PE world wakes up to fair value compliance

BVWireIssue #57-1
June 7, 2007

Speaking of those auditors: Ernst & Young recently dropped the Univ. of Texas Management Co. as a client, citing discomfort with its valuation of PE and hedge fund investments, according to recent PEWeek Wire reports.  “I don’t expect this to be a widespread problem,” said editor Dan Primack in the May 25th issue, who nevertheless added that fair value accounting has been “something that private equity firms have assiduously avoided for years.” (The article, “Compliance Trumps Complaints,” is available only to peHUB subscribers.)

Comments Al King, author of Fair Value for Financial Reporting (Wiley, 2006), “This is a serious issue, that I have brought up several times with VC firms” and others.  “They want to do their own valuations, despite the conflict, because then they control the answer(s).”

“Independence issues are popping up everywhere with good reason,” agrees Matt Crow (Mercer Capital).  “If an increasing amount of the economy ‘goes private’ and is therefore exempt from a lot of SEC scrutiny, something is going to have to come in to protect the interests of even the sophisticated investors in private equity funds.”  Private equity clients may not want to deal with valuation practitioners’ questioning their judgment, he says, “but auditors are increasingly hesitant to accept interested-party opinions of value.”

For more from the King/Crow duo, check out their recent BVR telephone conference: “Playing and Prospering by the New Valuation Rules,” available here.

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