Auditing is a flexible profession because of its great impact on business. It is a dynamic profession changing to adopt new changes in the business environment. Recently, a real controversy had been come to light due to calls to change from historical cost accounting to fair value accounting that was, finally, implemented by FASB and IARS. I believe that this is a real problem facing the auditing profession these days.
Fair value accounting is based on reevaluation assets and liabilities or some of them to present the actual prices at the moment of measurement. This seems a good idea to investors and other users of financial statements, and apparently it gives more efficient information. The problem lies in the implementation of fair value accounting when no active markets are existed. As a result, other bases than active markets’ actual prices are used. Even though these ways involve some merits, they are subject to uncertainty and manipulation. Therefore, generating such financial statements increases the likelihood of misleading the users.
Users of financial statements relay on the auditor’s report, which gives the financial statements trustiness, therefore, effectiveness. Thus, auditors are more responsible than any other else of any misleading. The underlying dilemma in fair value accounting is an absence of reliability in case of active markets’ lack. Fair value accounting lacks reliability because it relies on estimations more than documents, in general. Even if it is derived from markets, markets are subject to volatility. In case of inflation or recession, that makes it even worse. Furthermore, reporting unrealized gains or losses misleads users because of uncertainty about realizing them or not in the future, and no one can predict that. Also, naturally the tendency for manipulation and fraud increases in environments supporting estimation, and this is the environment available when no reasonable basis of estimation is available. Moreover, the...
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