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 Statement on the Reproposed Auditing Standard on Related Parties and Reproposed Amendments to Certain PCAOB Auditing Standards Regarding Significant Unusual Transactions 

DATE: May 7, 2013 
SPEAKER: Lewis H. Ferguson, Board Member 
EVENT: PCAOB Open Board Meeting 
LOCATION: Washington, DC 

I would like to thank the PCAOB staff in our Office of the Chief Auditor and in the other divisions that participated in this process, as well as the SEC staff, for their work on this reproposed standard. I know you have been working hard since our last open meeting approximately one year ago on this subject, and due to your efforts we are here with an improved proposal.

I support the PCAOB's efforts to strengthen the auditor's evaluation of related party and significant unusual transactions. Related party transactions, including transactions between a company and its executive officers or shareholders, as well as significant and unusual transactions, involve areas of utmost importance because such transactions have too often been sources of fraud and material misstatement of financial statements. These risks are present domestically, but we live in an ever more global economy and we have a growing awareness that these transactions are a risk around the world and particularly at companies in emerging markets.

In the Board's original release on these standards, we highlighted the specific risks of material misstatement associated with related party relationships and transactions in Asian markets arising from different ownership structures and cultural factors characteristic of that region. As the Board said in its 2011 Practice Alert on Audit Risks in Certain Emerging Markets, cultural differences, the importance of family ownership structures, ties of management to governments, and spin-offs of emerging market companies from state-owned enterprises pose particular risks of fraud in the context of related party transactions. Undisclosed related party transactions may also be an especially significant concern among smaller issuers (domestic and foreign) that have only recently gone public and that may have engaged in related party transactions while still private companies. Given these risks, current disclosure regimes, particularly in emerging markets, may not in all cases be sufficiently robust when it comes to related party transactions. The Board has already imposed sanctions through settlements in connection with matters in which undisclosed related party transactions were identified as problematic in audits of foreign issuers. At this time, it is especially important that we revise the current standard to elevate the audit work performed in this critical area.

The provision in the standard regarding the auditors' obligations to inform audit committees in detail about the work performed by auditors regarding related parties is a natural and necessary complement to the Board's current focus on improving audit quality by making efforts to reach Audit Committee members. The Board has identified as a near term strategic priority an effort to enhance our outreach to audit committees to constructively engage in areas of common interest. This effort will focus on helping audit committees improve their capacity to understand and evaluate audit quality, including through inspection reports and other reports that the PCAOB prepares. Among other things, this standard aims to ensure that audit committees have the information they need to understand the related party relationships and transactions and any significant, unusual transactions of the issuer whose financial statements they oversee. Better information in these important areas will improve the information audit committees receive from the auditors which will aid audit committees as they evaluate their auditors and audit quality more broadly.

As the staff has detailed, in digesting and implementing the comments received to the original proposal, we have been able to make further improvements to the reproposed standards. All of us on the Board look forward to receiving the public comments on these important standards.

 

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