Parties Related Parties - PCAOB
1666 K Street, N.W.Washington, D.C. 20006Telephone: (202) 207-9100Facsimile: (202) 862-8430www.pcaobus.org)))RELATED PARTIES))AMENDMENTS TO CERTAIN PCAOB AUDITING)STANDARDSREGARDINGSIGNIFICANT)UNUSUAL TRANSACTIONS))AND OTHER AMENDMENTS TO PCAOB)AUDITING STANDARDS))AUDITING STANDARD No. 18 –Summary:BoardContacts:I.PCAOB Release No. 2014-002June 10, 2014PCAOB RulemakingDocket Matter No. 038After public comment, the Public Company Accounting Oversight Board("PCAOB" or "Board") is adopting: (i) Auditing Standard No. 18, RelatedParties; (ii) amendments to certain PCAOB auditing standards regardingsignificant unusual transactions; and (iii) other amendments to PCAOBauditing standards. Auditing Standard No. 18 supersedes the Board'sinterim auditing standard, AU sec. 334, Related ,scatesg@pcaobus.org), Brian F. Degano, Associate Chief Auditor(202/207-9113, deganob@pcaobus.org), and Nicholas Grillo, AssociateChief Auditor (202/207-9104, grillon@pcaobus.org).IntroductionThe Board is adopting a new auditing standard and amendments to its auditingstandards to strengthen auditor performance requirements in three critical areas thathistorically have represented increased risks of material misstatement in companyfinancial statements. Related party transactions; significant transactions that are outsidethe normal course of business for the company or that otherwise appear to be unusualdue to their timing, size, or nature ("significant unusual transactions"); and a company's
PCAOB Release No. 2014-002June 10, 2014Page 2financial relationships and transactions with its executive officers,1/ have beencontributing factors in numerous financial reporting frauds over the last severaldecades.2/ Prominent corporate scandals involving these critical areas served toundermine investor confidence and resulted in significant losses for investors, as well asthe loss of many jobs.3/ These critical areas have continued to be contributing factors inmore recent cases.4/ As discussed below, the Board's oversight activities indicate thatthere are continuing weaknesses in auditors' scrutiny of these areas.1/A company's related party transactions, significant unusual transactions,and financial relationships and transactions with its executive officers, are collectivelyreferred to herein as "the critical areas" or "these critical areas."2/Such prominent corporate scandals include Enron Corporation, TycoInternational, Ltd., Refco, Inc., and WorldCom, Inc. For a more detailed discussion ofsuch financial reporting frauds, see: (i) Proposed Auditing Standard—Related Parties,Proposed Amendments to Certain PCAOB Auditing Standards Regarding SignificantUnusual Transactions and Other Proposed Amendments to PCAOB Auditing Standards(the "proposing release" or the "proposal"), PCAOB Release No. 2012–001 (February28, 2012) at 9-11, ase 2012001 Related Parties.pdf and (ii) Proposed Auditing Standard—Related Parties,Proposed Amendments to Certain PCAOB Auditing Standards Regarding SignificantUnusual Transactions and Other Proposed Amendments to PCAOB Auditing Standards(the "reproposing release" or the "reproposal"), PCAOB Release No. 2013–004 (May ket038/Release%202013004 Related%20Parties.pdf. See also Section II. of Appendix 5.3/In one such example, Enron Corporation was the nation's largest naturalgas and electric marketer, with reported annual revenue of more than 150 billion.When it filed for bankruptcy on December 2, 2001, its stock price had dropped, in lessthan a year, from more than 80 per share to less than 1. See SEC Settles Civil FraudCharges Filed Against Richard A. Causey, Former Enron Chief Accounting Officer;Causey Barred From Acting as an Officer or Director of a Public Company (U.S.Securities and Exchange Commission ("SEC" or "Commission") Litigation Release No.19996, February 9, 2007).4/See, e.g., SEC Accounting and Auditing Enforcement Release ("AAER")No. 3447, SEC v. Keyuan Petrochemicals, Inc. and Aichun Li (February 28, 2013), andSEC AAER No. 3385, SEC v. China Natural Gas, Inc. and Qinan Ji (May 14, 2012).
