Dudley W. Murrey, Jeff C. Dodd and Eric R. Markus
July 9, 2014
The Public Company Accounting Oversight Board (PCAOB) recently adopted new Auditing Standard No. 18, Related Parties (AS 18). which significantly revises the standards for the audit of related party transactions 1 by independent auditors of public companies. At the same time, the PCAOB adopted amendments to existing public company auditing standards to address audits of significant unusual transactions and financial relationships and transactions between issuers and their executive officers (Amendments). 2 AS 18 and the Amendments are further expressions of the risk-assessment principles that underlie the PCAOB’s Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement, and are designed to intensify an auditor’s search for, and to heighten the auditor’s scrutiny of, related party transactions, significant unusual transactions and financial relationships and transactions between issuers and their executive officers.
If, as expected, the Securities and Exchange Commission (SEC) approves AS 18 and the Amendments, these new and revised standards will be effective for audits of financial statements for fiscal years starting on or after December 15, 2014. Unless the SEC chooses not to follow the PCAOB’s recommendation that AS 18 and the Amendments should apply to audits of emerging growth companies (EGC), auditors will be required to comply with AS 18 and the Amendments when auditing the financial statements of EGCs and non-EGC issuers alike . 3
Audit committees and management of issuers required to file periodic reports with the SEC should understand the effects that AS 18 and the Amendments will have on audits of issuers’ financial statements and communications of audit committees and management with the auditors. Those effects are certain to include increases in audit fees and in the audit-related time commitments of audit committees and management.
Once approved by the SEC and effective, AS 18 will replace current Auditing Standard Section 334, Related Parties (AU 334). The PCAOB intends for AS 18 to enhance the quality of audits with respect to relationships and transactions between an issuer and its related parties and to improve auditor performance regarding identifying, assessing and responding to the risks of material misstatements in financial statements associated with such relationships and transactions . 4
New audit procedures. Once effective, AS 18 will require auditors, among other things, to:
- perform specified audit procedures to obtain an understanding of the issuer’s relationships and transactions with its related parties, including the nature of those relationships and the terms and business purposes of the transactions;
- evaluate whether the issuer has identified all of its related parties and its relationships and transactions with all of its related parties. This evaluation will require the auditor to perform additional audit procedures to test the accuracy and completeness of management’s identification of the issuer’s related parties and its related party relationships and transactions ; 5
- perform specified procedures regarding each related party transaction required to be disclosed in the financial statements or determined by the auditor to be a significant risk to the issuer and specific, additional procedures regarding related parties and related party transactions not previously disclosed by management to the auditor;
- discuss with the audit committee or its chair, preferably early in the audit process, the audit committee’s understanding of any related party transactions that are significant to the issuer and whether any audit committee member has concerns regarding the issuer’s relationships and transactions with related parties and, if so, the nature of those concerns; and
- communicate to the issuer’s audit committee the auditor’s evaluation of the issuer’s identification of, accounting for and disclosure of the issuer’s relationships and transactions with its related parties and any other significant matters relating to the audit of those relationships and transactions.
Auditors will be required to do more extensive diligence regarding an issuer’s related party transactions to comply with AS 18’s requirements, including inquiring of other persons within the issuer that the auditor identifies as being likely to have knowledge about the issuer’s related party transactions, including knowledge regarding, among other matters, the identity of the issuer’s related parties and their relationships with the issuer, the existing related party transactions entered during the audit period, the business purposes that led the issuer to enter into those transactions with a related party and not with an unrelated person, and the issuer’s controls over and approval of the related party transactions. 6 Such due diligence will also include evaluating, with respect to any transaction that the auditor determines to present a significant risk to the issuer, the financial capability of the related party involved in such transaction to perform any performance obligations the related party has to the issuer and whether the recorded values of the issuer’s assets relating to those obligations fairly reflect that capability.
