On May 7, the Public Company Accounting Oversight Board ("PCAOB" or the “Board”) reproposed for public comment a new auditing standard, Related Parties (the "reproposed standard"), that would strengthen existing auditing procedures associated with identifying, assessing, and responding to the risks of material misstatement associated with a company's relationships and transactions with its related parties. The PCAOB also reproposed amendments (the "reproposed amendments") to certain PCAOB auditing standards that address a company’s (1) significant unusual transactions and (2) financial relationships and transactions with its executive officers.
The proposed standard and amendments were originally issued on February 28, 2012. The Board is issuing the reproposed standard and amendments to provide an opportunity for commenters to provide input on the changes reflected in the reproposal.
In the Board's view, this project is particularly appropriate due to the number and magnitude of financial reporting frauds, and resulting investor losses, associated with these critical areas. As a result, the reproposed standard and amendments would update and strengthen auditor performance requirements in these areas that could pose significant risks of material misstatement to company financial statements.
Although the overall approach and many of the performance requirements remain the same in the reproposed standard and amendments, the Board is proposing certain changes to align more closely with the risk assessment standards and to respond to some commenters' suggestions, including clarifying that the procedures regarding a company's financial relationships and transactions with its executive officers would be performed as part of the auditor's risk assessment process and would not require the auditor to make any determination regarding the appropriateness and reasonableness of a company's compensation arrangements with its executive officers or recommendations regarding such compensation arrangements.
Relationships and transactions with related parties
The reproposed standard would strengthen existing audit performance requirements by enhancing and setting forth new, specific audit procedures that would include:
Significant unusual transactions
The reproposed amendments regarding significant unusual transactions 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:
Financial relationships and transactions with executive officers
Other reproposed amendments would modify Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement, 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.
The reproposed standard and amendments are applicable to all audits conducted in accordance with PCAOB standards. The Board is specifically requesting comments on considerations raised by the JOBS Act, including the application of the reproposed standard and amendments to audits of emerging growth companies. The Board is also requesting comments regarding the application of the reproposed standard and amendments to audits of brokers and dealers.
The reproposed standard and amendments would be effective, subject to approval by the SEC, for audits of financial statements for fiscal years beginning on or after December 15, 2013.
Comments on the reproposal are due on July 8, 2013.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the National Professional Services Group (1-973-236-7800).
Julie Anne Dilley