Advances in Accounting Education

Teaching and Curriculum Innovations

Thomas G. Calderon

• Publisher: Emerald Publishing Limited
• Year: 2021
• Print ISBN: 9781800717022
• eBook ISBN: 9781800717039
• Topic: Business
• Subtopic: Accounting
• Index: Business

Advances in Accounting Education is a high-quality publication of both empirical and non-empirical research that investigates vital matters within teaching, learning, and curriculum development. By focusing on these topics, this series works to support the improvement of accounting programs at colleges and universities, as well as fostering innovative discussion and significant contributions to faculty development.

This 25th volume features 13 peer-reviewed papers surrounding four themes: curriculum and pedagogical innovations, faculty reflections on teaching accounting during the COVID-19 pandemic, research on passing professional exams in accounting, and historical underpinnings and the choice of taxation as an area of specialization.

Faculty with an interest in accounting education as well as accounting program administrators should find all four themes to be highly informative and interesting. Some practitioners and regulators in the accounting profession may also find useful policy-related nuggets in Volume 25.

THEME 1

CURRICULUM AND PEDAGOGICAL INNOVATIONS

ACCOUNTING AND AUDIT QUALITY PERSPECTIVE: FAIR VALUE MEASUREMENTS AND DISCLOSURES CURRICULUM GAPS

Thomas R. Weirich and Natalie Tatiana Churyk

ABSTRACT

The accelerated pace of change in the global economy and capital markets along with the complexity of transactions and financial reporting that involve applying fair value measurements (FVM) is a major third-party user concern. The 2008 financial crisis highlighted risks that investors are exposed to when making FVM-related capital allocations. Accounting estimates often involve subjective assumptions and measurement uncertainty, increasing potential management bias (Choudhary, 2011; Ramanna & Watts, 2012). FVMs are of critical importance to the reliability of the financial statements. Therefore, the purpose of this chapter is to inform educators of the possible need to evaluate their curriculum as to coverage of FVM topics. The support for this evaluation is based on our attempt to: (1) evaluate the extent of reported FVM-related deficiencies with reference to regulatory bodies’ findings of significant deficiencies in FVM; (2) examine the use of FVM specialists; (3) determine if colleges and universities are keeping pace with FVM demands; (4) list the Uniform CPA Examination Blueprint FVM testing areas; and (5) provide curricular FVM topic recommendations.

Keywords: Fair value measurements; Fair value measurements deficiencies; Fair value measurements specialists; Fair value measurements curriculum; Securities & Exchange Commission; Public Company Accounting Oversight Board

In today’s capital markets, company managers and investors take sizeable risks based on entities’ fair market values measuring assets and liabilities for financial reporting purposes. Such risks include the absence of reliable market prices, subjective information, and potential bias in the information. Besides fair value’s use to measure financial instruments, it also helps to calculate financial instrument impairments, to record assets acquired and liabilities assumed in business combinations, litigation, asset restructuring decisions, transfer pricing decisions, and other tax issues. With several valuation methods currently available, each with its various estimates, assumptions, and potential biases, knowing how to correctly value an asset is critical for merger and acquisitions decisions and for selecting investments to include in a portfolio.

Regarding management’s determining fair value measurements (FVMs), many research studies find that auditors may lack the necessary knowledge to correctly assess the reasonableness of management’s FVM assessments (Bratten, Gaynor, McDaniel, Montague, & Sierra, 2013; Griffith, Hammersley, & Kadous, 2015). Furthermore, Cannon and Bedard (2017) reported that FVMs are one of the most encountered challenges facing auditors in evaluating management’s assumptions and methods utilized.

