PCAOB adopts rules changing fair value and specialist standards01.07.19
The Public Company Accounting Oversight Board (PCAOB) has adopted standards on auditing accounting estimates and the auditor’s use of the work of specialists. The new standards, which were adopted in tandem, were the first substantive auditing standards finalized since the full PCAOB was seated in April 2018.
The subjective nature of accounting estimates and fair value combined with a somewhat ambiguous set of definitions arising from the use of three standards to quantify these measurements has made this an area of controversy and difficulty for both auditors and public companies. Auditing Standard 2501, Auditing Accounting Estimates, Including Fair Value Measurements, replaces the current three standards with a single standard that emphasizes auditors’ responsibility to apply professional skepticism when auditing accounting estimates. In hopes of addressing the problems created by the current system, the newly adopted standard requires auditors to address potential management bias and provides more specific direction on auditing fair values of financial instruments that are based on information from third-party sources.
Perhaps because of the complex, difficult nature of the current three standard system, auditors often relied upon the work of specialists to assist them in determining the accuracy of estimates and fair values. Accounting Standard 1210, Using the Work of an Auditor-Engaged Specialist. This newly adopted standard strengthens the requirements for evaluating the work of a company’s specialist, regardless of whether the specialist is employed or engaged by the company. The amendments also require a supervisory approach by the auditor when working with specialists the auditor either employs or engages.
The standards are subject to final approval by the United States Securities and Exchange Commission. Upon such approval by the SEC, the new standards and amendments will take effect for audits of financial statements for fiscal years ending on or after December 15, 2020.