As we approach the 4th quarter I would like to remind all of you that many last minute audit issues can be best handled during the interim (rather than year-end) audit. Companies want to reduce the amount of audit work required at year-end to leave less chance for 11th hour audit issues and invite auditors to perform many audit tasks prior to year-end. Auditors have a similar incentive to complete 80-90% of their work in advance of year-end. This is the best time to have your FAS 133 hedge program reviewed in its entirety. Please contact the individual managing the audit or your company and use all your influence to have the program reviewed and all issues closed out before year-end.
There are several reasons why it makes sense to audit the hedge program earlier rather than later. As result of technical nature of FAS 133, the frequent lack of local specialists, and the shortage of national level specialists many auditors will either postpone review of derivative accounting until the very last moment or postpone addressing any issues identified during the audit until days or worse, hours before your earnings release is scheduled. This timing issue is only compounded when the local teams needs to involve the national office derivatives specialists.
The review process should be extensive and include documentation, effectiveness testing (data and approaches), ineffectiveness measurement, credit effecting derivatives, journal entries, financial statement presentation (geography) and FAS 161 tables. If these areas get the attention they need during the interim audit, the only open item for year end should be valuations and consistency of application.
On the other hand, if the hedge program audit is crammed into the final days of the audit, there won’t be time to sort issues out, deflect pressure from auditors and work out reasonable solutions. Every year, we see clients bullied into inappropriate accommodations during last minute negotiations. I entreat you to bypass this risk by requiring your auditors to complete their review of your hedge program during the interim audit. Specify your expectation that at year end, only year end valuations and consistency of practice will be on the table. As always we are available to help you during their review … preferably before, rather than after, year end.