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April 30, 2008

Big Six join forces to produce subprime guidance

Big Six join forces to produce subprime guidance

One of the main concerns of the recent subprime crisis has been the valuation of asset-backed securities, primarily subprime-related derivatives. As a result, the Big Six accounting firms – Deloitte, PricewaterhouseCoopers, Ernst & Young, KPMG, BDO International and Grant Thornton – have come together to draft a document that aims to provide consistency in the auditing of bank assets and application of IFRS guidance on fair value.

The document is set to be released before Christmas and comes on the back of subprime accounting advice issued by the Center for Audit Quality in the US. It is designed to allay concerns that further turmoil would lead banks and auditors to issue different conclusions about fair value and how holdings are valued. It has been sent to the UK Accounting Standards Board, the Basel Committee on banking supervision and an international grouping of central banks and financial regulators.

Steve Maslin, head of external professional affairs at Grant Thornton UK, told IAB one of the aims of the paper is to offer a unified voice from the profession: “We wanted to make sure that a consistent message was getting back to the world’s major issuers in terms of how it should deal with the situation.”

Andrew Spooner, an audit partner at Deloitte UK, added: “The advantage of us working together is to make quite clear that we all fully understand and appreciate what the current guidance is.”

The Big Six audit 95 percent of the world’s publicly listed companies, including most of the major financial institutions.

Profession leaders stress that consistency is essential if accountants and auditors are to maintain their clients’ confidence. The draft document aims to highlight IFRS guidance on fair value so banks know how accountants and auditors will deal with it. There is an emphasis on what fair value is and making sure that assets marked to model are valued properly. This should prevent firms from valuing assets on old figures because if they assume the subprime crisis is a blip.

Maslin explained: “You will have to feed into your valuation model the current credit spreads and the relative level of liquidity. Almost inevitably that’s going to lead you to take a heavier discount than you might have done on the values your model is producing. Transparency in the market is about if there’s some pain then you take your pain now and let people know about it.”

Spooner, however, noted that the draft will not contain any interpretation. He said: “The idea really is to make clear the guidance that is out there rather than do an interpretation because that‘s not our role.”

Maslin believes the profession has taken real steps forward in the last decade on the accounting of fair value. He said that no one has questioned “robustness of the accounting standards” despite the subprime crisis.

Maslin added: “I think that at last we’re being seen to work together so we’re on the front foot when things like this arise rather than it all happens and people get cross and we’re on the back foot trying to justify ourselves.”

Rob Waller

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