Although AU 334 addressed some of the same matters as AS 18 addresses, AS 18 will require auditors to conduct additional, as well as more thorough, procedures regarding related party relationships and transactions. It also provides specific directions as to some of the audit procedures to be performed. Audit committee members and management should be particularly aware that AS 18 contains provisions that will sharpen the focus of auditors on a number of matters during their audits, including:
- determining whether any related party and any related party relationships and transactions were not previously disclosed to the auditor by management and the reasons for the non-disclosure;
- evaluating the nature of the business purpose of, or, as a matter of increased importance under AS 18, any lack of a business purpose for, a related party transaction in order to assess the risk of the transaction giving rise to a material misstatement in the financial statements; and
- determining whether each related party transaction has been authorized and approved under the issuer’s policies and procedures for the authorization and approval of related party transactions or whether the related party transaction was granted an exception from authorization and approval pursuant to those authorization and approval policies and procedures.
Assertions of equivalence with terms of arm’s-length transactions. As did AU 334, AS 18 addresses assertions in an issuer’s financial statements that a related party transaction was on terms equivalent to those that could be obtained in an arm’s-length transaction. AS 18 toughens an AU 334 requirement by requiring the auditor to express a qualified or adverse opinion on the audited financial statements containing such an equivalence assertion if the auditor is unable to obtain sufficient audit evidence to substantiate that assertion and management will not modify the disclosure . 7
Of particular interest in this regard is a note to paragraph 18 of AS 18 indicating that for non-routine transactions it may not be possible for management to determine whether a particular transaction would have taken place or what the terms or manner of settlement of the transaction would have been if the other party to the transaction had not been related to the issuer, and, accordingly, it may be difficult for the auditor to obtain sufficient audit evidence to substantiate management’s equivalence assertion. Inclusion of phrases such as “management believes that” or “it is the company’s belief that” in connection with an equivalence assertion in an issuer’s financial statements will not change the auditor’s responsibilities regarding the nature of its opinion on the financial statements. It remains to be seen if auditors will consider the statements in the note to paragraph 18 as creating a higher standard that they must meet to give an unqualified opinion on audited financial statements containing an equivalence assertion. As a result, issuers should carefully consider whether they have sufficient justification for any equivalence assertion regarding a related party transaction before including that assertion in their future financial statements.
Audit committee communications. Audit committees and management should be aware that AS 18 will require auditors to engage in communications with audit committees in addition to those currently required by AS 16. Foremost among the new communication requirements is the requirement that the auditor communicate to the audit committee its evaluation of the issuer’s identification of, accounting for, and disclosure of its relationships and transactions with related parties. In addition, the auditor will be required to communicate to the audit committee in connection with every audit:
- each related party or relationship or transaction with a related party identified by the auditor that was not previously disclosed to the auditor by management;
- any significant related party transaction that was not authorized or approved in accordance with the issuer’s applicable approval policies and procedures and any significant related party transaction as to which an exception from those policies and procedures was granted;
- the inclusion of any statement in the financial statements that a related party transaction was conducted on terms equivalent to those in an arm’s-length transaction and the evidence obtained to support or contradict such an assertion; and
- the identification of any significant related party transaction appearing to lack a business purpose.
Appearances aside, AS 18 was not adopted to make the auditor sit in judgment of the appropriateness, reasonableness or legality of related party transactions. Rather, the PCAOB has adopted AS 18 to ensure that auditors obtain appropriate audit evidence that such transactions are identified, properly accounted for and properly disclosed in an issuer’s financial statements.
Amendments related to significant unusual transactions . The Amendments revise AS 5’s definition of “significant unusual transactions” to be significant transactions “that are outside the normal course of business for the company or that otherwise appear to be unusual due to their timing, size or nature.” 8 The PCAOB has focused on significant unusual transactions because of the risks it perceives such transactions to present for material misstatements in financial statements. In particular, such transactions are viewed as raising concerns that the issuer may be engaged in the transactions for other than legitimate business purposes. As a consequence, these Amendments will require the auditor to perform specified procedures to identify and obtain information with which to evaluate significant unusual transactions and to enhance its evaluation of their business purposes and the issuer’s reporting of such transactions.
New audit procedures required by the Amendments are intended to give the auditor an understanding of the business purpose of each significant unusual transaction the auditor identifies or to help the auditor determine if the transaction lacks a business purpose. These procedures are similar to the procedures relating to the assessment of related party transactions prescribed in AS 18, and focus on the authorization of the related party transaction, the financial capability of the third party to the transaction to perform its obligations to the issuer and the commercial or economic substance of the transaction or any series of related, connected or interdependent arrangements.
