The Public Company Accounting Oversight Board voted Tuesday to issue for public comment a proposed auditing standard on related-party transactions, and to amend standards on significant unusual transactions and auditors of broker-dealers.
[IMGCAP(1)]The proposed auditing standard on related parties aims to improve the auditor’s evaluation of a public company’s identification of, accounting for, and disclosure about its relationships and transactions with related parties (see PCAOB Mulls Standard for Auditing Related-Party Transactions). The PCAOB is also proposing amendments with the goal of enhancing the auditor's identification and evaluation of a company's significant unusual transactions that are outside the normal course of business or otherwise appear to be unusual due to their timing, size or nature.
In addition, the board is proposing amendments that, among other things, would improve the auditor's understanding of a company's financial relationships with its executive officers.
“The board is considering these changes because related-party transactions and significant unusual transactions have played a recurring role in financial failures, from those that led to the Sarbanes-Oxley Act to those recently alleged in companies in certain emerging markets,” said PCAOB Chairman James R. Doty in a statement. “Auditors have a unique vantage point from which to identify questionable transactions. We want this standard and the related amendments to improve auditors’ focus and help stem investor losses.”
The proposed amendments to other standards are intended to complement the proposed standard on related parties. For example, improving the auditor’s identification and evaluation of significant unusual transactions might assist the auditor in identifying related parties or relationships or transactions with related parties previously undisclosed to the auditor.
"The proposed standard and proposed amendments should improve the auditor’s focus on areas of increased risks and, thereby, can improve audits and provide greater investor protection,” said PCAOB chief auditor and director of professional standards Martin F. Baumann. “Further, the proposed standard and proposed amendments align with and build upon the foundational requirements in the Board's risk assessment standards.”
The proposed standard would supersede the PCAOB’s interim auditing standard AU sec. 334, Related Parties. The proposed amendments would amend other auditing standards, including AU sec. 316, Consideration of Fraud in a Financial Statement Audit, and AS No. 12, Identifying and Assessing Risks of Material Misstatement.
Background information is available on Docket No. 38. Comments on the proposed standard and related amendments are due by May 15, 2012.
Broker-Dealer Auditing Changes
In addition, the PCAOB proposed amendments Tuesday to its rules and forms to apply them to auditors of brokers and dealers registered with the Securities and Exchange Commission, as authorized by the Dodd-Frank Act.
The proposed amendments would include references to audits and auditors of brokers and dealers in relevant board rules. The proposal would also make the board’s auditing standards, including most of the board’s ethics and independence requirements, applicable to broker-dealer audits, once the SEC provides direction that auditors of brokers and dealers are to comply with PCAOB standards.
In addition, the amendments would change PCAOB registration, withdrawal and reporting forms to, among other things, require that auditors of brokers and dealers identify annually each audit report issued for a broker or dealer. PCAOB rules require similar reporting by auditors of public companies.
The proposed amendments include separate technical changes to board rules and forms unrelated to the Dodd-Frank Act.
“Among the technical and clarifying amendments are several that are more substantive and that require the board to make policy decisions,” noted PCAOB board member Jay Hanson. “Foremost among these is the board’s proposal regarding whether and how to apply its independence rules to the auditors of brokers and dealers. Other amendments that do not follow directly from the Dodd-Frank Act include the proposals to require certain special reports on PCAOB Form 3 that affect auditors of issuers as well as brokers and dealers and to require foreign audit firms to report annually on PCAOB Form 2 whether they have designated an agent in the U.S. for service of process pursuant to Section 106 of the Sarbanes-Oxley Act (as amended by the Dodd-Frank Act). Finally, the proposals include certain amendments to the board’s rules governing disciplinary proceedings that reflect the board’s experience conducting such proceedings in years past.”
Two appendices lay out the proposed changes, and commenters are encouraged to respond to specific questions that follow each rule section. The PCAOB is seeking public comment on the proposal through April 30, 2012.
The proposing release and comment letters will be available on the PCAOB website under Rulemaking Docket No. 39.
Bidding Farewell to Daniel Goelzer
[IMGCAP(2)]During Tuesday’s meeting, which will be available for playback on the PCAOB Web site, board members also paid tribute to outgoing board member Daniel Goelzer, who was one of the original founding members since it was established by the Sarbanes-Oxley Act of 2002 and its original meeting on Jan. 6, 2003.
“It has been a privilege to serve on the board for the past nine years,” said Goelzer. “Very few people have the opportunity to be part of the creation of a new regulator. For those of us who have spent our careers working in securities regulation, the chance to help strengthen the foundation of investor protection and full disclosure on which our capital markets and our economy rest is very special indeed. I want to thank everyone on the board’s staff – past and present – that I have worked with over the last nine years. We have come a long way together. I firmly believe that the board has made a lasting, positive difference in audit quality and in investor confidence in public company auditing.”
PCAOB chairman James Doty was among those paying tribute to Goelzer. “In the nine years since the board held its organizational meeting in the basement of the SEC, Dan has attended at least 60 public board meetings,” he said. “That doesn’t include meetings with our Standing Advisory Group, Investor Advisory Group or other public meetings. While I applaud Dan’s stamina—and his attendance record—I most want to recognize his work outside of the public eye, primarily his wise counsel and keen questioning that have helped shaped the policies and standards of the PCAOB, such as the ones we are considering today. When the SEC appointed Dan to the PCAOB, one of the attributes cited in favor of his selection was his distinction as the longest-serving general counsel in SEC history. Dan can now add to that superlative his role as the longest-serving member of the PCAOB. His presence in our PCAOB offices will be missed, but the good work he accomplished will continue.”
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