PCAOB Proposes New Related Party Auditing Standard and Other Amendments | Practical Law

PCAOB Proposes New Related Party Auditing Standard and Other Amendments | Practical Law

The Public Company Accounting Oversight Board (PCAOB) proposed for comment a new auditing standard on related party transactions and relationships. It also proposed amendments to other auditing standards relating to significant unusual transactions and financial relationships with executive officers. In a separate release, the PCAOB also proposed amendments to tailor certain of its rules to the audits and auditors of brokers and dealers, among other changes.

PCAOB Proposes New Related Party Auditing Standard and Other Amendments

Practical Law Legal Update 0-518-2721 (Approx. 4 pages)

PCAOB Proposes New Related Party Auditing Standard and Other Amendments

by PLC Corporate & Securities
Published on 29 Feb 2012 • USA (National/Federal)
The Public Company Accounting Oversight Board (PCAOB) proposed for comment a new auditing standard on related party transactions and relationships. It also proposed amendments to other auditing standards relating to significant unusual transactions and financial relationships with executive officers. In a separate release, the PCAOB also proposed amendments to tailor certain of its rules to the audits and auditors of brokers and dealers, among other changes.
On February 28, 2012, the Public Company Accounting Oversight Board (PCAOB) proposed 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. Among other things, the proposed standard would:
  • Align with and build on the foundational requirements in the PCAOB's standards on risk assessment (see Legal Update, PCAOB Adopts New Auditing Standards on Risk Assessment).
  • Require the auditor to perform procedures to:
    • identify the company's related parties;
    • obtain an understanding of the nature of the relationships between the company and its related parties; and
    • understand the terms and business purposes of the types of transactions involving related parties.
  • Require the auditor to evaluate whether information that comes to its attention during the audit indicates that undisclosed related parties or relationships or transactions with related parties might exist.
  • Require the auditor to communicate to the audit committee, before the auditor issues its report, its evaluation of the company's identification of, accounting for, and disclosure of its relationships and transactions with related parties.
The proposed new auditing standard would supersede PCAOB interim standard AU sec. 334, Related Parties.
The PCAOB also proposed 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, evaluate and determine whether significant unusual transactions:
  • Were undertaken for business purposes.
  • Have been appropriately accounted for and adequately disclosed.
In addition, the PCAOB proposed other amendments to auditing standards that would, among other things:
  • Require the auditor to perform procedures to obtain an understanding of the company's financial relationships and transactions with its executive officers as part of its risk assessment. The required procedures would include a review of the company's executive compensation, including perquisites and other arrangements.
  • Require the auditor to obtain representations from management that there are no side agreements or other arrangements that have not been properly accounted for and adequately disclosed.
  • Emphasize the auditor's existing responsibilities to communicate possible fraud to management, the audit committee and, under certain conditions, the SEC.
The PCAOB anticipates that the proposed new auditing standard and proposed 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, 2012. The PCAOB is seeking comment regarding the feasibility of this date.
Comments on the proposed standard and related amendments are due by May 15, 2012.

Rule Amendments for Audits and Auditors of Brokers and Dealers and Other Proposed Changes

Also on February 28, to conform to the requirements of the Dodd-Frank Act, the PCAOB issued an additional release proposing a series of amendments that would:
  • Tailor certain of the PCAOB's rules to the audits and auditors of brokers and dealers.
  • Require a registered accounting firm to file a special report with the PCAOB if it resigns, declines to stand for re-appointment or is dismissed from an issuer audit engagement and the issuer fails to file the required corresponding Form 8-K with the SEC (see Practice Note, Form 8-K: Changes in the Company's Certifying Accountant).
  • Revise the PCAOB's Annual Report Form (Form 2) to reflect the Dodd-Frank requirement that certain foreign public accounting firms must designate the PCAOB or the SEC as the firm's agent for service of process under Section 106 of the Sarbanes-Oxley Act. This requirement should make it easier for the SEC to compel foreign firms to produce their work papers in any SEC investigations.
Comments on these proposed amendments are due by April 30, 2012.