PCAOB Proposes to Enhance Requirements for Auditing Accounting Estimates, Including Fair Value Measurements
June 5, 2017
The Public Company Accounting Oversight Board issued for public comment a proposal on June 1 to enhance the requirements that apply when auditing accounting estimates, including fair value measurements.
The proposal emphasizes that auditors need to apply professional skepticism and devote greater attention to potential management bias when auditing accounting estimates.
The Board requests public comment on its proposal by August 30, 2017.
"Accounting estimates are integral to financial statements, but often subjective and susceptible to management bias," said James R. Doty, PCAOB Chairman. "Enhancing the standards for auditing estimates will benefit investors by directing greater attention to this important area of the audit."
Accounting estimates are becoming more prevalent and significant as financial reporting frameworks evolve and require greater use of estimates, including those based on fair value measurements.
Auditing certain accounting estimates has proven challenging to auditors. PCAOB inspectors continue to identify deficiencies at both larger and smaller audit firms in auditing accounting estimates, raising concerns about auditors' application of professional skepticism and consideration of potential management bias.
"Accounting estimates often represent the areas of greatest risk in an audit," said Martin F. Baumann, PCAOB Chief Auditor and Director of Professional Standards. "The proposal focuses auditors on estimates with greater risk of material misstatement, with particular attention to addressing potential management bias."
The financial statements of many companies include items that cannot be directly measured and therefore require estimates. These include values of financial and non-financial assets, allowances for credit losses, and contingent liabilities.
The Board is proposing to replace Auditing Accounting Estimates (AS 2501); Auditing Fair Value Measurements and Disclosures (AS 2502); and Auditing Derivative Instruments, Hedging Activities, and Investments in Securities (AS 2503). The updated and retitled standard would be Auditing Accounting Estimates, Including Fair Value Measurements (AS 2501).
The proposed single standard also would include a special topics appendix that addresses auditing the fair value of financial instruments, including the use of information from pricing sources.
In a companion release,the PCAOB is proposing to amend its standard on the auditor's use of the work of specialists. Auditors often use the work of specialists in auditing certain accounting estimates.
The PCAOB accounting estimates standard-setting project was informed by significant outreach and input from investors, auditors, public companies, and academia, including comments received on a staff consultation paper on auditing accounting estimates and fair value measurements. In addition, the topic was discussed at numerous meetings of the PCAOB Standing Advisory Group and at a meeting of the PCAOB Investor Advisory Group.
A fact sheet on the proposal also is available.