The Public Company Accounting Oversight Board has proposed another new auditing standard, this time to steer auditors toward more careful assessments of transactions with related parties or other significant unusual transactions.

The proposed new standard, titled “Related Parties,” is intended to improve the auditor's evaluation of how public companies handle transactions with related parties – such as subsidiaries, affiliates, or even family members where business may not be done fully at arm's length. Some related amendments would also instruct auditors to take more careful note of significant unusual transactions and get more familiar with a company's financial relationships with its executive officers.

Chairman James Doty said the board proposed the standard because such transactions have featured prominently in many of the financial failures that have unfolded in the past decade, beginning most notoriously with Enron and continuing with recent allegations related to companies in emerging markets, such as China. “Auditors have a unique vantage point from which to identify questionable transactions,” he said during an open meeting as the board voted to propose the new rules. “We want this standard and the related amendments to improve auditors' focus and help stem investor losses.”

The proposed standard and amendments are intended to improve how auditors assess a public company's work to identify, account for, and disclosure transactions that stem from related parties. The idea is to improve the auditor's focus on areas where there may be increased risk of misstatement as a result of relationships, and in some cases relationships that may not even be fully evident to auditors. The new rules would align with and build on the board's risk assessment standards, said PCAOB Chief Auditor Martin Baumann.

Under existing accounting rules, companies are required to identify, account for, and disclose relationships and transactions with related parties, where cozy connections may result in terms and conditions that are not typical. The PCAOB says related party transactions involve difficult measurement and recognition issues and have been used to carry out financial statement fraud and asset misappropriation. Significant transactions that are outside the normal course of business based on their nature, size, or timing pose similar risks, the board says. Even further, incentives and pressures on executive officers to meet financial targets an result in misstatements that auditors need to catch.

The proposed standard would give auditors new direction on evaluating a company's handling of such transactions and developing a thorough understanding of a company's financial relationships and transactions with executive officers to assure risks are identified and addressed. The proposal is open for comment through May 15.

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