Jody Keeling is an Associate in our Tampa office

On May 7, 2013, the PCAOB reproposed for comment: (1) an auditing standard on related parties; (2) proposed amendments to certain PCAOB auditing standards regarding significant unusual transactions; and (3) other proposed amendments to PCAOB auditing standards. The reproposed auditing standard would supersede the Board's auditing standard AU sec. 334, Related Parties. Several of these notable new requirements with respect to related parties were identified in the March 13, 2013 edition ofSecurities and Financial News to Note: http://www.hklaw.com/publications/PCAOBs-Proposed-Auditing-Standard-on-Related-Parties-Would-Increase-Auditor-Review-of-Executive-Compensation-03-12-2012/

The Board is proposing changes in these three critical areas contemporaneously because it believes that the auditor's efforts in these areas complement each other. The reproposed standard and amendments would update the Board's standards and focus the auditor's efforts on these critical areas that could pose significant risks of material misstatement to company financial statements. In the Board's view, this update is particularly appropriate due to the number and magnitude of financial reporting frauds, and resulting investor losses, associated with these areas. The reproposed standard includes several changes in response to comments received on the original proposal introduced on February 28, 2012.

Key Changes from the Proposed Standard regarding to Related Parties. The reproposed standard reflects clarifying changes and improvements in response to comments received. Some of the changes address the following:

  • Clarifying the Relationship between the Reproposed Standard and the Risk Assessment Standards: In response to requests to clarify the relationship between the proposed standard and the risk assessment standards, the Board made several revisions to better integrate the proposed requirements with those standards.
  • Responsibility of the Auditor to Evaluate the Company's Identification of Related Parties: Some commenters suggested that the Board clarify the auditor's responsibility to perform procedures to identify the company's related parties. In response, the reproposed standard has been revised to focus more directly on a key aspect of the audit objective, that is, whether relationships and transactions with related parties have been properly identified by the company under audit.

    As reproposed, the standard would include a new requirement for the auditor to evaluate whether the company has properly identified its related parties. Evaluating whether a company has properly identified its related parties involves more than assessing the process used by the company to identify its related parties. The new evaluation contained in the reproposed standard would require the auditor to perform procedures to test the accuracy and completeness of the related parties and relationships and transactions with related parties identified by the company.
  • Requests for Additional Auditor Judgment. Several commenters suggested that the proposed standard allow more room for the use of auditor judgment. In response, the Board has revised a
    number of the requirements, including: (1) clarifying that the auditor exercises discretion in making inquiries of certain individuals within the company regarding the company's relationships and transactions with its related parties; and (2) removing the requirement that each related party transaction previously undisclosed to the auditor by management be treated as a significant risk.


Key Change from the Proposed Amendments Regarding Significant Unusual Transactions. The reproposed amendments regarding significant unusual transactionsreflect certain changes made in response to comments received. The key change fromthe proposed amendments would enhance the linkage between the reproposedstandard and the reproposed amendments in the area of significant unusualtransactions.

Key Change from the Other Proposed Amendments. The other reproposed amendments relating to executive officers reflect certain changes made in response to comments received. The key change from the other proposed amendments would clarify that 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 or reasonableness of a company's compensation arrangements with its executive officers or recommendations regarding such compensation arrangements.

Comments on the reproposed standard should be received by the PCAOB no later than July 8, 2013.

http://pcaobus.org/Rules/Rulemaking/Docket038/Release%202013-004_Related%20Parties.pdf

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