Use of Pricing Service Information
Third-party pricing services often are used by management to obtain information to assist in its responsibilities for estimating and disclosing the fair value of financial instruments in the financial statements. In his remarks before the 2011 AICPA National Conference on Current SEC and PCAOB Developments, Jason Plourde, SEC Professional Accounting Fellow, discussed management's responsibilities when using third-party pricing service information to inform the estimation and disclosure of fair value. He stated that even though third-party sources may provide information, management is still responsible for:
- Complying with generally accepted accounting principles (GAAP).
In determining compliance with GAAP, if management includes information from a third-party pricing service to inform developing its estimate, it may need to consider the extent of its understanding of the pricing service's valuation techniques, assumptions and other inputs depending on, for example, the significance and complexity of its securities positions and the other procedures and controls it performs.
- Maintaining internal controls to prevent or detect material misstatements related to the fair value measurements and disclosures. Management is required to maintain a system of internal control over financial reporting sufficient to provide, among other things, reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP or any other criteria applicable to such statements. Management also has responsibilities to maintain accurate and reasonably detailed books and records as described in the Exchange Act and related rules. Management may need to obtain information about valuation techniques, inputs and assumptions from its third party pricing services to enable it to comply with these requirements.
- Assessing internal control over financial reporting related to fair value measurements. Management may need to design controls to appropriately weigh information received from multiple pricing services and/or other sources of fair value information to assure that the prices recorded for securities are indicative of fair value.
In his remarks, Mr. Plourde provides additional details about each of the above responsibilities. He concludes by stating that management would be well served to ask itself the following questions when using third-party pricing services:
- Do we have sufficient information about the values provided by pricing services to know that we're complying with GAAP?
- Have we adequately considered the judgments that have been made by third parties in order to be comfortable with our responsibility for the reasonableness of such judgments?
- Do we have a sufficient understanding of the sources of information and the processes used to develop it to identify risks to reliable financial reporting?
- Have we identified, documented, and tested controls to adequately address the risks to reliable financial reporting?