Deficiencies in Auditing Related-Party Transactions: Insights from AAERs

SUMMARY: After several high-profile frauds involving related-party transactions, regulators have raised questions as to whether current auditing standards remain appropriate. In this study, we examine 43 SEC enforcement actions against auditors related to the examination of related-party transactions. We conclude that the audit failures in these fraud cases were more the result of a lack of auditor professional skepticism and due professional care than any deficiency in current auditing standards. In other words, revised auditing standards would likely not have prevented these auditing failures, raising questions about the need for auditing standard revision for related-party transactions at this time. Despite this finding, we conclude with some suggestions to improve the auditing of related-party transactions, such as including the discussion of related-party transaction abuse during SAS No. 99 mandated fraud awareness “brainstorming” sessions.