You have got to enjoy the irony of fair value from the perspective of those in the implementation trenches. On the one hand, the move signifies the transition to the new “principles based” paradigm. On the other hand, you have accounting firms and the PCAOB alike moving aggressively on the CYA front. The result is something akin to a time when history was passed down by spoken word. I realize the analogy may require some explanation, so I will provide a simple, albeit early, example. When FAS 123R came out a controversy was set in motion that pit the venture capital community against the regulatory and audit community. On the one hand, the VCs proclaimed that many of their portfolio companies had a valuation below the liquidation claims of the preferred investments and as a result any options on the common stock would be worthless, as would the common stock. The regulators replied by asserting that if that was indeed the case, then those holding such interests should be willing to surrender them at no cost. This of course silenced the criticism, but what happened next foreshadows a dynamic that will be played out again and again in the coming “fair value” years.
Satisfied with the fact they had won the battle, the SEC was content with letting the spirit of those comments circulate through the audit and preparer community, where it hoped acceptable solutions would materialize. This of course did happen, and a number of academics, valuation practitioners, auditors, and venture investors came together to develop a practice aid which provided a number of detailed implementation alternatives. However, the practice aid was not formally a part of GAAP, nor is it taught to mainstream CPAs. Further, the document was essentially digested by the Big Four, where very specific guidelines were developed in terms of what was and what was not acceptable in terms of specific methods and approaches. The only way for a layman valuation practitioner or non Big Four auditor to learn these acceptable approaches was to be subject to a SAS 73 review of the FAS 123R work of the Big Four client.
In its most basic form, this represents a classic example of a set of principles being transformed into a set of rules as they are translated into practice. The Big Four have essentially been assigned this task, and in doing so now hold a pseudo regulatory status. However, the irony of it all is that these rulesets are not publicly disseminated. What’s worse, if one does not have prior knowledge of them chances are good that the analyses or work pertaining to the audit review will be rejected without feedback. Professionals at the Big Four claim such feedback would be considered a violation of independence, and that further they are not in the business of auditor and valuation education.
What this all translates to is a cornering of the audit market by the Big Four – an essential annex of audit and valuation rules which will make them proprietary. This is absolutely ridiculous. How can a company (or valuation practitioner assisting said company) be expected to comply with a ruleset it doesn’t have access to. Even more ridiculous, when the ruleset shouldn’t exist in the first place, but instead be consistent with the spirit, or “principle” of the requirements, as so explicitly stated in the framework of the new fair value standards? I fear that as each principles based requirement progresses through implementation, the existing rules based mindset of the audit community will prevail, and a new age of proprietary accounting standards will replace the old standards that were publicly available. In addition, accounting standards will experience a profound bifurcation – those audited by the Big Four who have the sophistication and contacts to stay on top of the new proprietary standards, and main stream American accounting, which will stick to the old ways or develop their own, “non-compliant” ways.
Satisfied with the fact they had won the battle, the SEC was content with letting the spirit of those comments circulate through the audit and preparer community, where it hoped acceptable solutions would materialize. This of course did happen, and a number of academics, valuation practitioners, auditors, and venture investors came together to develop a practice aid which provided a number of detailed implementation alternatives. However, the practice aid was not formally a part of GAAP, nor is it taught to mainstream CPAs. Further, the document was essentially digested by the Big Four, where very specific guidelines were developed in terms of what was and what was not acceptable in terms of specific methods and approaches. The only way for a layman valuation practitioner or non Big Four auditor to learn these acceptable approaches was to be subject to a SAS 73 review of the FAS 123R work of the Big Four client.
In its most basic form, this represents a classic example of a set of principles being transformed into a set of rules as they are translated into practice. The Big Four have essentially been assigned this task, and in doing so now hold a pseudo regulatory status. However, the irony of it all is that these rulesets are not publicly disseminated. What’s worse, if one does not have prior knowledge of them chances are good that the analyses or work pertaining to the audit review will be rejected without feedback. Professionals at the Big Four claim such feedback would be considered a violation of independence, and that further they are not in the business of auditor and valuation education.
What this all translates to is a cornering of the audit market by the Big Four – an essential annex of audit and valuation rules which will make them proprietary. This is absolutely ridiculous. How can a company (or valuation practitioner assisting said company) be expected to comply with a ruleset it doesn’t have access to. Even more ridiculous, when the ruleset shouldn’t exist in the first place, but instead be consistent with the spirit, or “principle” of the requirements, as so explicitly stated in the framework of the new fair value standards? I fear that as each principles based requirement progresses through implementation, the existing rules based mindset of the audit community will prevail, and a new age of proprietary accounting standards will replace the old standards that were publicly available. In addition, accounting standards will experience a profound bifurcation – those audited by the Big Four who have the sophistication and contacts to stay on top of the new proprietary standards, and main stream American accounting, which will stick to the old ways or develop their own, “non-compliant” ways.
1 comment:
Maven - your comments are dead on and echo my frustration as a practitioner. I have spent much time reading the pronouncements and practice aides, and coupled this with large investments in attending conferences - some of which have been dedicated two day seminars on these topics. Most topics are covered from a theoretical perspective - not a practical one.
The ins and outs are kept hidden, and revealed only when your work product goes under the inspection of the Big Four - each of whom have their own "proprietary" positions on how to handle certain assumptions, and when certain methods are appropriate.
This needs to stop. If we're going to be subject to the review - we should know what the rules are.
The big four all have written standards of their own that cover any and all topics. They should share these principles with experts who truly want to master these areas. I don't expect it to be shared for free, either.
These Big Four firms do their clients a disservice in creating the uncooperative environment that I have experienced.
Post a Comment