Subprime mess prompts guidance for auditors

WASHINGTON (Reuters) - The U.S. audit watchdog gave corporate auditors guidance on Monday to sort through the risks associated with the subprime credit situation.

In a staff audit practice alert, the Public Company Accounting Oversight Board (PCAOB), provided accountants with more information related to fair value measurements and disclosures among other guidance.

This is only the second time the PCAOB has issued an audit alert, which highlights noteworthy circumstances that may affect how auditors conduct audits under existing PCAOB standards and laws.

The first audit alert was issued in June 2006 on the topic of options backdating -- an illegal practice of manipulating stock options that has ensnared more than 150 companies.

This time, the PCAOB said it was motivated to develop and issue the alert due to the auditing challenges presented by the subprime credit situation and its effects on the markets and fair value measurements.

"This alert does not create any new auditing requirements," Tom Ray, the PCAOB's chief auditor, said in a statement. "We issued the alert because we believe it will be helpful to auditors as they gear up to complete their year-end auditing work."

The alert is designed to remind auditors of certain aspects of the auditing and related accounting standards that are particularly relevant at this moment.

The alert says that lower volumes of transactions in certain types of collaterized securities might make it more difficult to obtain relevant market information to estimate the fair value of financial instruments.

Fair value is the amount at which an asset of liability can be bought or sold in a current transaction, as opposed to using historical values.

(Reporting by Rachelle Younglai; Editing by Andre Grenon)