Audit regulators are in the early stages of deciding whether to write new rules for how to audit fair value measurements and other accounting estimates that underpin financial statement assertions.

Under the direction of Chief Auditor Martin Baumann, staff at the Public Company Accounting Oversight Board has indicated they are working on a recommendation for a new comprehensive standard for auditing accounting estimates and fair value measurements that would promote more consistent, effective auditing across the profession. The staff is contemplating a standard that would align with existing risk assessment standards and would retain certain substantive testing approaches in existing standards, but would establish more specific audit requirements, especially related to the use of third-party specialists.

In a staff consultation paper, PCAOB staff describes what has been learned and done so far and asks for feedback. More specifically, the staff is looking for input on the need for such a standard, current audit practices that have evolved in recent years to address ongoing issues in auditing accounting estimates, and any data that would facilitate economic analysis of potential new rules. 

PCAOB inspections frequently call out problems in the audit of accounting estimates and fair value measurements across the profession. Particularly through the financial crisis and economic downturn, preparers and auditors alike struggled with how to measure financial instruments in illiquid markets, prompting heavy tension in every stage of the financial reporting pipeline.

In its consultation, PCAOB staff summarize several key milestones in the focus on auditing estimates since 2007 -- six separate regulatory practice alerts that somehow address estimates, multiple consultations with the PCAOB’s Standing Advisory Group, the formation of a Pricing Sources Task Force to focus on the difficulties of auditing valuations of illiquid instruments, and heavy focus on auditing estimates through the audit inspection process. 

And it’s not just a U.S. problem, the paper points out. Surveys from the International Forum of Independent Audit Regulators suggests audit deficiencies are more common in the area of fair value measurements globally than in any other area. "Accounting estimates and fair value measurements can be subjective and complex, yet they can be an important part of a company's financial statements and critical to investors' decision-making," said PCAOB Chairman James Doty in a statement. 

Baumann says public comments on the paper will help the staff determine its next move in recommending an auditing standard to the board. The board also plans to consult SAG on the topic again at its Oct. 2 meeting in Washington.