Last week the SEC approved new PCAOB rules regarding:

• Company relationships and transactions with related parties,

• “Significant unusual transactions”, and
• Company relationships and transactions with its executive officers.

These three areas were selected for enhanced auditor requirements because of the frequency with which they generate material misstatements in a company’s financial statements or outright financial fraud.

New Auditing Standard No. 18 will take effect for audits of fiscal years beginning on or after December 15, 2014.

What changed?

The new rules are designed to strengthen auditor requirements for identifying, assessing and responding to the risks of material misstatements by requiring the auditor to, among other things:

• Perform certain procedures to understand these relationships and transactions,
• Evaluate whether the company has properly identified these relationships and transactions, and
• Communicate to the audit committee the auditor’s evaluation of how the company identifies, accounts for and discloses such relationships and transactions.

Governance Action Steps.

Companies should anticipate enhanced auditor scrutiny of related party and executive officer relationships and transactions. Looking at this from a corporate governance perspective, companies should:

• Confirm that all necessary authorizations are properly worded and effective,
• Brief the audit committee regarding the new audit procedures and communications,
• Evaluate whether existing relationships and transactions can withstand the enhanced scrutiny and whether any modifications or additional documentation is in order,
• Confirm that proper internal procedures are in place to identify all such relationships and transactions and prepare any necessary disclosures, and
• Modify the company’s related party policy to the extent necessary to ensure the foregoing.