The Amendments will modify the current auditing standards to refocus the auditor’s inquiries regarding significant unusual transactions. Where paragraph .67 of AU 316 currently indicates factors that an auditor should consider in evaluating the “business rationale” of a significant unusual transaction, new paragraph .67 of AU 316 will require the auditor to evaluate whether the transaction’s business purpose (or lack thereof) is indicative of a transaction entered to engage in fraudulent financial reporting or to conceal misappropriation of assets and sets out an enhanced list of matters for the auditor to consider in making that evaluation.
Amendments related to executive compensation . Furthering the PCAOB’s theme of enhancing auditors’ review and evaluation of transactions that create risks of material misstatements, the Amendments add new paragraph 10A to AS 12. New paragraph 10A will require the auditor to perform auditor-designed procedures to obtain an understanding of a company’s financial relationships and transactions with its executive officers, 9 including executive compensation, perquisites and other arrangements, to identify and assess any risks of a material misstatement in the issuer’s financial statements arising out of any such relationships and transactions. Paragraph 11 of AS 12 currently requires auditors to review compensation arrangements with senior management, including executive officers, but only as a part of the auditor obtaining an overall understanding of the issuer. This current requirement is being amended so that the auditor will review, in addition to the compensation arrangements of the issuer’s executive officers, the compensation arrangements of the members of senior management other than the issuer’s executive officers as part of its efforts to gain an overall understanding of the issuer. In addition, these Amendments will now require the auditor to make inquiries of the chair of the compensation committee of the issuer’s board and any compensation consultant engaged by the compensation committee or the issuer regarding the structuring of the company’s compensation for its executive officers and to obtain an understanding of the issuer’s policies and procedures for authorizing and approving executive officer expense reimbursements.
These Amendments to AS 12 are driven by the PCAOB’s belief that auditors must understand the financial relationships between the issuer and its executive officers as well as the incentives or pressures for the issuer to achieve a particular financial position or operating result that may lead officers to influence accounting decisions or financial reporting to achieve various ends. The PCAOB is concerned that such financial relationships that result in material misstatements in the financial statements intended to, among other things, “dress up” balance sheets and income statements at the end of a reporting period to make the issuer’s results of operations and financial condition for and at the end of the period look better than they actually were, to meet the earnings expectations of analysts and others or to meet internal financial targets, to increase the issuer’s stock price, or to allow the issuer to meet performance goals that affect executive compensation.
When the PCAOB originally proposed these changes to its auditing standards, commentators voiced concerns that auditors would be required to assess the appropriateness or reasonableness of an issuer’s executive compensation arrangements. 10 In its re-proposal of the changes 11 and in the Release, the PCAOB makes clear that the auditor’s work relating to an issuer’s financial relationships and transactions with its executive officers, including executive compensation arrangements, does not include assessing the appropriateness or reasonableness of executive officer compensation arrangements.
New management representations required. Amendments to AU section 333, “Management Representations,” will cause auditors to obtain from management new and enhanced written representations as to related party relationships or transactions, including representations that management has no knowledge of related party transactions that are undisclosed or are improperly accounted for and disclosed and as to the absence of undisclosed side agreements. These written representations must be obtained even if the result of the audit procedures performed has indicated that all related party relationships and transactions have been properly accounted for and adequately disclosed.
Other amendments. The Amendments include amendments to the standards relating to auditors’ reviews of interim financial statements that focus on the review of related party transactions pertinent to the interim financial statements. In addition, the PCAOB has adopted amendments to ensure that members of an audit team are exchanging information about related party transactions, including those with executive officers, and significant unusual transactions and, where pertinent, communicating about such matters with any recent predecessor auditor of an issuer. Other technical amendments will modify other existing auditing standards to reflect the adoption of the new and revised auditing standards.
Implications for Issuers
AS 18 and the Amendments are highly likely to affect the audits of most issuers, including EGC issuers if the SEC decides to follow the PCAOB’s recommendation that AS 18 and the Amendments should apply to EGC audits.
Increased costs and time commitments. Depending on an issuer’s circumstances, the degree to which the revised auditing standards will increase audit fees and the audit-related time commitments of audit committee members, management and other persons associated with an issuer may vary significantly from issuer to issuer. Many auditors have already been performing procedures intended to achieve the goals of AS 18 and the Amendments and may even be providing audit committees with some, or much, of the information to be provided in accordance with the new communication requirements. For issuers with such auditors, the requirements of the new audit procedures and communications may result in little additional burden on the audit committee and management and relatively insignificant additional audit expense. Other issuers may see noticeable increases in their audit fees and in the burden on management and audit committee time.
