Friday, June 08, 2012

Global Audit Groups Seek Alignment of PCAOB Proposed Standard on Related Parties with Int’l Audit Standards

The new proposed PCAOB standard on related parties introduces a closer alignment with the equivalent international audit standard issued by the IAASB, said the European Federation of Accountants in a comment letter to the Board. However, differences remain as displayed in the comparative analysis. Given that related parties often have cross-border elements in large companies, the Federation believes that differences in audit standards regarding the audit of related parties should be kept to a minimum with differences only arising from specific national requirements.

Similarly,  while reaffirming its commitment to the global convergence of auditing standards in its comment letter, the Institute of Chartered Accountants in England and Wales was saddened that the analysis of differences between PCAOB, AICPA and IAASB requirements in this area consisted of repeating verbatim the requirements of the various bodies with no attempt to explain or justify the differences. While it is appropriate for national standard-setters to challenge the IAASB, acknowledged the ICEAW, in order for this to happen the PCAOB needs to demonstrate confidence in its positions by means of proper analyses of the differences between its standards and those of the IAASB.  

In its letter to the Board, the German Auditors Institute, Institut der Wirtschaftsprüfer, welcomed the efforts made to align the proposed standard with the relevant international audit standards as a measure towards the international convergence of auditing standards needed for international capital markets. In comparing the proposed standard with the IAASB’s corresponding standards, however, the Institute noticed a number of instances where the relevant international standards require the auditor to perform procedures directed toward a certain aim, but provide flexibility by guiding the auditor with application material suggesting possible ways in which it might be appropriate for the auditor to tackle this, rather than prescribing a list of procedures to be performed. In contrast, the proposed standard often specifies required procedures.

In other comments, the Federation said that, throughout the standard, it should be highlighted that the responsibility to identify related parties is the one for the company and not the auditor. Similarly, the German Auditors Institute urged the Board to be quite clear that management and not the auditor is responsible for the identification of related parties, and that while the auditor can perform procedures to recognize fraud risk factors that may be associated with related parties, an audit cannot involve extensive or unlimited “fishing expeditions” to identify all related parties. The ICAEW was also concerned that the proposed standard could be read as laying the primary responsibility for identifying related parties at the auditor’s door. The final standard should clarify that the responsibility for identifying related parties, assessing the associated risks and making the required disclosures rests firmly with preparers.

The ICAEW went on to say that internal controls over related parties are not always as good as they could or should be. They urged the PCAOB to clarify in the final standard that the quality of internal controls over the identification of related parties, transactions with them and related
disclosures is critical. 

The Federation said that a true two-way communication between the auditor and the audit committee regarding related parties should be further highlighted. This additional focus on two-way communication in a PCAOB audit standard would give due consideration to a global solution on the matter, noted the Federation, in light of the current European debate on strengthening the role of audit committees and the communication between the auditor and the audit committee.

Communication with the audit committee is proposed to take place during the planning phase of the audit. However, given the current European debate on strengthening the role of audit committees and the communication between the auditor and the audit committee, which also is being debated by the PCAOB, the Federation recommends that a true two-way communication between the auditor and the audit committee be further highlighted.

In the German Institute’s view, there are potential drawbacks to taking a rules-based approach in the area of related parties, including the effect on the expectations gap between what the public expects of an auditor and what an auditor has the power to achieve in practice. The rules-based approach adopted by the PCAOB may leave the impression that auditors are in a position to obtain virtually absolute assurance in relation to related parties. This applies in particular in regard to the identification of related parties.