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PCAOB Preps New Standard on Related Parties

Tammy Whitehouse | February 22, 2012

After years of fretting over how to get auditors to pay closer attention to transactions among related parties or other unusual transactions, the Public Company Accounting Oversight Board is about to publish a proposed new standard to address the concerns.

The PCAOB has scheduled an open meeting to consider whether to issue a proposed new auditing standard on related parties as well as amendments to other auditing standards to address related issues, including significant unusual transactions. Typically, that means the board has prepared a proposal and will vote publicly to publish it for review and comments. The board also will consider amendments to various rules and forms related to its new duties under the Dodd-Frank Act to oversee the audits of brokers and dealers.

Parties that are “related” to the corporate entity might include subsidiaries, executives, key shareholders or family members who are somehow tied to the company. Companies are required to disclose all transactions with related parties, however aboveboard they may seem, to assure transparency and help keep them at arm's length.

AU Section 334, Related Parties, is a standard nearly 30 years old that the board adopted from professional literature as an interim standard when the board first formed. It spells out procedures auditors should consider to identify related-party relationships and transactions, requiring auditors to examine whether such relationships and any material transactions among them are properly accounted for and adequately disclosed in financial statements.

As far back as 2004, as the board began operating under Sarbanes-Oxley and sorting out the damage of the Enron collapse, the PCAOB began questioning its Standing Advisory Group about how to redirect auditing standards in a way that would more reliably expose transactions among related parties meant to hide fraud. Enron infamously leveraged relationships with its special-purpose entities to paint a colorful picture of fiscal health.

The PCAOB sought the SAG's counsel again in 2007 and in 2009 to discuss whether to amend existing rules or start with a blank sheet of paper. The board noted related-party transactions featured prominently in recent corporate scandals, and its own inspection and enforcement actions suggested auditors weren't tough enough when challenging related-party relationships and transactions.

Beyond related party transactions, the board also has warned auditors to pay more attention to other unusual transactions, even if not carried out among related parties. The board issued a staff audit alert in 2010 to remind auditors of their duty to look more closely at significant transactions that seem to fall outside the normal course of business or otherwise seem unusual given what the auditor knows about the company.