Increased auditor scrutiny. Regardless of their auditor’s current audit procedures, issuers should expect
to see their auditors perform new procedures that will represent a step-up in the auditors’ scrutiny of related party transactions and transactions fitting within the new definition of “significant unusual transactions.” Moreover, issuers with transactions of the type subject to this heightened scrutiny should see their auditors assessing the business purpose of those transactions or, more ominously, the perceived lack of a business purpose and determining whether each of those transactions were properly approved in accordance with the issuer’s existing corporate governance procedures. The auditors can also be expected to do so with greater skepticism about such matters and whether related party relationships and transactions and significant unusual transactions are free of risks of attempted fraudulent financial reporting or concealment of misappropriations of assets. The auditor may be much more likely to view an issuer’s related party transactions, significant unusual relationships and financial relationships and transactions with executive officers as presenting plausible risks of fraud or erroneous accounting than in the past.
Auditors are likely to gather from management and others more information on the issuer’s related parties, related party relationships and transactions and significant unusual transactions, and spend more time interviewing individuals associated with the issuer as well as related parties who are not directors or employees of the issuer regarding these matters than auditors have done in the past. They may do so from a more adversarial stance than in the past. Auditors will likely plan and execute their audits knowing that the PCAOB will concentrate on an auditor’s efforts to identify undisclosed related parties and related party relationships and transactions and the auditor’s reviews and assessments of the issuer’s related party relationships and transactions, significant unusual transactions and financial relationships and transactions with executive officers when the PCAOB conducts its inspections of the auditors’ first audits of financial statements performed under the revised auditing standards. Moreover, many auditors may not wait for the audit of the financial statements for an issuer’s first fiscal year commencing on or after December 15, 2014 to adhere to the revised auditing standards, and instead conduct their audit of issuer’s financial statements for the current fiscal year under part or all of the revised auditing standards.
Restatement concerns. The adoption of the revised auditing standards raises an additional, quite troubling potential concern for issuers. As more rigorous procedures are performed by the auditor, it is possible that the auditor may identify one or more previously undisclosed relationships or transactions with related parties, including executive officers, or new information regarding a relationship or transaction with a related party or a significant unusual transaction that was in effect or occurred in a prior audit period. In such an event, the auditor may reassess the prior period’s audited financial statements to determine if those financial statements contained a material misstatement as a result of the existence of the previously undisclosed relationship or transaction or as revealed by the new information obtained regarding a relationship or transaction. In the worst of such instances, an auditor may feel compelled to withdraw its audit report on the prior period’s financial statements, as well as its related report on its audit of the issuer’s internal control over financial reporting. The consequence of such an event could be the restatement and re-audit of the issuer’s prior year financial statements and internal control over financial reporting. Such consequences will come with all the attendant problems that result from a restatement, including highly undesirable disclosures and, depending on the timing of SEC and securities exchange rulemakings to implement the executive compensation clawback mandate of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the clawback of executive compensation from some executive officers.
Impact on reporting time tables. The additional and expanded audit procedures, increased auditor scrutiny and informational requirements associated with AS 18 and the Amendments could affect an issuer’s annual reporting time table. More extensive audit procedures and diligence and longer review times of documentation and an issuer’s SEC filings by the auditor could require an issuer to accelerate its audit schedule, if possible, to ensure that the issuer will be able to meet the filing deadlines for its Form 10-Ks. The Amendments may also affect, although to a lesser degree, the time an auditor will take to review the interim financial statements to be included in Form 10-Qs, and any possible significant increase in the time for such reviews should be considered in connection with setting the issuer’s schedule for preparation of its Form 10-Qs. Issuers that are active in the capital markets or are considering accessing the capital markets should discuss with their auditor if and how AS 18 and the Amendments will affect the auditor’s performance of its tasks in connection with an offering of securities by the issuer.
