The SEC's Proposed Rules reinforce the idea of “professional skepticism.”

July 15, 2019

The United States Securities & Exchange Commission (SEC) recently approved several changes ("Proposed Rules") to standards relied upon by the Public Company Accounting Oversight Board (PCAOB). Specifically, the SEC approved amendments to two existing standards and also retitled and replaced a third standard. The Proposed Rules provide for increased oversight and scrutiny of valuation specialists by strengthening the requirements when an auditor relies upon and uses the work of a valuation specialist as audit evidence. The Proposed Rules also aim to ensure the auditor fully understands the processes behind the valuation analysis and report.

The Proposed Rules reinforce the idea of “professional skepticism” whereby information provided by management should not simply be accepted as fact. Instead, the valuation specialist and auditor will be expected to perform detailed and independent research to address any contrary or negative evidence relative to management’s information. This will further support the need for a company to engage independent and trusted valuation specialists. Important to note is that the Proposed Rules will also be applicable to audits of emerging growth companies (ECGs), which is in contrast to the treatment of ECGs in Section 104 of the Jumpstart Our Business Startups Act (commonly known as the JOBS Act) of 2012.

Increased oversight and scrutiny ensures all valuations are given the same treatment and attention as other parts of a company’s audit, which will ultimately allow for greater investor confidence in financial statements and SEC filings. The Proposed Rules are effective for audits issued with a fiscal year date on or after December 15, 2020.

Co-authored by:

Tim Osborne
Vice President, Valuation Advisory
+1 216.373.2999
tosborne@stout.com

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