As always, hope all is going great. I will continue where we left off regarding the new PCAOB’s staff guidance on the auditing the fair value of financial instruments. This second portion of the blog is dealing with “pricing services.” According to PCOAB’s Auditing Standard (AS) 2501 (Revised), defined pricing services as “organizations that routinely provide uniform pricing information to users, generally on a subscription basis. In general, financial instruments covered by these services tend to be those with more direct or indirect observable inputs (such as municipal bonds and corporate debt).”
The staff guidance also suggested that pricing services are also sometimes hired to specifically value specific financial instruments not routinely priced for their subscribers. When this situation occurs, PCAOB classifies these pricing services as specialists.
PCAOB then addressed how one should assess the reliability of pricing information. They suggested that the reliability of audit evidence depends on the nature and source of the evidence and the circumstances under which it is obtained. The following factors were recommended in determining the reliability of pricing information from a pricing service:
- Experience and expertise of the pricing service relative to the types of financial instruments being valued,
- Whether the methodology used by the pricing service in determining fair value of the types of financial instruments being valued is in conformity with the applicable financial reporting framework, and
- Whether the pricing service has a relationship with the company by which company management has the ability to directly or indirectly control or significantly influence the pricing service.
Lastly, if the pricing service of a financial instrument includes unobservable inputs that are significant to the valuation, the auditor is required to obtain an understanding of how unobservable inputs were determined and to evaluate the reasonableness of those inputs by taking into account.
The point of this blog is twofold. One, PCAOB did a fine job in elaborating the expectations as to valuing financial instruments. On the other hand, was it really needed since these are audit steps that should be taken anyways? At the end of the day, it all comes down to integrity and competence. We can have all the standards in the world but unless the auditors conduct themselves with integrity, it is all moot.
Until next time………