Audit regulators are weighing the latest accounting guidance on fair value and impairment to determine whether a change in audit rules is warranted.

Mark Olson, chairman of the Public Company Accounting Oversight Board, told a gathering of the board’s Standing Advisory Group that the board is taking a close look at the controversial guidance that emerged from the Financial Accounting Standards Board to determine whether audit guidance should follow.

FASB adjusted impairment rules to provide earnings relief to financial institutions slumping under failing loans. FASB also offered views on how to establish fair values without relying on fire-sale prices, interpreted in some circles as a way to help banks report better values for troubled securities.

“We will be looking to see whether or not any conforming amendments to existing standards are appropriate and if any additional guidance would be helpful,” Olson told the board’s advisers. He indicated the advisers’ input would prove important in helping the board determine its next move.

SAG member Harold Schroeder, a director at Carlson Capital, said his firm’s dialogue with Standard & Poor’s 500 companies suggests auditors are clinging to distressed prices as benchmarks for fair value. “Even though there may be all the signs of a distressed price, there seems to be an unwillingness or misunderstanding of what the standard requires,” he said. “They view that as the only answer, and they can’t seem to get beyond some quoted price, no matter how distressed it may be.”

Ernst & Young Partner Randy Fletchall, also a SAG member, said he’s “somewhat pained” by criticism against auditors, who are working with difficult estimates in an unusual market situation. “They’re doing a darned good job of trying to exercise judgment,” he said. “Each time someone doesn’t like the answer, it gets played back that they’re too scared to exercise judgment.”

The PCAOB published guidance in late 2007 that focused on auditing fair-value measurements and published an alert at the end of 2008 that gave auditors a heads-up on a number of issues likely to emerge under unusual economic conditions, including issues around measuring value. SAG member Joseph Carcello, director of research at the Corporate Governance Center at the University of Tennessee, said he’s not sure what more the PCAOB can or should do.

“Some of the requests for guidance are to provide cover for auditors to be more flexible in how they view these estimates,” Carcello told Compliance Week. “That’s what some elements of the business community would like. The board can’t issue something like that. I’m not even sure what it would say. I think the accounting guidance that’s been issued pretty much speaks for itself.”

Topics