PCAOB Release No. 2014-002June 10, 2014Page 3The Board developed the standard and amendments because, as describedmore fully below, the Board believes its existing requirements need to be strengthenedto heighten the auditor's attention to areas that have been associated with risks offraudulent financial reporting and that also may pose increased risks of error. The Boardhas concluded that its existing requirements in these critical areas do not containsufficient required procedures and are not sufficiently risk-based, which can lead toinadequate auditor effort in the critical areas. The auditor, serving in the role as agatekeeper5/ in the financial reporting system, should be alert to the possibility thattransactions in these critical areas pose increased risks and, thus, require heightenedscrutiny during the audit.6/ Increased auditor attention to these critical areas should, inthe Board's view, increase the likelihood of the auditor identifying materialmisstatements.5/According to the SEC:The federal securities laws, to a significant extent, make independentauditors "gatekeepers" to the public securities markets. These lawsrequire, or permit us to require, financial information filed with us to becertified (or audited) by independent public accountants. Without anopinion from an independent auditor, the company cannot satisfy thestatutory and regulatory requirements for audited financial statements andcannot sell its securities to the public. The auditor is the only professionalthat a company must engage before making a public offering of securitiesand the only professional charged with the duty to act and reportindependently from management.See SEC Securities Act Release No. 33-7870, Proposed Rule: Revision of theCommission's Auditor Independence Requirements (June 30, 2000) at Section II.A. Seealso, SEC Securities Act Release No. 33-7919, Final Rule: Revision of theCommission's Auditor Independence Requirements (November 21, 2000) at SectionIII.A.6/See, e.g., SEC AAER No. 3427, In the Matter of the Application of f. That opinion states, in part,that the SEC and courts have repeatedly held that related party transactions requireheightened scrutiny by auditors. See also McCurdy v. SEC, 396 F3d 1258, 1261 (D.C.Cir. 2005) (citing Howard v. SEC, 376 F3d 1136, 1149 (D.C. Cir. 2004) noting thatrelated-party transactions "are viewed with extreme skepticism in all areas of finance,"aff'g James Thomas McCurdy, CPA, 57 S.E.C. 277 (2004)).
PCAOB Release No. 2014-002June 10, 2014Page 4The standard and amendments being adopted by the Board include: AuditingStandard No. 18, Related Parties (the "standard"); amendments to certain PCAOBauditing standards regarding significant unusual transactions (the "amendmentsregarding significant unusual transactions"); and other amendments to PCAOB auditingstandards (the "other amendments"). The amendments regarding significant unusualtransactions and the other amendments are collectively referred to herein as the"amendments." As described below, the standard and amendments address: Relationships and Transactions with Related Parties; Significant Unusual Transactions; and Financial Relationships and Transactions with Executive Officers.Relationships and Transactions with Related Parties: The standard addressesthe auditing of relationships and transactions between a company and its relatedparties. A company's related party transactions could pose increased risks of materialmisstatement, as their substance might differ materially from their form.7/ Related partytransactions also may involve difficult measurement and recognition issues that canlead to errors in financial statements. Such transactions potentially provide more of anopportunity for management to act in its own interests, rather than in the interests of thecompany and its investors. Moreover, in some instances, related party transactionshave been used to engage in fraudulent financial reporting and to concealmisappropriation of assets – types of misstatements that are relevant to the auditor'sconsideration of fraud.8/ The importance to investors of auditing related partytransactions is reflected in Section 10A of the Securities Exchange Act of 1934 (the"Exchange Act"), which requires each audit of financial statements of an issuer toinclude "procedures designed to identify related party transactions that are material tothe financial statements or otherwise require disclosure therein."9/ The standard isdesigned to strengthen auditor performance requirements by setting forth specificprocedures for the auditor's evaluation of a company's identification of, accounting for,7/See also Section II.B. of Appendix 5 for additional discussion of suchrisks.8/See paragraph .06 of AU sec. 316, Consideration of Fraud in a FinancialStatement Audit.9/See Section 10A(a)(2) of the Exchange Act, 15 U.S.C. §78j–1(a)(2), whichwas added to the Exchange Act by the Private Securities Litigation Reform Act, enactedby Congress in 1995.
