The board that polices auditors has put the corporate world on notice that it's monitoring how companies and beancounters make the transition to Enron-style "fair value" accounting.

The new standard, introduced last year, puts the reporting of financial assets and liabilities under a single definition of fair value, or how much they are worth on the market as opposed to using historical values.

The potential for fair value- generated fraud has not been been lost on the Public Company Accounting Oversight Board.

In his speech at the Compliance Week annual conference, chairman Mark Olson said that while fair value can provide accounts with greater relevance, it also "represents an area of potential audit risk".

"Thus, we are monitoring this area to understand how firms are addressing this potential risk," Mr Olson said.

Olson said many auditors mightn't have extensive training in valuation techniques. He said they should be mindful that the people preparing the financial statements might have a skewed view of what constitutes fair value. And he warned that internal controls surrounding fair value measurements might be quite different those over typical business transactions.

In another significant development during the week, private equity firm Blackstone announced that it would drop its plan to use the Enron-style accounting in its initial public offering.


The problem with fair value is that there are many occasions where it's hard to identify a liquid market. When that happens, you have to resort to different methodologies and subjective judgement comes into play. It becomes a case of the company telling shareholders "trust us". As a result, there is a greater likelihood of fraud and cooking the books. Witness the goings-on at Enron in a mark-to-market environment. It's a point raised by Harvard Business School professor Paul Healy in this interview.

"If anything, what we learned from Enron is that when you give that amount of judgement to management, it's going to get misused," Professor Healy told me.