Auditors find themselves on the “hot seat” as a result of the SEC’s recent mandate that corporations and other institutional investors report investment holdings based on a “market value” basis. As 2008 came to a close, many companies and institutional investors were hoping that the SEC would suspend the “fair-value” accounting rules that require companies to report actual market values for illiquid securities. Last week, those hopes were dashed. On December 31, 2008, the SEC announced that it would require mark-to-market valuations for these holdings and many companies are now facing significant write-downs. Under FAS 157 (the fair-value accounting rule), market value is defined as the price that would be receive to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
Supporters of this decision believe that this requirement promotes transparency and provides investors with consistency and comparability of current holdings. It also alerts investors as to the credit risk that institutions are facing. Critics of this decision, such as publisher Steve Forbes, believes the rule forces institutions to value assets at the current value instead of the value they may retrieve in years to come. The critics argue that these lower current values will further erode investor confidence.
The past 12 months have seen significant drops in various markets, including, but not limited to, the markets for collateralized debt obligations (CDO’s), auction-rate securities (ARS), mortgage-backed securities, and other structured finance vehicles. Companies that hold these securities must now, due to the adoption of the “fair value” standard, value these positions at market prices.
As a result, auditors are now placed in a dubious position of making sure their clients report market values for these securities even though such market values are substantially lower than the values previously assigned to the securities. Some auditors may even find themselves pressured by their clients to “fudge” the values, but failure to require clients to properly report the market values for their existing holdings would expose the auditors to significant liability. Auditors are well-advised to proceed carefully in determining market values and should double-and triple-check their clients’ financial statements. Among other things, auditors should consider using third party valuation services such as Pluris Valuation Advisors LLC in New York City.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in securities cases. For further information, please contact us.