Who Audits The Auditors’ Pricing Models?

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I’ve received several copies of the press release below in the last day or so. Given all the concern regarding asset pricing, especially of non-marketable securities, complex derivatives and other exchange traded and OTC products, I found this announcement refreshing and scary at the same time.

It’s refreshing if the firms are reviewing and vetting sophisticated tools, the same ones their clients are using (?) to be better at this. 

As we have seen, and I have suggested as well as others, the audit firms need quite a lot of expertise and need to maintain that expertise in order to keep up, or hope to get ahead of, their clients in this arena.

The press release is scary because it refers to KPMG Turkey.

Is Turkey the hotbed of companies and financial services firms with these assets on their balance sheets? What about London, New York, or Frankfurt? 

It looks like this company is based in the UK. I didn’t see a little USA flag on its website. 
Are there similar firms and tools in the US and are the audit firms using them and using them in an intelligent, fully trained, knowledgeable way? Have KPMG Turkey and the other audit firms that are using this tool and similar ones audited the models and assumptions used to make sure they comply with the accounting rules and standards and are they insuring that the software is updated appropriately?

Finally, there is the question of alliances and other marketing and promotion of an audit firm’s vendor. This company looks to be private, but it’s hard to tell. 

Could there be in independence problem if they are also an auditee of KPMG Turkey? Does KPMG Turkey have an investment in this company???????? Why is this firm allowed to issue a press release? Now all of KPMG Turkey’s auditees know what tool is being used.  

Who are these third-party pricing model vendors?

Whose responsibility is it to investigate these and other issues?

KPMG deploys SuperDerivatives platform in Turkey

Accounting firm KPMG’s Turkey operation has chosen SuperDerivatives’ multi-asset options pricing and analytics platform for foreign currencies and interest rates. The firm will use the platform to verify its audit clients’ portfolios.

KPMG Turkey has joined the other ‘Big 4’ accounting firms (Blogger note: Which ones???????) in standardising portfolios using the platform.

The platform will allow KPMG auditors to ensure their clients adhere to accounting standards such as FAS 161, which is to be introduced in the near future to ensure that derivatives are priced at the fair market value.

“Both external auditors and internal risk controllers find that given the recent financial crisis and increasingly stringent reporting regulations, they demand precise, market-relevant valuation and risk analysis tools,” said Ed Crouch, head of corporate development and strategy for SuperDerivatives. “Determining the correct price of derivatives can only be achieved with well chosen, verified market data, in conjunction with a scientifically sound model and continuous calibration to the actual traded market.”

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1 reply
  1. Anonymous
    Anonymous says:

    Unfortunately for the accounting profession, I think their is a wide gap between their understanding of even the simplest plain vanilla derivates (theory), and the actual use of them (practice). Typically, staff are told to use the Black-Scholes model to price equity derivatives (again, theory). However, if you take a stroll down to your nearby CBOE, and ask any equity options market maker what model they are using to price and trade with, they will tell you that they are using some form of the binomial model like Cox-Ross Rubenstein (practice & reality), and that Black-Scholes is more appropriate for the Futures market.

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