Earlier this week the SEC approved, without amendment, the PCAOB’s new auditing standards that expand audit procedures required to be performed with respect to three important areas: (1) related party transactions; (2) significant unusual transactions; and (3) a company’s financial relationships and transactions with its executive officers (including executive compensation). The standards also expand the required communications that an auditor must make to the audit committee related to these three areas and amend the standard governing management representations that the auditor is required to periodically obtain. See SEC Release No. 34-73396, Order Granting Approval of PCAOB’s Proposed Rules on Auditing Standard No. 18, Related Parties, Amendments to Certain PCAOB Auditing Standards Regarding Significant Unusual Transactions (October 21, 2014), available at http://www.sec.gov/rules/pcaob.shtml.
Notably, the SEC retained the PCAOB’s proposed effective date, and as a result, the new and amended standards will become effective for audits of financial statements for fiscal years beginning on and after December 15, 2014.
As noted in our blog about the PCAOB’s adoption of the new standard, available here, there are several steps companies should consider taking in light of the new standards, including:
- In view of the expansion of procedures auditors must perform on related party transactions, companies should focus on ensuring that appropriate authorizations and approvals are in place and documented for these transactions.
- Audit committees should be briefed about the expanded set of communications they can anticipate receiving from the auditor concerning related party transactions and significant unusual transactions. In this regard, we anticipate that auditors will communicate with audit committees about compensation arrangements. Companies will want to consider whether the compensation committee (or its chair) also should be part of those discussions.
- Companies should review related party transaction policies to evaluate whether any changes should be made in light of the new standard, including whether the responsibility for overseeing such policy should be shifted to the audit committee if not already the case.
- Companies should be prepared to address the expanded set of required management representations about related party transactions and significant unusual transactions.