The Public Company Accounting Oversight Board has reproposed for public comment its related-parties auditing standard along with related amendments to other standards to address areas that have been contributing factors in financial reporting frauds.
The standard, if adopted, would increase the auditor's focus on the evaluation of a company’s identification of, accounting for, and disclosure of its relationships and transactions with related parties.
“Related-party transactions, and significant transactions that are outside the normal course of business, have been a contributing factor in numerous prominent financial reporting frauds over the decades,” said PCAOB chairman James Doty. “Our reproposing release mentions a skein of financial reporting failures in this area that have resulted in significant investor losses as well as the loss of jobs at affected companies. The newspapers are replete even now with revelations of insider and significant unusual transactions that, in the light of day, only served to delay the day of reckoning with the markets. And, as is often the case, the market reckoning comes at great cost to investors.”
The reproposed amendments, if adopted, would enhance the auditor’s identification and evaluation of a company's significant unusual transactions. They also would require that the auditor perform procedures as part of the process to assess the risk of material misstatement in the financial statements, to obtain an understanding of a company's financial relationships and transactions with executive officers. These procedures would not require the auditor to make any determination regarding the reasonableness of, or any recommendations regarding, compensation arrangements.
“The board is proposing new and revised standards in areas that have been a continued focus in cases of financial reporting fraud,” said Doty. “The number and magnitude of these cases demonstrate that heightened auditor scrutiny is warranted, and the reproposed standard and amendments will focus auditors on providing a more consistent examination of these areas.”
The reproposed standard and amendments include revisions to respond to public comments on the PCAOB’s initial proposal issued on Feb. 28, 2012 (see PCAOB Proposes Related-Party Audit Standard). Those revisions include clarifying the relationship of the reproposed standard with the board’s risk assessment standards. Additional revisions would require the auditor to evaluate whether the company has properly identified its related parties and relationships and transactions with related parties.
“The board’s goal with the initial proposal and this reproposal has been to develop an approach that promotes audit quality and investor protection, while at the same time taking into account economic considerations, including avoiding unnecessary costs and implementation issues,” said PCAOB chief auditor and director of professional standards Martin F. Baumann in a statement.
The reproposed auditing standard would supersede the Board’s existing auditing standard AU sec. 334, Related Parties. The reproposed amendments would amend other auditing standards, including AU sec. 316, Consideration of Fraud in a Financial Statement Audit, and Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement.
Comments on the reproposed standard and related amendments are due by July 8, 2013.
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