Determining fair value for the purpose of issuing Financial Statements is an area full of challenges, either because of the interactions between professionals, the complexity of the work roles of the specialists, or the difficulty of supervising management on both aspects (interaction between professionals and technical complexity). These challenges demonstrate the importance of effective collaboration between evaluators, administrators, and auditors.
Below we will discuss some of the topics of these challenges.
Administration: The Interface Between Reports and Reality Management is responsible for the accuracy of financial statements, but it usually lacks the resources or expertise needed to thoroughly analyze fair value estimates. They therefore rely on the evaluators to substantiate the assessments presented in the reports. In the context of publicly traded companies in the USA, where the Sarbanes-Oxley Act imposes additional responsibilities on CEOs and CFOs, the accuracy and timeliness of the reports become even more crucial and thus the managers are also responsible for the capacity of the contracted company. Here, the expectation is that evaluators not only support the issuance of reports within the deadlines, but also assist in the auditing process, maintaining their independence and professional judgment.
Evaluators: Your Critical Role At the core of determining fair value is the painstaking work of the evaluators. These professionals operate under strict standards in their countries; evaluators of American companies generally follow the rules of the USPAP “Uniform Standards of Professional Appraisal Practice”, evaluators of Brazilian companies generally follow standards related to the IVSC “International Valuations Standards Council”, which are tropical to local standards such as ABNTs. These evaluators provide essential estimates that support financial reports, which in turn are subject to review by auditors. The interaction between evaluators and auditors is not limited only to independence and the analysis of technical capacity. Both have the same objective; to ensure that fair value estimates comply with accounting, valuation, and auditing standards, while maintaining the safeguards of both companies.
Auditors: The Quest for Accuracy and Compliance Auditors face the challenge of evaluating fair value estimates in light of professional auditing standards, such as those established by the PCAOB for U.S. public companies. This process involves validating the reasonableness and reliability of fair value estimates, which requires a careful analysis of the methodologies (which can often be specific and internal to each company), the financial data provided by the company, and the various inputs used in the valuations. The objective is to ensure that fair value estimates do not introduce material distortions in the financial statements.
Problem: Common Challenges and Professional Intersections The complexity of auditing fair value estimates is illustrated by the deficiencies identified in PCAOB inspections, highlighting the need for adequate tests on the assumptions used, compliance with the methods used in the evaluations, and more effective communication between the parties involved. These challenges highlight the importance of appropriate documentation, an efficient dialogue with administrators and evaluators, and the maintenance of appropriate professional skepticism.
Enhancement: Promoting a Constructive Dialogue To successfully navigate the complexity of fair value in financial reporting, it is essential that evaluators, administrators, and auditors maintain an open and constructive dialogue. Proactive and timely communication and documentation between parties are key to aligning understandings about important technical considerations and avoiding delays or complications in the financial reporting process. Dedicating experienced professionals to these interactions provides support so that the parties are not distracted by non-relevant topics, while remaining focused on dialogues on relevant topics. Thus, fair value estimates for financial reports can be treated with the precision and regulated to the depth that each task requires, benefiting all the parties involved and, finally, the stakeholders who depend on this timely and accurate information to make their decisions.
Abstract prepared by Renato Mateus Gonçalves and Wiliam Junior , inspired by the document “First Exposure Draft of Proposed Changes to Valuation Brief #3: Professional Interactions Unique to Fair Value for Financial Reporting” issued by The Appraisal Foundation.
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