3rd party experts 2589

  • Can anyone out there clarify for me the current thinking and approach to the use of 3rd party experts?
    I was previously under the impression that a SAS70 was not required because they were experts which I think is still the case. What has surprised me though is that our auditors expect us to validate the assumptions, methodology, calculation, etc of our experts which leaves me wondering what exactly I am using them for.
    I can accept that it is reasonable to ensure you give accurate data to your valuers (for pensions, property, investments, etc). Maybe even apply some reasonableness test on the revised figures. But how far does one go?
    what is everyone else doing regarding the use of experts? How are you doing fair value valuations?

  • Hi,
    It might be helpful to review SAS No. 73 - ‘Using the Work of a Specialist’. A reasonable approach would be to review and document the competency, objectivity, and credentials of the specialist.
    In my opinion, I would not place alot of time assess the correctness of the valuations or estimates that were developed by the expert. This seems to be the general approach.
    Anything more seems a bit excessive and non value-add.

  • I would agree that management is responsible for validating assumptions. Let’s use pension calculations for example. The assumptions going into the calculation related to discount rate, long term return on assets, rate of compensation increase are all items that management needs to make a call on. The third party actuary is responsible for performaing the actuarial analysis based on your data and assumptions. You are not required to test his calculations - that’s his job as an expert. The same logic would apply to FAS 106 and FAS 112 calculations as well.

  • Would agree with your logic there.

  • Thank’s for your views and I agree with your comments. I have in the past ensured that we controlled the data given along with our underlying assumptions so that we know the 3rd party has the best info. Even some reasonableness check afterwards.
    My external auditor is pushing back hard based on what they claim is feedback from the SEC. It just seemed unreasonable to me. After all how do I know whether the morbidity rate used by my Actuary is reasonable? I just wondered if anyone had received anything on those lines in recent months as it took me a bit by surprise.

  • Hi,
    The emphasis from the auditor seems unreasonable.
    A recent announcement from the PCAOB emphasized that audit firms should apply more professional skepticism in their audits of companies’ financial statements.
    It is possible that this recent PCAOB push is driving the auditor behavior…behaviour if you’re across the pond.

  • Ask you auditor to provide you with the source or a written copy of the feedback from the SEC concerning this topic. If he does not know it, ask him to ask whoever told him about the feedback (i.e. their national practice guy that produces the internal guidelines for auditors how to conduct audits).
    If it is simply a verbal comment by an employee of the SEC concerning a particular case, it does not carry much weight and you should tell him so. Lean back hard on your auditor 🙂
    The whole point of outsourcing tasks to an expert is that you do not have the internal knowledge. Unless you get the detailed workpapers and spreadsheets and references to sources of data from the expert and unless any sources of info (e.g. mortality rates) are easily publicly available, you have no chance of verifying whether he used the right data and assumptions and whether his calculations contain formula errors. Asking for all that is overkill. However, some reasonableness check of the final amount would be in order.

  • Fair value of assets seems to be where the main focus is. PCAOB Staff Audit Practice alert 2.
    The guidelines set for auditors when they use a specialist in their audit (per this alert) states they need to:

    • obtain an understanding of the methods and assumptions used by the specialist
    • make appropriate tests of data provided to the specialist
    • evaluate whether the specialist’s findings support the realted assertions in the financial statements.
      Whilst this is guidance for auditors the SEC comments I have been shown appear to require management to name the third party experts in their filing and ensure they have their consent to be so disclosed. Otherwise management must disclose the methods and assumptions to determine valuation.
      So my conclusion is I either ensure my third party agrees to being named or I ensure I understand the methodology and assumptions. This is not unreasonable as I see it but I guess it depends how far the auditors want us to go.

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