Regulators have put accountants on notice that they can’t simply outsource the hardest parts of the financial reporting process and rely blindly on third-party conclusions.

As new fair-value measurement methods are still coalescing, and as volatility and instability have made it difficult to pinpoint market pricing, preparers of financial statements and their auditors are turning to outside specialists to get help on valuing assets and liabilities.

But staff of the Securities and Exchange Commission and the Public Company Accounting and Oversight Board told accountants at a national conference of the American Institute of Certified Public Accountants not to place blind faith in those third-party reports. Management still is expected to understand the assumptions and judgments that go into their financial reports, SEC and PCAOB staff said.

Paul Beswick, deputy chief accountant for the SEC, said the SEC staff has seen instances where individuals have asserted they used judgment but wouldn’t or couldn’t explain their reasoning. While SEC staff says it will respect reasonable judgments, that doesn’t mean they won’t ask preparers to explain their judgments, he said.

“Any standard about judgment would not limit the staff’s necessary and appropriate evaluation of a registrant’s judgment,” Beswick said. Take a careful, good-faith approach that considers all the facts and circumstances, and avoid a checklist approach, he said.

Acknowledging market circumstances that have made it difficult to establish assumptions and estimates, Beswick gave preparers two concise pieces of advice: “do your homework,” and “don’t get cute.” At minimum, a reasoned assumption should include current market data, consideration of what experts in the industry are forecasting, and an evaluation of what others in the industry are doing, among other things, he said.

“If you find yourself rationalizing overly rosy forecasts, making changes to the models or assumptions to achieve a specific result, not being consistent with the objectives of the particular accounting standards, or other things, you might want to take a step back and consider the implications,” he said.

Doug Besch, a professional accounting fellow at the SEC, said the staff hears from auditors that they often struggle to understand assumptions management has used, and especially when management has enlisted outside service providers. “To the extent you can’t provide the auditor with support, you likely have a deficiency in internal control over financial reporting,” he said. “Both the registrant and the auditor would need to evaluate whether a material weakness exists.”

Marty Baumann, chief auditor for the PCAOB, reinforced the SEC’s expectation. “Management has a responsibility for the valuation, and they need to understand the inputs that went into the valuation,” he said. If auditors can’t get comfortable with what management provides, they’re forced to get third-party assistance for themselves, he said.

Evan Sussholz, another professional accounting fellow, offered some ideas on how to develop assumptions from the perspective of a hypothetical market participant, as required by accounting rules under Accounting Standards Codification Topic 820.

Sussholz suggested preparers explore some basic issues that should help guide the process of establishing market participant assumptions, including the potential exit markets for an asset and the asset's principal or most advantageous market, the highest and best use for the asset, the characteristics of potential market participants, and how they compare with the entity’s own characteristics.

“It is reasonable to anticipate that the staff will continue to inquire about the process employed and judgments made by a reporting entity when developing market participant assumptions,” he said. “we have observed that conversations are generally more productive when a reporting entity has documented how market participant assumptions were developed when performing a fair-value measurement.”