M)ost investors, and many others, agree that fair value is a meaningful and transparent measure of an investment for financial reporting purposes," Cox said, though adding that "we must endeavor to continue to develop robust best practice guidance for auditors and preparers —- particularly for fair value measurements of securities traded in inactive or illiquid markets. Education efforts and the development of application guidance must provide a path for auditors and preparers to reach a common ground on these difficult issues."

The short answer: Improvements must be made, but fair-value reporting remains an important part of the financial reporting process. And at a time when too many people are panicking, that seems like a reasoned approach. Fair-value reporting didn't cause this crisis. It merely served as evidence that problems existed. Calls for its demise amount to nothing more than shooting the messenger.

The auditing profession, meanwhile, apparently could use some improvements of its own.

The Public Company Accounting Oversight Board has released a report that examines PCAOB inspections of the eight largest audit firms over the past four years. The results?

"Inspectors continue to find deficiencies in important audit areas, both established and emerging," the report states. "These areas include critical and high-risk parts of audits, such as revenue, fair value, management's estimates, and the determination of materiality and audit scope."

The PCAOB pointed out that the report examined "a relatively small portion of the total audits of issuers performed by these firms, and the selection of audits for review was not, and was not intended to be, a representative sample of the audits that the firms performed."

Still, the PCAOB challenged auditors to bring a healthy dose of skepticism to the table when they "test or challenge management's forecasts, views or representations."

Read the PCAOB's report in its entirety, then tell us: In your opinion, what's the most problematic part of the financial reporting process?


Bill Sheridan