Auditors of public companies face oversight on valuation issues

In the keynote address given at the American Accounting Association’s Annual Ohio Region Meeting on May 10. 2013, Public Company Accounting Oversight Board (PCAOB) member Jay Hanson recognized the changing nature of financial accounting and wondered aloud whether the next generation of auditors is being trained to handle it.

Financial statements used to be all about “tangible assets and historical cost accounting. Today…the balance sheets of an increasing number of companies are dominated by valuation estimates…” and “it is much more difficult for accountants, auditors and investors to understand the transactions and products that must be captured in financial statements.”

Valuation analysts know what it’s like to have auditors looking over their shoulders.  Auditors of public companies have the Board looking over theirs. “Estimates and measurements” are frequently red-flagged, particularly with respect to impairment of goodwill and accounting for indefinite-lived intangible assets. Hanson points out auditors must assess the “reasonableness of assumptions applied by management in making the necessary measurements or estimates.” “In some cases, auditors did not appropriately consider the weight of both positive and contradictory evidence,” reinforcing the need for valuation analysts to explore alternative valuation methods.