PCAOB Issues Guidance on Auditing the Fair Value of Share Options Granted to Employees

The Public Company Accounting Oversight Board today issued staff questions and answers about auditing the fair value of share options granted to employees.

The staff guidance provides direction for auditing a company’s estimation of the fair value of stock options granted to employees pursuant to Statement of Financial Accounting Standards No. 123 (Revised), Share-Based Payment (FAS 123R). FAS 123R became applicable for financial statements of companies with fiscal years ending on or after June 15, 2006.

“I appreciate that many firms currently are auditing the fair value of share options and have developed their auditing approaches using the general principles in the existing auditing literature," said Tom Ray, PCAOB Chief Auditor and Director of Professional Standards. “The staff’s questions and answers were developed to help auditors apply the existing auditing standards to this area appropriately and consistently, and I encourage auditors to review this guidance as they plan for calendar year-end audits.”

This series of questions and answers is limited to addressing auditing the fair value measurements associated with determining compensation cost. It highlights risk factors that auditors should be aware of and addresses the auditor’s consideration of the process for developing a fair value estimate, significant assumptions used in options pricing models, and the role of specialists in fair value measurements.

In July, the Board published Staff Audit Practice Alert No. 1  in response to reports about practices related to the granting of stock options, including the “backdating” of such grants. The alert highlighted issues that auditors should be aware of primarily related to auditing stock options that were accounted for under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which has been superseded by FAS 123R.

The questions and answers are available under Standards, Staff Questions and Answers at www.pcaobus.org.