The Public Company Accounting Oversight Board plans to hold an open meeting on Tuesday to consider issuing a proposed auditing standard on related parties and to amend other auditing standards to address significant unusual transactions and broker-dealer auditors.
This will not be the first time the PCAOB has met to consider issuing an auditing standard on related-party transactions. In 2004, 2007 and 2009, the PCAOB’s Standing Advisory Group held meetings to discuss the problem of related-party transactions. At an October 2009 meeting, the advisory group was asked to assess the risks associated with related-party transactions, including the fraud risks of significant related-party transactions outside the ordinary course of business, especially with related parties who are not audited. Other risks include related-party transactions with management, such as the CEO and CFO.
The Standing Advisory Group was told that PCAOB staff already thought a standards-setting project could be a good idea. “The staff believes that a standards-setting project to revise the related party guidance may be appropriate for a number of reasons,” said a background document for the October 2009 meeting.
“First, financial relationships with related parties have been a factor in recent corporate scandals. Second, information obtained from the board's inspection reports and enforcement actions indicate that some auditors might not be exercising sufficient professional skepticism when evaluating financial relationships and transactions with related parties. Finally, a standards-setting project in this area could clarify and consolidate the related party guidance into a single standard, as well as consider both the work of other standards setters and additional input from the SAG.”
The PCAOB staff has also been eyeing the problem of significant unusual transactions. In April 2010, it issued a Staff Audit Practice Alert on auditor considerations regarding those types of transactions (see PCAOB Warns Auditors of Fraud Risks).
”During the course of an audit, the auditor may become aware of significant transactions that are outside the normal course of business for the company, or that otherwise appear to be unusual given the auditor's understanding of the company and its environment,” said the alert. “Significant unusual transactions, especially those close to period end that pose difficult "substance over form" questions, can provide opportunities for companies to engage in fraudulent financial reporting. Further, the auditor's evaluation of whether the company's financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework, includes the consideration of the financial statement presentation and disclosure of significant unusual transactions.”
The broker-dealer auditing amendments that will be under consideration at the meeting stem from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which expanded the authority of the PCAOB to inspect firms that audit broker-dealers, in response to the Bernard Madoff scandal and other Ponzi schemes.
At the meeting, the PCAOB will consider proposing for public comment amendments to PCAOB rules and forms that would conform them to the Dodd-Frank Act, which, among other things, authorized the PCAOB to oversee the audits of SEC-registered brokers and dealers, and that would make certain other technical improvements to PCAOB rules and forms in light of the board’s experience.
The meeting is open to the public and will take place on Tuesday, Feb. 28, at 9:30 am in the PCAOB’s meeting room at 1666 K St. N.W., Washington, D.C. The PCAOB site will webcast the meeting and provide a podcast later in the day.
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