PCAOB Reproposes New Related Party Auditing Standard and Related Amendments | Practical Law

PCAOB Reproposes New Related Party Auditing Standard and Related Amendments | Practical Law

The Public Company Accounting Oversight Board (PCAOB) reproposed for comment a new auditing standard on related party transactions and relationships. It also reproposed amendments to other existing auditing standards relating to significant unusual transactions and relating to financial relationships and transactions with executive officers.

PCAOB Reproposes New Related Party Auditing Standard and Related Amendments

Practical Law Legal Update 2-528-1386 (Approx. 4 pages)

PCAOB Reproposes New Related Party Auditing Standard and Related Amendments

by PLC Corporate & Securities
The Public Company Accounting Oversight Board (PCAOB) reproposed for comment a new auditing standard on related party transactions and relationships. It also reproposed amendments to other existing auditing standards relating to significant unusual transactions and relating to financial relationships and transactions with executive officers.
On May 7, 2013, the Public Company Accounting Oversight Board (PCAOB) reproposed for comment a new auditing standard, Related Parties, that seeks to improve the way auditors evaluate public company disclosure about relationships and transactions with related parties.
The PCAOB also reproposed amendments to other auditing standards to enhance auditor:
  • Identification and evaluation of companies' significant unusual transactions.
  • Understanding of companies' financial relationships and transactions with their executive officers.
The reproposed new standard and amendments were originally proposed on February 28, 2012 (see Legal Update, PCAOB Proposes New Related Party Auditing Standard and Other Amendments).
Comments on the reproposed new standard and amendments are due by July 8, 2013.

Reproposed New Auditing Standard

Among other things, the reproposed new auditing standard would require the auditor to:
  • Perform specific procedures to obtain an understanding of the company's relationships and transactions with related parties. The new procedures are intended to be performed in conjunction with the auditor's risk assessment procedures under Auditing Standard No. 12.
  • Evaluate whether the company properly identified its related parties and its relationships and transactions with related parties.
  • Perform specific procedures if the auditor determines the existence of a related party, relationship or transaction that was not previously disclosed to it.
  • Perform specific procedures for each related party transaction that is either required to be disclosed in the company's financial statements or determined to be a significant risk.
  • Communicate to the audit committee the auditor's evaluation of the company's identification of, accounting for and disclosure of its relationships and transactions with related parties, and other significant matters arising from those relationships and transactions.
The reproposed new standard addresses comments received on the original proposal to:
  • Clarify the relationship between the reproposed new audit standard and the existing risk assessment standards.
  • Clarify the responsibility of the auditor to evaluate the company's identification of related parties.
  • Allow more room for the use of auditor judgment.
The reproposed new auditing standard would supersede PCAOB interim standard AU sec. 334, Related Parties.

Reproposed Amendments to Existing Auditing Standards

Significant Unusual Transactions

The PCAOB reproposed amendments to AU sec. 316, Consideration of Fraud in a Financial Statement Audit, that would, among other things, require the auditor to perform specific procedures to identify significant unusual transactions and evaluate whether those transactions:
  • Have been appropriately accounted for and adequately disclosed in the company's financial statements.
  • May have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets.
The reproposed amendments address comments received on the original proposed amendments to enhance the linkage between the reproposed auditing standard (Related Parties) and the reproposed amendments in the area of significant unusual transactions.

Financial Relationships and Transactions with Executive Officers

The PCAOB also reproposed amendments to Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement. The amendments would require the auditor to perform specific procedures to understand the potential risks of material misstatement posed by incentives and pressures that arise from financial relationships and transactions between the company and its executive officers.
The reproposed amendments address comments received on the original amendments to clarify that the auditor's procedures:
  • Would be performed as part of its risk assessment process.
  • Would not require the auditor to make any:
    • determinations on the reasonableness of a company's compensation arrangements; or
    • recommendations on compensation arrangements.

Anticipated Effective Date

The PCAOB anticipates that the reproposed new standard and reproposed amendments to existing standards would be effective, subject to approval by the SEC, for audits of financial statements for fiscal years beginning on or after December 15, 2013. The PCAOB is seeking comment regarding the feasibility of this date.