Regulators keep an expert eye on fair value calculations

As banks reported somewhat disappointing annual results amidst the global
financial crisis, little seems to have been pinned on issues directly related to
their audits.

But the industry is in any case looking at how it audits fair value
calculations.

The IAASB is issuing
an alert on the issue. According to IAASB chairman John Kellas, the resolution
to issue the warning came out of the group’s fair value task force, which
reported back at the IAASB’s quarterly meeting a week ago.

Kellas said that the alert would refer to issues around fair value which
include modelling, the imposition of assumptions in audit evidence and
disclosures. Complex valuations are also among the priority areas.

‘This concerns the use of experts by auditors in looking at complex
valuations. The auditors will have to question the need to draw on expertise of
others. In some instances clients may also be using experts.

‘In these cases, the auditor might need to consider what instructions were
given to the expert for the valuations, and whether the approach of the expert
is consistent with the accounting framework,’ said Kellas

‘The kinds of assumptions, methods and models that they use are also likely
to be questioned in terms of the requirements of the accounting framework.’

Auditors will also be expected to make judgments on the reliability of audit
evidence, especially in cases where a value can no longer be ascertained in line
with the market for an asset, because the market is no longer active.

The way in which auditors will assess fair value has also come under the
scrutiny of the International
Forum of Independent Audit Regulators, which noted it as an area under their
attention in the course of inspection work.

With the international regulatory eye carefully watching their actions in the
current period, auditors might find themselves being especially strict in their
audits.

Some clients, particularly those in the banking sector, might prefer
different rules.

However a recent assessment by market-players, facilitated by the
International Accounting Standards Board has deemed that the rules will remain,
pending a consultation on the valuation of assets whose markets have seized up.

While the rage about the unfairness of fair value continues, those who take
issue with it will ultimately have to fall in line with the rules.