4 questions to ask about fair value estimates before audit fieldwork begins

Fair value measurements deserve special attention at year end. The challenge is that estimating fair value often requires assumptions that involve significant judgment. Management is generally responsible for making these estimates. But if your business issues audited financial statements, your auditor will review fair value measurements closely and may propose adjustments for estimates that are inaccurate or based on unsubstantiated assumptions. Here are four questions to consider when closing your books for 2026.

1. Which assets and liabilities require fair value measurement?

The first step is identifying items subject to fair value accounting requirements. While publicly traded investments often come to mind, many businesses overlook less obvious items that may require valuation.

Common examples are:

• Intangible assets acquired in mergers and acquisitions (M&As),
• Interest rate swaps and other derivative contracts,
• Certain investments in private businesses,
• Contingent consideration arrangements (such as earnouts from acquisitions), and
• Liabilities associated with deferred compensation arrangements and certain stock-based compensation plans.

When planning for your annual audit, be sure to compile a full list of items reported at fair value. This exercise helps ensure you don’t overlook any required valuations or disclosures when preparing your financial statements. If you’re unsure about what to include, contact your auditor for guidance. This may be especially helpful if you’re evaluating potential impairment issues or you recently completed an M&A transaction. Evaluating the reporting considerations early gives you time to gather supporting documentation and identify issues before they affect your audit.

2. Have market conditions changed since the last valuation?

For existing fair value measurements, one common mistake is relying too heavily on prior-year assumptions. Even if the underlying asset hasn’t changed significantly, economic conditions may have. Recent changes to interest rates, industry outlooks, inflation expectations and transaction activity can affect fair value estimates.

Assumptions that appeared reasonable a year ago may no longer reflect current market participant expectations. Management should evaluate whether significant changes in the economic environment warrant updates to projected cash flows, discount rates or other key valuation inputs.

3. Are the underlying assumptions adequately supported?

Auditors evaluate whether the assumptions behind fair value estimates are based on observable market data and whether management’s analysis of that information results in a reasonable conclusion. For example, estimated revenue growth rates should generally align with historical performance, industry trends and strategic plans. Likewise, discount rates should reflect current market conditions and the risks associated with the asset or liability being measured.

Another common issue arises when the forecasts underlying fair value estimates differ from budgets or other information presented to lenders and investors. Inconsistencies can raise questions about an estimate’s reliability. Management’s assumptions should be well documented and, whenever possible, based on objective, market-based evidence. Inadequate documentation can lead to additional audit procedures, delays and requests for further support.

Recent inspection reports issued by the Public Company Accounting Oversight Board (PCAOB) continue to highlight deficiencies involving fair value measurements. Although these findings involve audits of public companies, they also offer valuable lessons for private businesses.

Common deficiencies the PCAOB has observed include:

• Missing support and inadequate testing for significant assumptions,
• Failure to explain changes from prior-year methodologies,
• Inadequate disclosure and documentation of management’s review process, and
• Overreliance on external valuation specialists.

Reviewing assumptions and preparing supporting documentation before the audit begins can help streamline the engagement and reduce the likelihood of unexpected adjustments.

4. Would an outside valuation be helpful?

Many businesses hire external valuation specialists to assist with complex fair value measurements. Doing so can improve the quality of the analysis, particularly when observable market data is limited. However, obtaining a third-party valuation report doesn’t eliminate management’s responsibility for the estimate.

Some organizations mistakenly assume that once an outside specialist has completed a valuation, the matter is settled. However, auditors evaluate the work of valuation specialists and may challenge assumptions, methodologies or data used in the analysis.

An external valuation isn’t a substitute for management oversight. Management should understand the key assumptions behind the valuation and assess whether they align with current business conditions and available evidence.

Smoother audits, more reliable reporting

Lenders, investors and other stakeholders may rely on audited financial statements when making important decisions about your business. Accounting estimates can significantly affect reported earnings, assets and liabilities.

Although many businesses struggle with fair value reporting, you can take steps to reduce the risk of audit adjustments and improve the reliability of your financial statements. A proactive year-end review may help uncover potential issues while there’s still time to address them. If you have questions about fair value measurements, valuation support or audit readiness, contact us for assistance.

© 2026