The need for alternative investment funds to report their investments at fair value is long-standing.
For those reporting under the U.S. generally accepted accounting principles adopted by the Securities and Exchange Commission (SEC), fair value reporting has been a requirement since the passing of the 1940 Investment Company Act.
The fair value requirement has evolved considerably over the years, though, and scrutiny has only intensified since the financial crisis. Over the past decade, particularly, the Public Company Accounting Oversight Board (PCAOB) examinations have consistently found exceptions with respect to auditors' assessment of fair value estimates. The SEC, too, has questioned the lack of rigor from registrants providing fair value measurements.
There are several Valuation Professional Organizations that provide credentials for valuation professionals, and the
International Valuation Standards Board has provided global valuation standards. The SEC, however, has remained concerned that many valuation professionals may not adhere to uniform standards for documentation, conduct or quality control.
As the SEC's deputy chief accountant said back in 2011, "Risks created by the differences in valuation credentials that exist today range from the seemingly innocuous concerns of market confusion and an identity void for the profession to the more overt concerns of objectivity of the valuator and analytical inconsistency. The fragmented nature of the [valuation] profession creates an environment where expectation gaps can exist between valuators, management and auditors, as well as standard-setters and regulators."1
Momentum is building to close that gap, though.
First, following consultation papers on auditors' use of the specialists' work and fair value, the PCAOB has proposed new audit standards focused on the issue.
Second, and more immediately, the SEC's concerns have been noted and a new credential established: the Certified in Entity and Intangible Valuations (CEIV) credential,2 the result of a collaboration amongst the American Society of Appraisers, the American Institute of Certified Public Accountants, the Royal Institution of Chartered Surveyors and major valuation and accounting firms, amongst others. CEIV-credentialed professionals must follow guidance in Mandatory Performance Framework (MPF) documents,3 detailing the documentation and work required to support fair value measurements.
Over time, pressure is likely to grow on alternative managers to provide fair value calculations that comply with the MPF. Indeed, the MPF documents seem to expect it. While only valuation professionals with CEIV credentials are required to adhere to it, the MPF is explicitly "designed for use by all valuation professionals" and asserts that "adhering to the MPF documents should be considered best practice" in valuation.4
While the new standards and credential are still bedding in, that may come to be the case sooner rather than later. The benefits of greater consistency and transparency in the performance of fair value measurements have long been clear. With a solution now finally available to deliver it, auditors, regulators and investors will not want to see it ignored.
1 2011 AICPA National Conference on Current SEC and PCAOB
Developments, December 5, 2011, Paul A. Beswick, as Deputy Chief
Accountant of the U.S. Securities and Exchange Commission
3 https://www.aicpa.org/content/dam/aicpa/interestareas/fairvaluemeasurement/downloadabledocuments/mpf-for-ceiv-credential.pdf and https://www.aicpa.org/content/dam/aicpa/interestareas/fairvaluemeasurement/downloadabledocuments/application-of-mpf-for-ceiv.pdf
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