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.