Understanding fair value could take 30 years

It could take another 20 to 30 years for the auditing profession to become
used to dealing with fair value.

The claims, made by a senior US finance director, will also have echoes in
the UK, where IFRS rules impose similar fair-value standards on corporate
reporting.

Arnold Hanish, chief accounting officer for pharma giant Eli Lilly and a
member of the advisory group to US accounting watchdog the PCAOB, made the
comments in response to demands that a new auditing standard be created to help
companies deal with the fair-value method of accounting.

The advisory group has instead urged the PCAOB and audit industry to look
into auditors’ lack of education in the various valuation methods. Hanish said
accounting students weren’t learning fair-value concepts in the US.

Hanish’s dire warning about the length of time it will take to get used to
the rules has led to criticisms in the UK that standards are becoming more
opaque.

The advisory group members suggested that CPA programs include training on
fair-value, so that the industry did not have to rely only on valuation
specialists.

Retired PwC partner Philip Ashton said the issue was not a crisis, but merely
another way in which auditors have to ‘evolve’.

‘It is fair to say that the way in which the accounting world is moving,
means that fair values are becoming more significant in terms of the way
accounting is done.

‘But it’s not unreasonable to expect auditors to be able to deal with these
things. I don’t think the situation is one which is out of control in today’s
world,’ said Ashton.

Fair-value accounting, as opposed to accounting on the basis of historical
cost, has been controversial since its introduction, not least because of the
challenges posed by putting a value on complex derivatives or other items so
bespoke that there may be no market for them.

PCAOB chairman Mark Olson has also questioned whether firms have the ability
to properly audit fair-value accounting at companies.

Two weeks ago, the PCAOB took to task Deloitte & Touché for failing to
properly test clients’ fair-value calculations.

The Financial Accounting Standards Board unveiled plans this week to form a
working group that will clarify fair-value issues.