AICPA survey reveals lack of awareness of complex financial instruments

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More market awareness is needed to prevent another financial crisis, a recent survey of certified public accountants (CPAs) by the American Institute of CPAs (AICPA) found.

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Specifically, 53 percent of CPAs polled said there isn’t enough market awareness of complex financial instruments — such as mortgage-backed securities, interest rate swaps or other derivatives — to prevent a financial crisis. In contrast, only 22 percent said they believe there is adequate awareness.

The study revealed that 59 percent of the CPAs surveyed reported having complex financial instruments on their company balance sheets. Of that 59 percent, 69 percent expect financial instruments to become more complex over the next one to three years. Only 1 percent expect them to decrease in complexity.

Additionally, 55 percent said they are concerned about the valuation of derivatives while 56 percent said it would be easier to determine the value of complex financial instruments if they were measured and reported on a consistent and transparent basis.

Complex financial instruments historically have been difficult to value, and that difficulty is seen as a major cause of the financial crisis of 2008.

“With financial instruments growing in complexity and taking up an increasing share of balance sheets, it is imperative that executives and finance teams understand these potentially risky investments,” Ash Noah, managing director of CGMA learning, education and development for the Association of International Certified Professional Accountants, said. “A uniform framework to value financial instruments will provide companies the information they need to make better decisions and offer greater transparency to investors and other stakeholders.”

The AICPA created a Financial Instruments Performance Framework to improve the consistency and transparency of fair value measurements for these complex instruments. The framework will help assure financial statements and disclosures are consistent and supported.

“Creating standard processes for documenting and valuing these instruments will improve clarity and transparency within the valuation profession. This will provide executives, investors, and regulators information on the value of these securities in a consistent manner,” Jeannette Koger, vice president for advisory services and credentialing, said.

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