Last Tuesday, attorney Peter J. Anderson (Eversheds Sutherland) was at the SEC and remarked to an official that he was convinced the agency would never bring a case where the staff went after the actual valuation of an asset or financial instrument. He felt that the agency would continue to focus on policies, procedures, and internal controls. When Anderson made his remark, the enforcement lawyer just smiled—he knew that later that afternoon the SEC would release an order doing just the opposite.
Not pretty: KPMG agreed to pay more than $6.2 million to settle SEC charges that it failed to properly audit the financial statements of an oil and gas company. Specifically, the failures involved management’s fair valuations of unproven oil and gas reserves and related fixed assets.
Allegations included misuse of industry expert reports on reserves and tangible assets, a double counting of fixed assets, inadequate testing of assumptions, the auditor’s lack of industry experience, an inadequate disclosure of the work of the valuation specialists, which contributed to the improper valuations, according to the order.
Red flag: Fair value expert Mark Zyla (Acuitas) noted that the company paid $4.5 million for oil and gas assets and then booked them at $480 million. Under ASC 805, that’s a bargain purchase, which standard setters expect to be rare. “If it looks like you have a bargain purchase, check your work,” says Zyla. “In the order, the SEC says this should have triggered extra scrutiny.”
Attorney Yvonne Williams-Wass (Eversheds Sutherland) led the presentation and, along with Anderson and Zyla, gave additional insights on this case and related regulatory matters during a webinar, Fair Value and Valuation: Understanding the SEC, PCAOB and Key Case Law. Anderson urged everyone in the audience to read the order to get a sense of where the SEC will be focusing as to the use of and work by valuation specialists, whether internal or external by auditors. The SEC order can be found on BVR’s website in the Free Resources area in the Articles and Webinars section.
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