* Proposed rule aims to improve audits of insider deals
* Insider deals figured in many China-based company frauds
* Auditors given too much latitude on related-party deals
By Dena Aubin
May 7 Corporate auditors would be required to
look more closely at insider business deals, like those used in
many Chinese company frauds, under a rule the U.S. audit
regulator proposed on Tuesday.
The Public Company Accounting Oversight Board's rule takes
aim at so-called "related party transactions," or deals between
a company and corporate insiders. These kinds of transactions
have played a role in many accounting frauds.
Over the past two years, investors have suffered massive
losses after U.S.-listed companies based in China funneled
company assets to insiders in improper business deals.
In February, China-based petrochemical company Keyuan
Petrochemicals Inc agreed to pay $1 million to settle
securities fraud charges involving related-party transactions.
Greater auditor scrutiny "can help to avert the corporate
failures and job losses we read about all too often once it's
too late," PCAOB Chairman James Doty said at a PCAOB meeting.
The board is seeking comments from the public on the
proposed rule through July 8. It could take effect as early as
next year, a PCAOB staff member said at the meeting.
Auditors are allowed too much latitude in how they deal with
related-party transactions under current rules, PCAOB Chief
Auditor Martin Baumann said at the Washington meeting.
Baumann cited a long history of frauds committed through
unusual transactions. Former energy trader Enron Corp, for
example, set up joint ventures that drained company funds and
were not well-understood by investors, he said.
Enron's devastating collapse in 2001 helped spur Congress to
create the PCAOB and toughen regulation of corporate auditors.
In addition to related-party transactions, the new PCAOB
rule would require auditors to take a closer look at executives'
pay to see if it creates incentives to manage earnings.
Auditors would not assess if executives' pay is reasonable,
but would review it to see if it puts pressure on executives to
meet financial targets, board member Jay Hanson said.
Many executives' bonuses are tied to earnings targets, a
structure meant to align their interests with shareholders. But
pressure to meet targets for bonus pay has often been a motive
for accounting fraud, according to academic studies.
Tuesday's proposal was a revision of an audit standard first
proposed in February 2012. The rule was tweaked to clarify some
requirements but follows the same basic approach, Hanson said.
Auditors would have to review related-party transactions,
determine if they pose a significant risk and discuss them with
the audit committee, he said. They would also have to look at
significant unusual transactions to be sure they were not used
for fraudulent purposes, he said.