PCAOB Release No. 2014-002June 10, 2014Page 5and disclosure of relationships and transactions between the company and its relatedparties. The standard supersedes the Board's existing standard, AU sec. 334, RelatedParties, (the "existing standard"), which has not been substantively updated since it wasissued in 1983.10/Significant Unusual Transactions: The amendments regarding significant unusualtransactions recognize that a company's significant unusual transactions can createcomplex accounting and financial statement disclosure issues that could pose increasedrisks of material misstatement. In some instances, significant unusual transactions havebeen used to engage in fraudulent financial reporting. For example, significant unusualtransactions, especially those close to period end that pose difficult "substance-overform" questions, may be entered into to obscure a company's financial position oroperating results.11/ In such cases, management may place more emphasis on the needfor a particular accounting treatment than on the underlying economic substance of thetransaction. Existing audit requirements regarding significant unusual transactions areprincipally contained in AU sec. 316. The amendments regarding significant unusualtransactions include specific procedures that are designed to improve the auditor'sidentification and evaluation of a company's significant unusual transactions and, inparticular, to enhance the auditor's understanding of the business purpose (or the lackthereof) of such transactions.Financial Relationships and Transactions with Executive Officers: The otheramendments include, among other things, improved audit procedures addressing acompany's financial relationships and transactions with its executive officers. Acompany's executive officers are in a unique position to influence a company'saccounting and disclosures. A company's financial relationships and transactions withits executive officers (as one example, executive officer compensation) can createincentives and pressures for executive officers to meet financial targets, which canresult in risks of material misstatement to a company's financial statements. The other10/AU sec. 334 is one of the Board's interim auditing standards. Shortly afterthe Board's inception, the Board adopted the existing standards of the AmericanInstitute of Certified Public Accountants ("AICPA"), as in existence on April 16, 2003, onan initial, transitional basis. See Establishment of Interim Professional AuditingStandards, PCAOB Release No. 2003–006 (April 18, 2003).11/See, e.g., SEC AAER No. 1631, In the Matter of Dynegy Inc., Respondent(September 24, 2002), http://www.sec.gov/litigation/admin/33-8134.htm; and SECAAER No. 2775, In the Matter of Michael Lowther, CPA, Respondent (January 28,2008), pdf.
PCAOB Release No. 2014-002June 10, 2014Page 6amendments modify Auditing Standard No. 12, Identifying and Assessing Risks ofMaterial Misstatement, to require the auditor to perform specific procedures, as part ofthe auditor's risk assessment process,12/ to obtain an understanding of the company'sfinancial relationships and transactions with its executive officers. However, theseamendments do not require the auditor to make any determination regarding thereasonableness of compensation arrangements or recommendations regardingcompensation arrangements.The auditor's efforts regarding these critical areas are, in many ways,complementary. For example, the auditor's efforts to identify and evaluate a company'ssignificant unusual transactions could identify information that indicates that a relatedparty or relationship or transaction with a related party previously undisclosed to theauditor might exist. Likewise, obtaining an understanding of a company's financialrelationships and transactions with its executive officers also could identify suchinformation. The standard and amendments direct the auditor to consider the linkagebetween a company's relationships and transactions with its related parties, itssignificant unusual transactions, and its financial relationships and transactions with itsexecutive officers. This complementary audit approach should help the auditor "connectthe dots" between different aspects of the audit. Both the auditor and the investorbenefit from a comprehensive and consistent examination of the critical areas, not onlybecause of the risk of material misstatement due to fraud, but also because thesetransactions, due to their nature, could pose a risk of material misstatement due toerror.In addition, the standard imposes new requirements relating to the auditor'scommunications with the company's audit committee. These changes recognize that thenew auditor performance requirements contained in the standard relate to areas of theaudit that warrant discussion with the audit committee. The new communicationrequirements in the standard work in concert with the communication requirements inAuditing Standard No. 16, Communications with Audit Committees,13/ and require the12/In 2010, the Board adopted eight standards on assessing and respondingto risk in an audit (the "risk assessment standards"), which cover the entire auditprocess, from initial planning activities to evaluating audit evidence to forming theopinion to be expressed in the auditor's report. See Auditing Standards Related to theAuditor's Assessment of and Response to Risk and Related Amendments to PCAOBStandards, PCAOB Release 2010–004 (August 5, 2010).13/See Communications with Audit Committees; Related Amendments toPCAOB Standards; and Transitional Amendments to AU Sec. 380, PCAOB ReleaseNo. 2012–004 (August 15, 2012).
