The new standard and amendments are intended to strengthen auditor performance requirements in three critical areas.
On June 10, 2014 the Public Company Accounting Oversight Board (“PCAOB” or “the Board”) adopted Auditing Standard No. 18, Related Parties (“the standard”), which is intended to strengthen auditor performance requirements for 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 adopted amendments to certain PCAOB auditing standards that address the auditor’s responsibilities with respect to a company’s significant unusual transactions and a company’s financial relationships and transactions with its executive officers (“the amendments”). The PCAOB adopted the standard and amendments substantially as they were re-proposed in May 2013 (the standard and amendments were originally proposed in February 2012).
The Board determined the existing standards in these areas do not contain sufficient required procedures and are not sufficiently risk-based, which can lead to inadequate auditor effort. Additionally, the Board’s inspection and enforcement activities indicate that there are continuing weaknesses in auditors’ scrutiny in these areas.
The Board believes that the standard and amendments, which are aligned with the risk assessment standards, represent a cohesive audit approach that will contribute to audit effectiveness and provide opportunities for an efficient implementation.
Relationships and transactions with related parties
The standard, which supersedes PCAOB interim standard AU 334, Related Parties, is designed to strengthen auditor performance requirements by setting forth specific procedures for the auditor’s evaluation of a company’s identification of, accounting for and disclosure of relationships and transactions between the company and its related parties. Among other things, the standard requires the auditor to:
Significant unusual transactions
The amendments regarding significant unusual transactions revise PCAOB AU 316, Consideration of Fraud in a Financial Statement Audit, and other PCAOB auditing standards with the intent of strengthening the auditor’s performance requirements for the identification and evaluation of these transactions. Among other things, the amendments require the auditor to:
Financial relationships and transactions with executive officers
Other amendments 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 company’s financial relationships and transactions with its executive officers, including compensation. The amendments do not require the auditor to make any determination regarding the reasonableness of compensation arrangements or recommendations regarding compensation arrangements.
The standard and amendments, if approved by the SEC, will be applicable to all audits performed pursuant to PCAOB standards, including audits of brokers and dealers. Pursuant to the JOBS Act, the standard and amendments will be subject to a separate determination by the SEC regarding their applicability to audits of emerging growth companies (“EGCs”). The PCAOB is recommending that the standard and amendments apply to audits of EGCs, and is providing information including a discussion of economic considerations for audits of EGCs to assist the SEC in its consideration. The standard and amendments build upon the existing standards; therefore, we are in process of evaluating the impact of the changes against our current methodology.
The standard and amendments will be effective, subject to SEC approval, for audits of financial statements for fiscal years beginning on or after December 15, 2014, including reviews of interim financial information within these fiscal years.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams who have questions should contact James Anderson (1-973-236-5738) or Julie Anne Dilley (1-646-471-3205) in the National Professional Services Group.
James D. Anderson
Julie Anne Dilley