Audit watchdog to home in on "fair value"

By Rachelle Younglai

WASHINGTON (Reuters) - Hard to value financial instruments such as mortgage-backed securities will be scrutinized for any auditing failures when the latest crop of annual reports are inspected, the chairman of the Public Company Accounting Oversight Board said on Thursday.

Fair value accounting, a method of valuing complex structured financial products such as those tied to troubled subprime mortgages, will be the real issue for auditors, Mark Olson told the Reuters Regulation Summit in Washington D.C.

Inspectors will look at "the extent to which securitized products have been appropriately valued," he said.

The PCAOB, which was established by Congress to regulate the accounting profession after a series of book cooking scandals shattered investor confidence, will start inspecting the 2007 audits of companies over the next few months.

Olson said there are very specific guidelines on how to determine the appropriate value of subprime products and that the auditor's role is to look at that value with professional skepticism.

"Our role is to see if that was done and done to professional principles," he said. Inspectors will look to see "if they had gathered the appropriate substantive documentation to support whatever judgment they made."

Structured financial products linked to subprime mortgage debt started deteriorating when homeowners with spotty credit began defaulting on loan payments as higher interest rates pushed up their bills.

Since then, the value of the mortgage-backed securities products have dropped drastically, freezing credit markets and causing Wall Street's biggest banks to write-down billions of dollars in subprime related losses.  Continued...