Action Items for Audit Committees and Management
In preparation for auditors performing audits of financial statements in compliance with AS 18 and other auditing standards as amended by the Amendments, an issuer’s audit committee, its principal accounting officer and other appropriate members of management should consider doing, among other things, the following:
- familiarize themselves with AS 18 and the Amendments;
- discuss with their auditor how the auditor expects its audit procedures will change as a result of the adoption of AS 18 and the Amendments and how the changes in those procedures will affect the issuer’s reporting time tables;
- reassess and modify, if and as appropriate: (1) the issuer’s accounting policies and procedures and internal control over financial reporting to ensure that they are effective to permit management to identify all of the issuer’s related parties, its related party relationships and transactions in existence, its significant unusual transactions (as the term will be redefined) and all financial relationships and transactions with executive officers; and (2) how the issuer accounts for and discloses those transactions or relationships;
- management, working with the audit committee, should act quickly to make any necessary improvements to these controls, policies and procedures to ensure that the issuer’s auditor will not encounter misstatements in the issuer’s financial statements in connection with these relationships and transactions;
- management should consider whether its controls, policies and procedures are adequate to allow the issuer’s accounting group and internal audit group to spot red flags that could indicate the existence of previously unidentified related parties or related party transactions or relationships or that any related party relationship or transaction or any significant unusual transaction presents a significant risk of causing a material misstatement in the issuer’s financial statements ; 12
- review the issuer’s disclosure controls and procedures and internal control over financial reporting to determine if changes should be made to ensure that the issuer will be able to provide to its auditor on a timely basis all of the information necessary to permit the auditor to comply with the revised auditing standards and modify its disclosures controls and procedures and internal control over financial reporting as appropriate;
- both the audit committee and management should review the issuer’s procedures for identifying its related parties as defined for purposes of AS 18 and related party transactions, keeping in mind that the definition of “related parties” for accounting purposes is very different from the definition of “related persons” set forth in Item 404(a);
- review the issuer’s policies and procedures relating to the issuer entering into relationships and transactions with its related parties, how those relationships and transactions are authorized and approved, including how the business purpose of such relationships and transactions is assessed in the authorization and approval process and how exception requests are handled, and make any appropriate modifications to those policies and procedures;
- consideration should also to be given to if and how any modifications to those policies and procedures will require new or different disclosure of the issuer’s policies and procedures for the review, approval, or ratification of related person transactions pursuant to Item 404(b) of Regulation S-K in the issuer’s Form 10-Ks, proxy statements and registration statements;
- review the issuer’s policies and procedures relating to authorizing and entering into significant transactions, especially those outside the ordinary course of business or that are unusual due to their timing, size or nature, and to assessing whether those policies and procedures create risks that such a transaction may be entered into in order to engage in fraudulent financial reporting or to conceal a misappropriation of assets, and make any appropriate modifications to those policies and procedures;
- the audit committee and management should consider any existing delegations of authority to authorize and approve such transactions or any subset of such transactions made by the board of directors to members of management and the risks any such delegation may create of material misstatements in the issuer’s financial statements;
- if the issuer has historically asserted in its financial statements that the terms of one or more related party transactions were equivalent to those prevailing in an arm’s-length transaction, review the policy for making such statements and the standards in that policy for the type of support the issuer must have to make such equivalence assertions and modify that policy as appropriate;
- notify the compensation committee and the issuer’s and the compensation committee’s compensation consultants that the auditor will soon begin to make inquiries of them regarding the structuring of the issuer’s executive compensation;
- review and modify, if and as necessary, the issuer’s policies and procedures for approving executive officer expense reimbursements; and
- discuss with the auditor the changes that will be required in management’s representation letter to be provided under amended AU section 333.
Andrews Kurth advises numerous public companies, including publicly traded partnerships, in a variety of industries and will continue to follow developments related to the topic of this client alert and other PCAOB and SEC rulemaking and guidance.
If you would like more information about the subject of this client alert and other securities law developments, please contact an Andrews Kurth attorney in the Corporate/Securities practice section .
1. Topic 850 of the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) requires disclosure of material related party transactions in the financial statements. The SEC’s Regulation S-X requires separate presentation of accounts receivable from related parties and accounts payable, notes payable and the non-current portion of indebtedness to issuers of related parties on balance sheets, of related revenues and expenses in income statements and of related cash items in cash flow statements. As a result of the lack of materiality of the related party transactions, such items are frequently not presented as separate line items in the various financial statements of issuers, but are disclosed in the notes to the financial statements, if at all.
