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Higher quality valuations can help reduce risk and enhance value
Valuation in the fair value era
A concern has been growing in recent years and is shared by many regulators, standard-setting bodies, and accounting and valuation professionals: Are financial statement preparers, their valuation advisers, and auditors equipped and qualified to engage in the various aspects of estimating and auditing fair value measurements in this new world?
The increasing complexity of the financial marketplace adds to the difficulty of answering such a question. Educating the various stakeholders regarding key issues associated with fair value measurements is increasingly important. Higher quality, more consistent fair value measurements provided by company management to auditors should help address some of the issues that currently lead regulators and investors to challenge companies' financial reports.
Widespread education about fair value should enhance the ability of auditors to audit certain fair value measurements, increase the stature of the valuation and audit professions, and influence the standard-setters’ and regulators’ future agendas. In addition, educating business leaders and company executives regarding valuation should help them understand the need for, and value of, qualified fair value specialists when developing fair value estimates, whether employed internally or engaged externally. Mitigating such regulatory and credibility risks can ultimately enhance shareholder value.
The benefits of enhancing fair value quality
Scandals, crises, and growing accountability demands have triggered an unstoppable march toward higher quality fair value measurements, provided by better qualified valuation practitioners. The consistent application of valuation standards is an important foundation for achieving this goal. However, fully understanding the expectations of the environment within which fair value measurements are used is crucial for those wishing to be involved. Much has been achieved in the last decade toward improving the quality of fair value measurements. Much more, however, is required and must be strived for in the coming years.
This is especially relevant for the senior executives of publicly traded companies who are responsible for tasking others in the organization to perform fair value measurements, providing information to external providers, providing such fair value measurements to their auditors, confident in the knowledge that they are reasonable and well supported, and ultimately signing off on those financial reports.
Importantly, by focusing attention on these issues, publicly listed companies with significant fair value requirements in their financial reporting can address audit and regulatory risks, enhance their credibility in the investment community, and, ultimately, increase their enterprises’ value in the marketplace.