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An analysis of the guidance in the Professional Issue Task Force's practice alert
In response to a recommendation of the Public Oversight Board (POB) of the SEC Practice Section (SECPS) of the AICPA's Division for CPA firms in the report In the Public Interest-Issues Confronting the Accounting Profession, the SECPS executive committee established the Professional Issues Task Force (PITF). The PITF is charged with reviewing and examining practice issues that appear to present audit concerns for practitioners. It accumulates such information and disseminates specific guidance relating to these issues in the form of practice alerts (PA). The task force is also responsible for referring matters that may require a reconsideration of existing standards to the appropriate standard setters.
An important practice alert was issued in 1995 setting forth guidance for auditing related parties. Beginning with the Continental Vending case in the 1960s, related party transactions have been a way in which perpetrators of financial statement fraud have crafted their work at the expense of unsuspecting auditors and the public. While related party transactions are not inherently bad, they have proven to be an easy and effective way for perpetrators to misstate the economic substance and reality of financial transactions.
The standard setters have had difficulty in providing guidance about related party transactions. Following the Continental Vending adversity, the first guidance on the presentation of related party transactions in financial statements appeared in, of all places, an SAS (SAS No. 6-July 1975) issued by the AICPA's Auditing Standards Board (ASB). It pointed out the inherent measurement difficulties with related party transactions, which by their nature may not be comparable to what would have transpired had the transactions taken place between unrelated third parties. It concluded that disclosure was the overriding principle that should govern related party transactions. Finally, in Statement of Financial Accounting Standard (SFAS) No. 57, Related Party Disclosures, the FASB issued guidance on accounting for and disclosing related party transactions, which took the same approach as the ASB. After the issuance of SFAS No. 57, SAS No. 6, with its accounting guidance, was superseded by SAS No. 45, Related Parties
In general, the PITF issues PAs to provide auditors with information that may help them improve the efficiency and effectiveness of their audits....