Financial statements have always incorporated accounting estimates. But as our financial reporting frameworks have evolved, we have seen the use and reliance on estimates grow.
Estimates help investors understand value, and expected future value. But because they necessarily involve judgment, they are a particularly challenging area for auditors, as evidenced by inspections findings.
Many companies use specialists such as actuaries, reserve engineers, and valuation specialists, to assist in providing information used in preparing their financial statements, especially accounting estimates.
The proposals before the Board today, on auditing accounting estimates, including fair value measurements, and on using the work of specialists, were developed together because of the close relationship of the subjects. Both proposals have been informed by extensive staff research and outreach, including two PCAOB staff consultation papers.
The proposed revisions to our existing standards in these areas are intended to make the auditor's opinion more reliable.
The proposal on accounting estimates would replace three existing, overlapping standards with a single standard, updated in light of changes in practice, such as the use of pricing services in the valuation of financial instruments.
The proposal on specialists would impose a more uniform, risk-based approach across audit firms regarding the use of the work of company specialists and of auditor specialists. It reflects certain best practices we have observed in our oversight activities.
This is an important point. In many cases we have observed, firms employ many of the practices described in these proposals, as a way to comply with the Board's existing risk assessment standards.
The proposal on using the work of specialists would also address identified risks in the use of the company's specialist, by enhancing the auditor's involvement with such specialists or restricting their use.
I look forward to public comment on these proposals.