Accounting & Auditing

Related-Party Transactions Soon to Receive Increased Auditor Scrutiny

October 2014

Since enactment of the Sarbanes-Oxley Act in 2002, the Public Company Accounting Oversight Board has adopted—and the U.S. Securities and Exchange Commission (SEC) has approved—16 auditing standards. The adoption of its newest auditing standard—Auditing Standard (AS) No. 18, Related Parties—on June 24, 2014, requires specific audit procedures for the auditor's evaluation of a company's identification of, accounting for and disclosure of transactions and relationships between a company and its related parties. The standard also imposes new requirements for the auditor to communicate to the company’s audit committee the auditor’s evaluation of the company’s identification of, accounting for and disclosure of its relationships with related parties.

The standard and amendments direct the auditor to consider the linkage, or “connect the dots,” between a company’s relationships and transactions with related parties, significant unusual transactions and financial relationships and transactions with its executive officers. If not properly scrutinized, these transactions historically have contributed to increased risk of financial reporting fraud and material misstatement of the financial statements; they also may pose an increased risk of error.

AS No. 18 supersedes the board's interim auditing standard, AU Section 334, Related Parties. The SEC approved AS No. 18 on October 22; it will be effective for fiscal years beginning on or after December 15, 2014, including reviews of interim financial information within these fiscal years.

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