PCAOB Release No. 2014-002June 10, 2014Page 7auditor to include, as one of the auditor's required communications with the auditcommittee, the auditor's evaluation of the company's identification of, accounting for,and disclosure of its relationships with related parties. Additionally, the amendmentsregarding significant unusual transactions are intended to enhance the discussionbetween the auditor and the audit committee regarding the business purpose (or thelack thereof) of a company's significant unusual transactions required by AuditingStandard No. 16.14/ Similarly, requiring the auditor to perform procedures to obtain anunderstanding of the company's financial relationships and transactions with itsexecutive officers is intended to improve the auditor's identification of fraud risks orother significant risks, which are also already required to be discussed with the auditcommittee pursuant to Auditing Standard No. 16.15/As discussed below, recommendations to improve the requirements in the criticalareas have been longstanding. The standard and amendments reflect public input,including discussions with the Board's Standing Advisory Group ("SAG")16/ andcomments received on a proposal in 201217/ and a reproposal in 2013.18/ A wide range14/See paragraph 13.d. of Auditing Standard No. 16, as revised by theamendments regarding significant unusual transactions in Appendix 2.B. As revised, theauditor is required to communicate to the audit committee the auditor's understanding ofthe business purpose (or the lack thereof) of significant unusual transactions.15/See paragraph 9 of Auditing Standard No. 16, which requires the auditorto discuss with the audit committee the significant risks identified during the auditor'srisk assessment procedures.16/The SAG discussed the topic of related parties at a number of its meetingsprior to the issuance of the Board's proposal, including at meetings occurring on:September 8-9, 2004; June 21, 2007; and October 14-15, 2009. The SAG alsodiscussed the proposal and reproposal on May 17, 2012 and May 15, aspx.17/See the proposing release, which included: (i) an auditing standard,Related Parties ("proposed standard"); (ii) amendments to certain PCAOB auditingstandards regarding significant unusual transactions; and (iii) other amendments toPCAOB auditing standards (collectively, these are referred to as the "proposed standardand amendments").18/See the reproposing release, which included: (i) an auditing standard,Related Parties ("reproposed standard"); (ii) amendments to certain PCAOB auditing
PCAOB Release No. 2014-002June 10, 2014Page 8of commenters, including audit firms serving companies of all sizes, were supportiveoverall of the need to improve existing standards in these critical areas. During thestandard-setting process, the Board considered various alternatives, including someproposed by commenters, in order to develop new requirements that would promoteinvestor protection, but that also would provide opportunities for efficientimplementation. After considering the comments received on the reproposal, the Boardis adopting the standard and amendments substantially as reproposed.In general, the Board's new performance requirements for auditors are designedto promote heightened scrutiny in the critical areas, with the goal of promoting theauditor's ability to identify, evaluate, and respond to risks of material misstatement. Thenew requirements represent a targeted approach, focusing on areas that havehistorically reflected increased risks of fraudulent financial reporting and that also maypose increased risks of error. The Board believes that the standard and amendments,which are aligned with the risk assessment standards, represent a cohesive auditapproach that will contribute to audit effectiveness and provide opportunities for anefficient implementation. In the Board's view, the new requirements further the Board'soverall mission of improving audit quality, protecting the interests of investors, andfurthering the public interest in the preparation of informative, accurate, andindependent audit reports.19/II.Background and Need for ImprovementAs described more fully in the Board's proposing and reproposing releases, theBoard developed the standard and amendments against the backdrop of severaldecades of financial reporting frauds involving companies' relationships andstandards regarding significant unusual transactions; and (iii) other proposedamendments to PCAOB auditing standards (collectively, these are referred to as the"reproposed standard and amendments").19/See Section 101 of the Sarbanes–Oxley Act of 2002 ("Sarbanes–Oxley"or the "Act"), Pub. L. 107-204, 116 Stat. 745. Under Section 101 of the Act, the missionof the PCAOB is "to oversee the audit of companies that are subject to the securitieslaws, and related matters, in order to protect
PCAOB Release No. 2014-002 June 10, 2014 Page 5 and disclosure of relationships and transactions between the company and its related parties. The standard supersedes the Board's existing standard, AU sec. 334, Related Parties, (the "existing standard"), which has not been substantively updated since it was issued in 1983.10/ Significant Unusual Transactions: The amendments regarding .
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The PCAOB's inspection program also covers foreign accounting firms that audit, or participate in audits of, U.S. public companies. Over 800 foreign firms are registered with the PCAOB, and these firms may audit foreign companies that have issued U.S.-traded securities or foreign subsidiaries of U.S.-based companies.
Public Company Accounting Oversight Board 2020 Annual Report 5 MESSAGE FROM THE CHAIRMAN The PCAOB's annual report summarizes our operations and financial results from fiscal year 2020. The PCAOB continues to pursue its five-year strategic plan—first adopted by the Board in 2018 and affirmed annually thereafter. Our plan emphasizes
Marcum & Kliegman LLP Issued by the Public Company Accounting Oversight Board March 9, 2006 PCAOB RELEASE NO. 104-2006-064 THIS IS A PUBLIC VERSION OF A PCAOB INSPECTION REPORT PORTIONS OF THE COMPLETE REPORT ARE OMITTED FROM THIS DOCUMENT IN ORDER TO COMPLY WITH SECTIONS 104(g)(2) AND 105(b)(5)(A) OF THE SARBANES-OXLEY ACT OF 2002
Accounting Oversight Board (PCAOB)) an engagement under PCAOB standards with a period-end during the peer review year. b. The firm is a provider of quality control materials (QCM) (or affiliated with a provider of QCM) that are used by firms that it peer reviews. Firms that are not required to have their review administered by the NPRC may choose
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Wilton, CT 06897 USA www.deloitte.com . Securities and Exchange Commission Office of the Secretary August 25, 2011 Page 2 The Proposed Rule would become effective prior to the proposed PCAOB attestation and auditing standards for broker-dealers, which were issued for public comment on July 12, 2011.2 The PCAOB’s
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