In the absence of any fresh guidance in the United States about how to audit valuations of complicated or illiquid financial assets, U.S. CPAs are grateful to see something perking on the international front.
The International Auditing and Assurance Standards Board is finalizing an audit practice statement proposed last October that would give auditors some new guidance on using specialized skills or knowledge as part of the audit process, especially as it relates to valuing complicated financial instruments. The guidance also addresses auditing procedures and timing, communications with regulators, and credit risk, especially when valuing financial liabilities.
The New York State Society of CPAs says market conditions, interest rates, and credit quality all have a “profound impact” on the valuation of complex financial instruments. The IAASB's proposed guidance would help a great deal in clarifying how auditors can get a better understanding of all the relevant elements that go into such valuations, the group says.
In fact, the United States could use a refresher on the same topic, says Anthony Chan a partner with accounting firm Berdon and chair of the NYSSCPA's SEC Practice Committee. “Do we need guidance in the United States? Absolutely,” he says.
Chan notes the last substantive guidance offered to U.S. auditors came from the Public Company Accounting Oversight Board in the form of Staff Audit Practice Alert No. 2 published in December 2007 and Alert No. 4 published in April 2009. The PCAOB has nibbled at the edges of valuation issues with other alerts addressing economic conditions, using the work of outside auditors, and unusual transactions.
Chan notes auditors might gain some meaningful insight by reviewing the international guidance and considering it when auditing U.S. GAAP financial statements. But caution is in order, he says, because the guidance doesn't have authority in U.S. capital markets.
“The challenges are not unique to international audits,” says Chan. “Some guidance for U.S. auditors would be helpful at this point.”
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