At a Q&A during the AICPA conference on PCAOB and SEC developments, PCAOB Member Jay Hanson discussed the use pricing services to provide fair valuation measurements for financial instruments. While the Board does not have direct influence over pricing services, he noted, at task force meetings he is hopeful that the pricing services are getting the message that their business models are not geared to do what the standards require. They are at the table, he said, and are hearing the concerns.
The PCAOB currently has a Pricing Sources Task Force examining issues pertaining to fair value measurements of financial instruments and the use of third-party pricing sources. The Task Force focuses on the auditing of fair value of financial instruments that are not actively traded. Recently, the PCAOB’s Standard Advisory Group discussed the role of fair value pricing services
Ultimately, said Member Hanson, company management is responsible for fair valuation measurements, and that there is compliance with GAAP. He added that if management understood what went into fair value measurements, the auditors would not have as much trouble auditing the measurements.
Board member Hanson noted that his conclusion after Task Force fair value reviews is that every pricing service can defend how they arrived at their fair valuation of a financial instrument. He concluded that two fair valuation numbers can both be arrived at in good faith and not necessarily be wrong.
With regard to the Board’s concept release on the auditor reporting model, Member Hanson reminded the conferees that this is a concept release, and is far removed from any final rules or standards. The next step that could be taken in this regard is an exposure draft of proposed change. The Member said that he expects the Board to have at least one roundtable before doing so. In addition, a personal goal of Mr. Hanson is that there be a field test before any final rules are adopted.
Mr. Hanson said that the PCAOB is concerned about audit fees, but added that the Board is not in a position to put any pressure on audit committees in relation to audit fees. The Board has met with leaders of major firms to discuss the pressure to reduce fees and the ramifications of such pressure and how it could affect the quality of the audit if firms are being squeezed to lower audit fees.