PCAOB Auditing Standards: PCAOB Adopts New Auditing Standard for Related Party Transactions and Amendments Regarding Transactions and Relationships with Executive Officers and Significant Unusual Transactions

Sullivan & Cromwell LLP - June 19, 2014

The Public Company Accounting Oversight Board has adopted Auditing Standard No. 18, Related Parties, addressing audit procedures used to evaluate transactions and relationships between a company and its related parties.  Under the new standard, the auditors must (i) perform specific procedures to obtain an understanding of a company’s relationships and transactions with related parties, (ii) perform more in-depth procedures in response to risks of material misstatement associated with these relationships and transactions, (iii) communicate with the audit committee or its chair to obtain information specifically regarding related party transactions during the auditor’s risk assessment, and (iv) communicate to the audit committee or its chair the auditor’s evaluation of the company’s identification of, accounting for, and disclosure of related party relationships and transactions.

The Board also adopted amendments that prescribe specific audit procedures intended to improve the auditor’s identification and evaluation of significant unusual transactions and the auditor’s review of financial relationships and transactions with executive officers.
Although the new standard and amendments are directed at auditors, not issuers, SEC-reporting companies should consider the extent to which their audit committee agendas should be updated to take into account the new required communications with the auditor.  In addition, companies should note that the auditor will be required to inquire of the chair of the compensation committee or its equivalent and any compensation consultants engaged by either the committee or the company regarding the structuring of the company’s compensation for executive officers.

Auditing Standard No. 18 and related amendments are subject to SEC approval. Subject to that approval, the PCAOB anticipates that the new standard will be effective for audits and quarterly reviews for fiscal years beginning on or after December 15, 2014.