AICPA offers guidance on alternative investments, such as hedge funds and investments related to subprime loans.

• Position: Accounting & auditing news

Over the past several years, certain not-for-profit organizations, healthcare entities, pension plans and investment companies--including hedge funds and funds of funds have dramatically increased their investment in financial instruments that do not have a readily determinable market value. These investments are commonly referred to as alternative investments. Many entities report alternative investments at fair value and developing valuations, as well as obtaining sufficient appropriate audit evidence in support of the valuation assertion, can present challenges because of the lack of readily determinable fair value and the limited investment information generally provided by the fund managers. For example, the values of investments related to subprime loans (which may be either direct holdings of subprime loans or ownership of entities or investment vehicles, such as tranches, whose value is affected by the value of subprime loans) have reportedly declined significantly based on recent developments, including but not limited to decreased liquidity for such investments. However, the existence of investments related to subprime loans within an alternative investment portfolio and the basis for their valuation may not be obvious.

To address the auditing challenges associated with all alternative investments, the Alternative Investments Task Force developed and issued a practice aid for auditors in 2006, "Alternative Investments--Audit Considerations." The practice aid clarifies the responsibility of the client to have appropriate controls in place so that management can adequately address valuation assertions and the auditor can be...