With its new audit standards and amendments aimed at specific transaction types, the Public Company Accounting Oversight Board (“PCAOB”) has targeted three critical areas in its ongoing efforts to combat financial reporting fraud. The new rules are intended to increase heighten auditor scrutiny regarding (i) related-party deals, (ii) significant unusual transactions, and (iii) financial relationships with executives.
The PCAOB notes that related party deals represent increased risks of material misstatement involving substance over form in that they may:
- “potentially provide more of an opportunity for management to act in its own interests, rather than in the interests of the company and its investors”
- “involve difficult measurement and recognition issues that can lead to errors in financial statements”
- “have been used to engage in fraudulent financial reporting and to conceal misappropriation of assets — types of misstatements that are relevant to the auditor’s consideration of fraud” and
- include “counterparties that are willing to structure transactions to achieve desired accounting results….