PCAOB Mulls New Related-Party Standards

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Worried that corporate auditors are being duped by widespread related-party transaction frauds, officials at the Public Company Accounting Oversight Board are considering new standards establishing stiffer and more specific requirements for accountants who encounter these arrangements.

Although such standards have been in the talking stage at the PCAOB for at least five years, there is fresh interest in this area now because related-party fraud has been a factor in a number of recent corporate financial scandals.

The new standard being considered by PCAOB staffers would establish that, under certain circumstances, auditors must presume that related-party transactions are fraud risks.

“Presuming that a related-party transaction is a fraud risk could enhance the auditor’s ability to identify the types of material misstatements that could occur due to fraud,” officials at the board explained. “For example, the presumption of a fraud risk could result in the auditor designing procedures to detect those types of misstatements.” The staff’s latest thinking on such a standard surfaced during the PCAOB’s recent meeting with its Standing Advisory Group — a panel of public accountants and other stakeholders with expertise in corporate auditing.

The board’s existing audit standards already require auditors to perform procedures to address the risk of “material misstatement of financial statements” arising from related-party transactions.

But some officials at the PCAOB as well as members of the accounting profession have suggested that these standards may not be sufficient. At least part of the problem involves what some have described as widespread related-party transaction fraud slipping under the radar screen of auditors.

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