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