The Assurance Problem in Illiquid Markets

International Financial Reporting Standards require companies to measure certain assets and liabilities at fair value, with assurance providers subsequently auditing these determinations for accuracy and reliability. IFRS 13, introduced in 2011 and implemented globally in 2013, defines fair value as the exit price in an orderly transaction between market participants. The standard establishes a three-level hierarchy for valuation inputs, with Level 1 representing quoted prices in active markets and Level 3 encompassing unobservable inputs for illiquid assets.

The challenge emerges when auditors must provide assurance on fair value determinations in illiquid markets. Management makes valuation judgments based on internal models and assumptions, while auditors must verify that these judgments reflect economic reality rather than optimistic projections. Research by Dontoh and colleagues documents how fair value measurements in illiquid markets create significant information spillover effects, with firms writing down assets experiencing abnormal negative returns that cascade across entire sectors. When observable market transactions become sparse or non-existent, the assurance function confronts a fundamental verification problem.

Level 3 measurements depend heavily on management's unobservable inputs and subjective modelling. Companies construct internal models based on assumptions about future cash flows, discount rates, and market conditions that auditors cannot easily verify through independent market evidence. The International Accounting Standards Board acknowledges these implementation challenges, particularly in inactive markets where the concept of an "orderly transaction between market participants" becomes nearly impossible to observe. For private equity investments, specialised real estate, certain intangibles, and thinly traded securities, auditors face a verification paradox where professional scepticism demands corroboration but observable evidence remains unavailable.

Economic Substance Through Behavioural Verification

When auditors evaluate management's fair value determinations, they assess whether assumptions reflect realistic expectations about future performance. Traditional verification approaches examine comparable company transactions when available, review management's historical forecasting accuracy, and test discount rate calculations against theoretical models. Each method faces limitations in illiquid markets. Comparable transactions occur infrequently or involve companies with different characteristics. Historical accuracy proves irrelevant when market conditions shift dramatically. Theoretical discount rates embed assumptions about risk that themselves require judgment.

The rise of alternative data fundamentally changes what constitutes verifiable evidence of economic substance. Research identifies how nontraditional data sources including individual behaviours, business processes, and sensor-based inputs "can be used to conduct more in-depth, comprehensive, and timely evaluations of enterprises" compared to traditional financial statements. The study documents key advantages of alternative data including objectivity, flexibility, and the ability to reveal business operations through multiple heterogeneous sources rather than single accounting perspectives. This capability explains why the alternative data market has expanded from a specialised institutional tool, as organisations increasingly recognise that these sources capture economic activity with greater immediacy than quarterly financial reporting cycles.

Consumption intelligence represents a particularly powerful verification tool for auditors. When businesses participate in markets, they generate behavioural footprints through customer transactions, payment patterns, inventory movements, and competitive positioning. These consumption behaviours prove far more difficult to manipulate than financial projections and occur in real-time rather than quarterly reporting cycles. Academic research shows behavioural analytics achieving fraud detection accuracy rates exceeding eighty-seven per cent, precisely because consumption patterns reflect actual economic activity rather than accounting estimates.

Seventwos addresses the assurance challenge by providing economic substance behind fair value determinations in illiquid markets. The platform analyses consumption habits to establish actual market participation rather than projected market potential. For businesses where comparable transactions rarely occur, consumption data reveals market share dynamics, competitive positioning, and customer retention patterns that auditors can use to verify management's valuation assumptions with observable behavioural evidence rather than accepting purely modelled projections.

Consider a private company in a specialised industrial sector where comparable sales occur perhaps once every several years. Management prepares a Level 3 fair value measurement using discounted cash flow methodology with growth rates based on their strategic plans and discount rates estimated from adjusted public company comparables. The auditor must determine whether these assumptions reasonably reflect market participant expectations. Without observable transactions, traditional audit procedures offer limited verification capability.

Consumption intelligence data helps verify a company’s performance by showing its market share trends, customer concentration, pricing power versus costs, and wallet share against competitors. These consumption metrics provide auditors with independent evidence to assess whether management's growth assumptions align with demonstrated market performance rather than aspirational targets.

This consumption intelligence addresses IFRS 13's fundamental requirement to maximise observable inputs even in Level 3 measurements. Market share trajectory becomes observable through transaction data rather than estimated through management assertion. Customer retention rates emerge from payment pattern analysis rather than customer relationship management system reports. Pricing behaviour relative to input costs appears through purchase order data rather than internal margin calculations. When these consumption-derived metrics inform DCF inputs, auditors can verify that fair value determinations rest on economic substance rather than purely internal projections.

The alternative data market's expansion validates this verification approach. Financial institutions, particularly those managing private equity portfolios or specialised debt, increasingly demand consumption-level intelligence precisely because traditional financial statements arrive quarterly while market conditions shift continuously. IFRS Foundation guidance from 2023 specifically addresses using internal data and models for Level 3 inputs in illiquid markets, creating an explicit framework for incorporating consumption intelligence into fair value determinations that assurance providers must audit.

