Statement on Proposed Auditing Standard on Auditing Accounting Estimates, Including Fair Value Measurements, and Proposed Amendments to Auditing Standards For Auditor’s Use of the Work of Specialists

Thank you Mr. Chairman. I support the two proposals before us today. Both projects have been on the PCAOB's agenda for considerable time and I am happy to see the Board finally acting on them. [1]

As noted in both releases, accounting estimates and fair value measurements are more prevalent and significant in today's financial statements than ever. These estimates often have a major impact on a company's reported financial position and results of operations. Because these estimates often involve subjective assumptions and measurement uncertainty, they are susceptible to management bias. Thus, these accounts usually comprise the areas of high risk in an audit.

Accounting estimates also often involve complex processes and methods. As a result, companies often turn to specialists for assistance in developing accounting estimates or performing assessments of assets. In turn, auditors' use of specialists during an audit has also increased. This trend is likely to continue.

This increased prevalence of accounting estimates and use of the work of specialists by management and auditors amplifies the need for today's proposals. If auditors do not appropriately evaluate management's estimates and properly oversee the work of specialists', they may perform an insufficient audit, potentially harming investors.

Both proposals protect investors' interests by strengthening the procedures auditors perform when testing accounting estimates, evaluating the work of a company's specialist, and supervising the work of the auditor's specialists.

Accounting Estimates, Including Fair Value Measurements

As the proposing release related to the accounting estimates notes, the PCAOB continues to identify high rates of audit deficiencies in this area. We are not alone. The International Forum of Independent Audit Regulators' ("IFIAR") annual surveys have consistently noted high rates of deficiencies in the area of fair value measurements since the inception of the survey in 2013.[2]

These findings and the auditing difficulties observed by the PCAOB due to the disruptions in credit and capital markets during the 2008 financial crisis[3] indicate a clear need for auditors to devote greater attention to their evaluation of accounting estimates. The proposed auditing standard prompts such auditor action by highlighting the risk of management bias and the need for the auditor to exercise an appropriate level of professional skepticism.

The proposed auditing standard also strengthens auditing in this area by extending key requirements in the existing fair value standard to all accounting estimates and by providing specific procedures for unique situations, such as using information from pricing services.

I believe this proposal strikes the appropriate balance by outlining an appropriate framework while not being overly prescriptive and prudently aligns with our risk assessment standards.

Investors were generally supportive of certain aspects of the approach included in the 2014 Staff Consultation Paper,[4] which this proposal builds upon.[5] That said, investors continue to ask for greater transparency by auditors in this area, such as disclosure of the auditor's evaluation of management's estimates and judgments in the auditor's report.[6] As noted by the Colorado PERA, "there remains a significant expectation gap that needs to be closed through better disclosure and more robust auditing practices."[7]

The Auditor's Use of the Work of Specialists

The proposal related to using the work of specialists covers two groups of specialists whose work may be implicated in an audit—specialists engaged or employed by the company and those engaged or employed by the auditor. I support the Board acting on this proposal as our inspectors have observed auditors too often accepting the findings of specialists without first evaluating their work.

Company Specialist

The proposed amendments improve the auditor's evaluation of the work of a company's specialist by enhancing how the auditor tests and evaluates the data used by the specialist and by also requiring the auditor to evaluate the significant assumptions and methods the specialist used. The latter is important because today the auditor is only required to gain an understanding of those assumptions and methods.

Commenters, including investors, generally supported stronger evaluation requirements in their comments to the 2015 Staff Consultation Paper[8] on this topic. As noted by Brandon Rees of the AFL-CIO in their comment letter, "[m]ore rigorous testing of the work of company specialists will reduce the risk of material misstatements."[9]

Auditor Specialist

With respect to the auditor's specialist, today's proposal calls for a uniform approach to supervising that work, which is an improvement from the current requirement. The proposed approach is appropriate as the role and work of the auditor's specialist is the same regardless of the specialist's arrangement with the audit firm.

Independence of the Auditor's Specialist

Regarding the role of the auditor's specialist, I believe that certain commenters to the 2015 Staff Consultation Paper would have preferred that the auditor's engaged specialist be subject to the same independence standards applicable to the auditor's employed specialist.[10]

Independence is a key tenet investors look to when relying on the work of the auditor. In turn, when the auditor engages a specialist when auditing highly complex and subjective areas, investors appropriately expect that individual or entity whose work is part of the audit to also be independent.

I look forward to hearing more from investors on this aspect of the proposal during the comment process.


In conclusion, I would like to thank the staff in the various offices at the PCAOB who have contributed to these projects. We are here today largely due to the collaborative efforts of all involved.

In particular, I would like to thank Keith Wilson, Barbara Vanich, Lisa Calandriello, Nike Adesoye, Dominika Taraszkiewicz, Mamed Salmanov, David Hardison, Karen Wiedemann, in our office of Chief Auditor and Joon-Suk Lee, in our Office of Economic and Risk Analysis for working tirelessly over the years on these projects.

I also would like to express my appreciation to Wes Bricker, the SEC's Chief Accountant, and Marc Panucci, Deputy Chief Accountant, for their significant contributions to these projects.

[1] The PCAOB Standard Advisory Group ("SAG") first discussed accounting estimates, including fair value measurements, and the use of the work of specialist in September 2004 and February 2006, respectively. See SAG Meeting Archive at

[2] IFIAR annual inspection survey findings are located at

[5] See, e.g., Jeff Mahoney, General Counsel, Council of Institutional Investors comment letter (CII Comment Letter) (Oct. 2, 2014), Jennifer Paquette, Chief Investment Officer, Colorado PERA comment letter (Colorado PERA Comment Letter) (Nov. 3, 2014), and Brandon Rees, Deputy Director, AFL-CIO comment letter (AFL-CIO Comment Letter) (Nov. 3, 2014)

[6] See, e.g., CII Comment Letter, (Oct. 2, 2014) and Colorado PERA Comment Letter (Nov. 3, 2014).

[7] Colorado PERA Comment Letter (Nov. 3, 2014) at 2.

[9] AFL-CIO Comment Letter (July 29, 2015).

[10] See AFL-CIO Comment Letter (July 29, 2015) and Comment letter from James R. Dalkin, Director, Financial Management and Assurance, U.S. Government Accountability Office (July 31, 2015).

Event details and documents

News release on proposal for auditing accounting estimates (Jun. 1, 2017)

News release on proposal for an auditor’s use of the work of specialists (Jun. 1, 2017)