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Valuation for fair value can be challenging. Deficiencies in the valuation process can result in exposure to regulatory scrutiny from the SEC or PCAOB, and may result in enforcement actions or costly litigation—and corresponding damages or financial penalties. Regulatory oversight can be compounded with pressure from auditors and, of course, the client themselves. In situations like these you want to make sure you have a good lawyer on your side. Attorneys Peter Anderson and Yvonne Williams-Wass are here to provide an overview of the legal and regulatory challenges and changes facing fair value professionals. Mark Zyla of Acuitas brings the valuation perspective, and together they bring a complete picture of the assumptions processes and regulatory pressures along with the best strategies to employ on your next valuation.
Program Agenda
Introduction
FASB definition of fair value in financial reporting: “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”
Fair value measurements are used to estimate a transaction price for a particular asset, liability, or equity instrument
“What would a market participant pay for this?”
How do you determine what the market would pay? Who makes the assumptions?
Assumptions are being made by third-party service providers, rather than management
Increase in the business of third-party pricing services led to increased focus by regulators
Number of SEC enforcement actions declining
Decline in cases focusing on individuals and directors in fair value
Decline in cases focusing on fraud in fair value
SEC has instead been urging profession regarding need for credentials, standardization
Uniform guidance on documentation necessary to support FVM, mandatory performance framework
Oversight of credential holders
Fair value remains a focus for PCAOB:
From July 2016 release discussing key focus of 2016 inspections
PCAOB ispection reports - percentage of all audit engagements with deficiencies has increased dramatically since 2009
PCAOB recently issue two proposals for public comment related to auditing accounting estimates including fair value measurements and the auditor’s use of the work of specialists
Understanding the broker's or dealer's process for fair value measurement
Of the 19 firms that had deficiencies relating to fair value measurements, 13 involved situations where firms did not obtain an understanding of the methods and assumptions internally developed or obtained from third parties that were used by the broker or dealer to determine the fair value of securities
Testing fair value measurements
See SEC v. Covenant Financial Services
See In the Matter of Calvert Investment Management
Learning Objectives
Recall SEC enforcement trends
Define fair value for financial reporting
Understanding the broker's or dealer's process for fair value measurement
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