Democratizing Institutional-Grade Verification

The practical challenge for small and medium enterprises lies not in the theoretical validity of consumption intelligence but in access. Institutional investors deploy teams of analysts with specialised data subscriptions. Private equity firms maintain networks of industry consultants who gather primary consumption data. Large audit firms build proprietary databases tracking market dynamics across sectors. SMEs typically lack resources for these institutional-grade capabilities, creating information asymmetry that affects both their ability to prepare defensible fair value measurements and auditors' ability to verify those measurements efficiently.

Seventwos addresses the democratisation challenge through revenue-sharing models with data suppliers. Rather than requiring upfront capital investments in data infrastructure, the platform provides access to consumption intelligence in terms that align costs with value realisation. For SMEs preparing fair value measurements in illiquid markets, this model delivers the economic substance that auditors require to provide assurance, without the institutional-scale budgets that only large enterprises can afford.

The methodological contribution combines three analytical layers that support both management's determination process and the auditor's verification procedures. First, consumption habit analysis establishes actual customer behaviour patterns rather than assumed purchasing trajectories. Second, market share intelligence quantifies competitive positioning through observed transaction data rather than survey-based estimates. Third, traditional DCF methodology receives consumption-verified inputs rather than purely projected assumptions. This three-layer approach directly addresses IFRS 13's requirement to maximise observable inputs even when measuring inherently illiquid assets.

Behavioural analytics tools processing consumption data achieve market valuations exceeding 1 billion dollars globally, with Fortune Business Insights projecting the behaviour analytics market will reach 10.8 billion dollars by 2032. The technology has matured from experimental to essential precisely because consumption behaviours provide leading indicators of business performance. When market share contracts, consumption data reveals the trend months before financial statements report declining revenues. When customer acquisition costs rise, transaction patterns show increased marketing intensity before expense reports formalise the change.

For assurance providers verifying fair values in illiquid markets, consumption intelligence offers three distinct advantages. First, behavioural data creates audit trails linking valuation assumptions to observable economic activity rather than management representation alone. Second, consumption patterns provide contemporaneous evidence rather than historical financial statements, reducing the temporal gap between measurement date and information availability. Third, behavioural analytics generate independent corroboration that enhances audit quality while potentially reducing the extent of traditional substantive procedures.

The regulatory environment increasingly supports this alternative data integration into the assurance process. The SEC's 2025 examination priorities explicitly reference the accuracy of illiquid asset valuations and the adequacy of valuation disclosures. IFRS post-implementation reviews acknowledge that Level 3 measurements present implementation challenges requiring judgment, while simultaneously concluding that practice continues developing to resolve these challenges. Consumption intelligence represents exactly the type of practice evolution that regulators expected when designing standards that must function across both active and inactive markets.

Beyond Compliance Toward Market Intelligence

The fair value measurement challenge in illiquid markets fundamentally reflects an information verification problem. IFRS 13 provides the framework for management to make determinations, but assurance providers need observable evidence to verify those determinations reflect economic reality. When active markets exist, prices provide verification efficiently. When markets become inactive or assets prove inherently illiquid, alternative information sources must provide the economic substance that makes Level 3 measurements auditable rather than merely assertable.

This shift from document-based audit evidence to behaviour-based verification represents a broader transformation in how economic substance gets established and verified. Financial statements remain essential, but they document past performance through accounting conventions that management prepares. Consumption data reveals ongoing economic activity through behavioural observation that exists independently of financial reporting processes. For businesses operating in illiquid markets, the distinction proves critical when auditors must assess whether fair value determinations reflect market participant perspectives rather than optimistic internal views.

Seventwos' approach offers SMEs capabilities previously reserved for institutional investors and their audit teams, providing economic substance that serves dual purposes. For management preparing fair value measurements, consumption intelligence informs DCF inputs with observable market participation data. For auditors providing assurance on those measurements, the same behavioural analytics supply independent verification that assumptions reflect demonstrated performance rather than aspirational projections. This dual functionality transforms consumption intelligence from a compliance cost into operational intelligence that illuminates strategic opportunities, operational risks, and market positioning dynamics.

As alternative data markets expand from 7.5 billion dollars in 2024 towards a projected 27 billion by 2035, the integration of consumption intelligence into both valuation determination and audit verification will transition from innovation to standard methodology. For now, businesses preparing fair value measurements in illiquid markets face a choice. They can base Level 3 inputs primarily on modelled assumptions that auditors struggle to verify, or they can supplement traditional approaches with behavioural evidence derived from actual market participation. The latter path proves more rigorous for management, more verifiable for auditors, and ultimately more aligned with what IFRS 13 seeks to achieve: fair value measurements that reflect economic reality supported by observable substance rather than purely theoretical constructs.