What Auditors Actually Look For in Your 409A Valuation
FairValueX Team · 10 min read
The Auditor's Mindset
Your auditor isn't trying to redo your valuation. They're asking one question: "Is there sufficient evidence to support the conclusion, and can I document my review for PCAOB inspection?"
PCAOB inspectors review audit firm working papers. If an inspector finds that the auditor didn't adequately document their review of a fair value measurement — including your 409A — the audit firm gets a deficiency finding. Audit firms take deficiency findings very seriously, which is why your auditor's review is increasingly thorough.
The 12-Point Auditor Checklist
Based on experience with 200+ engagements interfacing with Big 4 and regional audit teams, here are the exact things auditors check — and how to prepare:
1. Qualifications of the Valuator
The auditor verifies that the person who performed the valuation meets "qualified appraiser" criteria under IRC §409A: relevant training, experience, and ideally a professional designation (CPA, CFA, ASA, ABV). If the valuator's qualifications are unclear, expect a request for their CV and credentials.
FairValueX approach: The credentials section includes valuator qualifications upfront.
2. Engagement Purpose & Standard
The auditor confirms the valuation was performed for the stated purpose (IRC §409A) and under the correct standard of value (fair market value, willing buyer/willing seller). Mismatched standards are a red flag.
FairValueX approach: the relevant deliverable section 1 (Engagement Mandate) specifies purpose, standard, and date.
3. Methodology Selection & Rationale
Why was DCF chosen over comps? Why OPM instead of PWERM? The auditor needs to see that the method is appropriate for the company's stage, available data, and complexity. Simply stating "we used DCF" is insufficient — the rationale must be documented.
FairValueX approach: the relevant deliverable section 6 documents methodology selection rationale with supporting evidence.
4. Key Inputs & Data Sources
Every material input (revenue projections, discount rate, comparable companies, volatility) must have a documented source. The auditor traces inputs to underlying evidence. "Management estimate" without further detail invites questioning.
FairValueX approach: the relevant deliverable section 7 (Data Source Provenance Index) traces every input to its source — market data, financial statements, management representations, or third-party databases.
5. Comparable Company Selection
If market comps are used, the auditor evaluates whether the selected comparables are truly comparable (industry, size, growth profile, geography). They also check whether any obvious comparables were excluded and why.
6. Discount Rate / Capitalization Rate
For DCF valuations, the discount rate is scrutinized heavily. Auditors check: risk-free rate source, equity risk premium source, size premium, industry-specific adjustments, and the overall build-up or CAPM calculation.
7. Sensitivity Analysis
The auditor tests what happens to the conclusion if key assumptions change by ±10-20%. If a small change in discount rate flips the value by 30%, they need to understand that — and see that the valuator considered it. Missing sensitivity analysis is a common deficiency finding.
FairValueX approach: the relevant deliverable section 12 includes automated sensitivity analysis on all key variables.
8. Discount for Lack of Marketability (DLOM)
DLOM is one of the most scrutinized areas. Auditors check: which method was used (Finnerty, Chaffe, restricted stock studies, IPO studies), what inputs went into the calculation, and whether the result is reasonable given the company's stage and expected time to liquidity.
9. Equity Allocation Method
OPM, Backsolve, or PWERM — the auditor verifies the method is appropriate for the company's stage, that the waterfall is correctly modeled (all liquidation preferences, participation rights, conversion ratios), and that the breakpoints are accurate.
10. Professional Judgment Documentation
Anywhere professional judgment was applied — selecting a volatility input, choosing between methods, determining scenario probabilities in PWERM — the auditor needs documented rationale. Not "professional judgment" as a blanket statement, but specific reasoning linked to evidence.
FairValueX approach: professional judgment documentation documents every material judgment with rationale, evidence, and alternatives considered.
11. Consistency with Prior Periods
If the company has had prior 409A valuations, the auditor checks for consistency in methodology and inputs. Switching from OPM to PWERM without explanation, or applying a dramatically different DLOM, raises questions.
12. Conclusion Reasonableness
The auditor steps back and asks: "Does this conclusion make sense?" If the company just raised at a $100M pre-money valuation and the common shares are valued at $0.10, something doesn't add up. Reasonableness is the final sanity check.
The Five Most Common Auditor Requests
After reviewing hundreds of valuation engagements, these are the questions that come up most frequently:
| Auditor Question | What They Really Want |
|---|---|
| "Can you provide support for the DLOM?" | The specific inputs to the DLOM calculation, the method used, and benchmarking against published studies |
| "What volatility did you use and how was it derived?" | The comparable company set used for volatility estimation, the measurement period, and how you arrived at the selected figure |
| "Can you provide a sensitivity analysis?" | Impact of ±10-20% changes in key assumptions (discount rate, revenue growth, volatility, DLOM) on the concluded value |
| "Why was this methodology selected over alternatives?" | Written rationale explaining why the selected approach is appropriate for this company at this stage |
| "Can we schedule a call with the valuator?" | The documentation didn't answer their questions. If the report pre-answers these items, the call often becomes unnecessary. |
The FairValueX Difference: Section 19 — Audit Q&A Pack
Every FairValueX binder includes Section 19: a pre-built Audit Q&A Pack that answers the 10 most common auditor questions with direct references to the binder sections containing the supporting evidence. Your auditor opens the binder, finds Section 19, and closes their review faster — without scheduling supplemental calls or requesting additional information.
This isn't just a convenience — it directly reduces your audit fees by eliminating the hours your auditor would spend drafting information requests and reviewing supplemental responses.
How PCAOB Pressure Affects Your 409A Review in 2026
The PCAOB's 2025 inspection priorities specifically highlighted fair value measurements as a focus area. Their 2024 inspection results showed that valuation-related deficiencies tripled compared to prior years. This has real consequences for you:
- Your auditor is spending more time on valuation review (= higher audit fees)
- They're asking more detailed questions about methodology and inputs
- They're documenting their review more thoroughly in working papers
- They're less likely to accept thin documentation without pushback
The implication is clear: the quality bar for 409A deliverables is rising. What passed audit review in 2020 may not pass in 2026.
Preparing for a Smooth Audit Review
- Choose a provider that documents for audit — not just for compliance
- Ensure sensitivity analysis is included — don't make your auditor ask for it
- Verify judgment documentation — every material assumption should have written rationale
- Confirm 12-month audit support — you'll need it during audit season
- Share the binder with your auditor proactively — don't wait for them to request it
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