PCAOB Proposes Auditing Standard on Related Parties

On February 28, the Public Company Accounting Oversight Board (PCAOB) issued for public comment a proposed auditing standard – Related Parties. The proposed standard would improve the auditor's evaluation of a public company's identification of, accounting for, and disclosure about its relationships and transactions with related parties.

The Board also is proposing amendments to enhance the auditor's identification and evaluation of a company's significant unusual transactions, which are significant transactions that are outside the normal course of business or that otherwise appear to be unusual due to their timing, size, or nature. In addition, the PCAOB 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. "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. Further, the proposed standard and proposed amendments align with and build upon the foundational requirements in the Board's risk assessment standards," said PCAOB Chief Auditor and Director of Professional Standards Martin F. Baumann.

The proposed standard would supersede the Board's interim auditing standard AU Section 334, Related Parties. The proposed amendments would amend other auditing standards, including AU Section 316, Consideration of Fraud in a Financial Statement Audit, and AS No. 12, Identifying and Assessing Risks of Material Misstatement.