Sneak Peek at PCAOB Report Reveals Fair Value Problems

The PCAOB continues to find “frequent deficiencies in auditing unobservable inputs used to measure the fair value of certain financial instruments,” according to a staff preview of 2018 inspection observations. Common audit deficiencies include instances where:

·         Auditors did not obtain an understanding of the specific methods and assumptions underlying fair value measurements obtained from pricing services and used in the auditors’ testing;

·         Auditors did not test the accuracy and/or completeness of company data used to determine the fair value; and

·         Auditors, when developing an independent estimate, did not appropriately corroborate the fair value measurement the company determined because the auditor used the same pricing source the company used.

Ongoing deficiencies are also being found in other areas, such as business combinations where the auditors did not evaluate the reasonableness of certain significant assumptions underlying forecasts that management used in determining the fair value of assets acquired. The PCAOB urges the use of more professional skepticism in developing these estimates.