PCAOB Reproposes Auditing Standard Regarding Related-Party Transactions and Related Amendments

By Cydney Posner

The PCAOB has reproposed an auditing standard regarding related-party transactions and reproposed related amendments to other standards, all intended to address "areas that have been a continued focus in cases of financial reporting fraud." According to the press release,  the "reproposed 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." The reproposed amendments would enhance the auditor's identification and evaluation of significant unusual transactions and require that the auditor perform procedures to obtain an understanding of a company's financial relationships and transactions with executive officers.

The release states that the reproposed standard "would strengthen existing audit performance requirements by setting forth new, specific audit procedures that would include: (i) obtaining an understanding of the company's relationships and transactions with its related parties; (ii) performing specific procedures for related party transactions that require disclosure in the financial statements or that are determined to be a significant risk; (iii) evaluating whether the company has properly identified its related parties and relationships and transactions with related parties; and (iv) communicating with the audit committee. The reproposed standard would supersede the existing auditing standard, AU sec. 334."

With regard to significant unusual transactions, the release states that the reproposed amendments "are designed to focus the auditor's identification and evaluation of a company's significant unusual transactions, and, among other things, enhance the auditor's evaluation of (i) whether such transactions have been appropriately accounted for and adequately disclosed in company financial statements; and (ii) whether the lack of a business purpose indicates that they may have been entered into to engage in fraudulent financial reporting or conceal misappropriation of assets."

Other reproposed amendments regarding financial relationships and transactions with executive officers would modify AS 12 to "require the auditor to perform specific procedures to obtain an understanding of the potential risks of material misstatement posed by incentives and pressures arising from a company's financial relationships and transactions with its executive officers." These procedures would not require the auditor to make any determination regarding the reasonableness of, or any recommendations regarding, compensation arrangements.

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