2. AS 18 and the Amendments are set forth and discussed in Auditing Standard No. 18 - Related Parties, Amendments to Certain PCAOB Auditing Standards Regarding Significant Unusual Transactions and Other Amendments to PCAOB Auditing Standards, PCAOB Release No. 2014-002 (June 10, 2014) (Release), available at http://pcaobus.org/Rules/Rulemaking/Docket038 /Release_2014_002_Related_Parties.pdf . The Amendments relating to the audit of significant unusual transactions modify Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements (AS 5), Auditing Standard No. 9, Audit Planning, Auditing Standard No. 12, Identifying and Assessing Risk of Material Misstatement (AS 12), Auditing Standard No. 13, The Auditor’s Responses to the Risks of Material Misstatement, Auditing Standard No. 16, Communications with Audit Committees (AS 16), AU section 316, “Consideration of Fraud in a Financial Statement Audit” (AU 316), and AU section 722 “Interim Financial Information.” The details and text of AS 18 and the Amendments can be found in Appendices 1 - 3 of the Release and further discussion of AS 18 and the Amendments is included in Appendix 4 to the Release.
3. Section 104 of the Jumpstart Our Business Startups Act provides that any PCAOB rules adopted after April 5, 2012 do not apply to the audits of EGCs unless the SEC “determines that the application of such additional requirements is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation.” As a result, even if the SEC approves AS 18 and the Amendments it must make a separate determination regarding the applicability of AS 18 and the Amendments to the audits of EGCs.
4. Release at 18. AS 18 uses the term “related parties” as it is defined in Rule 1-02 of the SEC’s Regulation S-X, which defines “related parties” by reference to the definition of that term in the Master Glossary of the ASC. The ASC’s Master Glossary defines the term “related parties” to mean: (1) affiliates of an issuer; (2) principal (i.e.. more than 10%) owners of the issuer and members of their immediate families; (3) management of the issuer and members of their immediate families; (4) entities for which investment in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of ASC Section 825-10-15, to be accounted for by the equity method by the issuer; (5) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (6) other parties with which the issuer may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (7) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transaction parties might be prevented from fully pursuing its own separate interests. For these purposes, “management” is defined as persons who are responsible for achieving the objectives of the issuer and who have the authority to establish policies and make decisions by which those objectives are to be pursued and “members of the immediate family” are family members who might control or influence a principal owner or a member of management, or who might be controlled or influenced by a principal owner or a member of management, because of the family relationship. Obviously, “related parties” for purposes of financial statement preparation and disclosure are different from “related persons” as defined in Instruction 1 to Item 404(a) of Regulation S-K (404(a)), which relates to disclosure of related person transactions in or to be incorporated by reference in certain filings with the SEC, including registration statements under the Securities Act of 1933, as amended, annual reports on Form 10-K, proxy statements and information statements.
5. Appendix A to AS 18 sets forth a list of examples of the types and sources of information that may indicate or provide evidence that previously undisclosed related parties or relationships or transactions with related parties may exist.
6. Such other persons may include personnel of the issuer who may initiate, process or record related party transactions and those supervising or monitoring such personnel, as well as internal auditors, in-house counsel, chief compliance/ethics officers and human resources directors. See Release, Appendix 1 at A1-4.
7. See Release, Appendix 1 at A1-11.
8. See Release, Appendix 2 at A2-1.
9. Appendix A to AS 12 will be amended to specify that, for purposes of AS 12, “executive officer” means, for non-broker-dealer issuers, the issuer’s president, any vice president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function or any other person performing a similar policy-making function for the issuer. Executive officers of an issuer’s subsidiaries may be deemed executive officers of the issuer if they perform policymaking functions for the issuer.
11. See Proposed Auditing Standard–Related Parties, Proposed Amendments to Certain PCAOB Auditing Standards Regarding Significant Unusual Transactions and Other Proposed Amendments to PCAOB Auditing Standards, PCAOB Release No. 2013-004 (May 7, 2013), available at http://pcaobus.org/Rules/Rulemaking/Docket038/Release%202013-004_Related%20Parties.pdf .
12. Appendix A to AS 18, as set forth in the Release, provides examples of information that may be gathered during the audit that could indicate related parties or relationships or transactions with related parties were previously undisclosed to the auditor.