Organizations such as the Public Company Accounting Oversight Board (PCAOB), the US Securities & Exchange Commission (SEC), and the International Forum of Independent Audit Regulators (IFIAR) scrutinize FVM and its impact on financial statements. The regulators have often questioned the integrity and reliability of the FVM valuation or models used to measure assets and liabilities, especially in terms of how management determines and assigns fair value and how auditors audit FVM. The PCAOB (2007) reports that a lack of valuation knowledge and professional skepticism were observed audit deficiencies in many inspections resulting in auditors not sufficiently prepared for the challenges in auditing FVM. Financial statement users demand high quality auditing of increasingly complex investment vehicles and the related financial reporting requirements. This increase in fair value as a meaningful measure for reporting assets and liabilities stems largely in response to investors and regulators identifying it as the most relevant financial reporting metric.¹

As financial reporting requirements move to FVM,² accounting and finance professionals should adequately understand valuation methods and models. It starts with college education. Curricula must be dynamic and market-driven to meet the evolving nature of capital markets. This will help to better inform those involved in financial reporting and help prepare new entrants to the profession. Thus, we focus on analyzing the existing broad spectrum of valuation education available to students and consider how and whether it meets current market needs and the needs of investors. After examining PCAOB, SEC, and IFIAR findings to identify gaps between regulators, auditors, and professional education/exam, we highlight and suggest how to reduce this potential “knowledge gap” that currently exists in the accounting profession related to valuation services. This study focuses on these main points: (1) the increasing use of FVM over the last 20 years and the importance of the competency of company management and auditors who are charged with assigning values; (2) the importance of auditors’ valuation knowledge, especially when their knowledge is juxtaposed against a valuation expert’s knowledge in arriving at FVMs; (3) short of becoming a valuation expert, the auditor needs to possess an adequate level of knowledge in valuation topics to conduct an audit in accordance with current and proposed auditing standards; and (4) the limited training of valuation topics in US colleges and universities accounting curriculums.

The remainder of this chapter is organized as follows. Part II contains a review of the PCAOB, SEC, and IFIAR Inspection Findings as they relate to valuation audit deficiencies. It also provides examples of critical audit matters (CAMs) that highlight valuation issues as reported in current audit reports. Part III contains a discussion of considerations and challenges for auditors regarding the role and use of the work of specialists. Part IV evaluates the current academic accounting curriculum based on a sample of major universities as to the required coverage of valuation course offerings for accounting graduates. It also lists FVM topics currently tested on the CPA exam. Part V provides recommendations to reduce the “knowledge gap” by suggesting fundamental valuation topics that could/should be incorporated into required valuation courses or included in other required courses. These suggested topics are also important for auditors to understand to aid in discussion and evaluation of services provided in house or by third-party valuation experts. Lastly, Part VI discusses conclusions.

REVIEW OF PCAOB, SEC, AND IFIAR INSPECTION FINDINGS

Over the past 10 years, regulators, including the PCAOB and the SEC, have increasingly criticized the Big 4 (PwC, KPMG, EY, and Deloitte) public accounting firms for the quality of their audit work and audit documentation including deficiencies related to financial instruments, business combinations, impairment of goodwill, and valuation. Findings have also been critical of the firms’ valuation quality controls. A review of PCAOB, SEC, and the IFIAR reports indicate that among other matters, there were a significant number of deficiencies relating to auditing the valuation of investments and securities and impairments. Additionally, a report, Survey of Fair Value Audit Deficiencies (2012), by Atlanta based valuation and litigation consultancy firm, Acuitas, Inc. – reviewed PCAOB inspection reports for the periods 2008–2011 and reported that approximately one-fourth of all audit deficiencies reported by the PCAOB related to fair value measurement audit deficiencies. The study notes the primary causes of such deficiencies as being related to: pricing, failure to test, disclosures, risk assessment, prospective financial information, and other-than-temporary investments.

The following Acuitas observations relate to pricing and failure to test:

• Pricing – Includes failure to understand the methods, models and assumptions used by pricing services or valuation specialists; using the...

Table of contents

• Cover
• Title
• Theme 1. Curriculum and Pedagogical Innovations
• Theme 2. Faculty Reflections on Teaching Accounting During The Covid-19 Pandemic
• Theme 3. Research on Passing Professional Exams in Accounting
• Theme 4. Historical Underpinnings and the Choice of Taxation as an Area of Specialization
• Index