The standards we are proposing today "raise the bar" for what 
            auditors are required to do in auditing related party transactions 
            and other transactions deemed to be significant and unusual. 
            Investors have been harmed in the past by frauds perpetuated in 
            connection with related parties as well as surprised by the 
            significance of related party transactions and significant unusual 
            transactions not disclosed to them. These proposed standards are 
            intended to address both problems. 
            Many years ago, as a young audit senior, I was responsible for 
            detecting a fraud at a client. As it turned out, the fraud went to 
            the highest level of the organization. The business was struggling 
            to meet its cash needs and found "creative" ways to obtain more 
            money from its asset based lender. The creative ways ultimately 
            crossed the line. In reviewing the audit results, it became clear 
            that too many things failed to add up. Several related parties had 
            been identified and disclosed in the past, and as I dug deeper into 
            these related parties, I encountered more questions than answers. 
            The simple question, "where is this related party located?" was met 
            with evasive answers. The answer to the question of how many 
            employees the related party had — zero — was troubling and created 
            serious doubt about whether the related party was actually providing 
            any services. As I began to understand the flow of transactions, or, 
            rather, the flow of funds, it became clear how the lender was being 
            defrauded. Unfortunately, the business did not have an audit 
            committee, and the CEO was deeply involved in the fraud. Ultimately, 
            the CEO pled guilty to charges against him and died in prison. 
            This is but one example of many similar scenarios, some of which 
            are not discovered until great harm has been done to investors. In 
            some cases, related party transactions involve difficult measurement 
            and recognition issues that pose a risk of material misstatement in 
            the financial statements; in other cases, related party transactions 
            have been used — as in the situation I encountered — to engage in 
            fraud. 
            The auditing standard addressing related parties dates back 
            almost 30 years to 1983, and the standard we are proposing today is 
            the result of a fresh look at this important topic. It is intended 
            to strengthen the existing audit procedures for identifying, 
            assessing and responding to the risks of material misstatement 
            associated with a company's related party transactions. 
            Complementing this proposed standard are proposed amendments to 
            strengthen the auditor's identification and evaluation of 
            significant unusual transactions, along with a series of amendments 
            to standards addressing related matters, such as transactions and 
            relationships with executive officers. 
            The changes we are proposing today attempt to apply a 
            comprehensive and common sense approach to the auditor's work to 
            identify and understand related party transactions, significant and 
            unusual transactions, and their respective implications. 
            The proposed related party standard requires auditors: 
            
              - to consider the fraud risks posed by the relevant 
              transactions; 
              
- to conduct procedures to identify related parties, including 
              by asking management to identify such relationships and the 
              resulting transactions; 
              
- to discuss relevant relationships and transactions with the 
              audit committee, including inquiring about any concerns that audit 
              committee members may have about any related party relationships; 
              
- to conduct specified procedures to understand the 
              transactions, including their business purpose and the company's 
              accounting and disclosures; and 
              
- to consider all other evidence revealed during the auditor's 
              work that may be relevant to the auditor's evaluation. 
Similar to the proposed standard on related parties, the proposed 
            amendments to AU sec. 316 are intended to focus auditors on the 
            identification and evaluation of significant unusual transactions. 
            Identifying such transactions — broadly defined in the proposed 
            amendments as significant transactions outside the normal course of 
            business or that otherwise appear to be unusual due to their timing, 
            size or nature — may be difficult. However, it is a procedure that 
            is vital to protecting the interests of investors. The proposed 
            amendments would require auditors to inquire about such transactions 
            with a variety of parties, to understand and consider the 
            implications of the company's internal controls related to such 
            transactions, and to review other information that comes to light 
            during the performance of the audit that may evidence significant 
            unusual transactions. The amendments also would require auditors to 
            design and perform specific audit procedures intended to address the 
            risks of material misstatement uniquely presented by significant 
            unusual transactions and to facilitate a clearer understanding by 
            auditors of the business purpose of such transactions. 
            As I noted earlier, the proposed standard, Related 
            Parties, and the proposed amendments regarding significant 
            unusual transactions also are intended to complement each other. For 
            example, while Appendix A to the new related parties standard 
            provides guidance to auditors on examples of information that could 
            indicate the existence of transactions with related parties, it may 
            also help auditors to identify significant unusual transactions. At 
            the same time, the new procedures required in connection with the 
            auditor's evaluation of significant unusual transactions may also 
            help the auditor identify related parties or transactions with 
            related parties that were previously undisclosed to the auditor. 
            I believe that the proposed standard and proposed amendments — 
            through the increased focus on related party and significant unusual 
            transactions, and the increase in audit procedures required in these 
            areas — will increase investor confidence in the financial 
            statements and serve the public interest. However, I am, as always, 
            interested in the costs associated with the proposals, and whether 
            there are any unintended consequences that we should consider before 
            adopting final standards. In crafting the proposed standard and 
            other amendments, we considered what burdens would be imposed on 
            auditors and their clients. For example, in connection with the 
            proposed requirements relating to the auditor's work to understand 
            the company's financial relationships and transactions with its 
            executive officers, we thought carefully about what procedures to 
            require in order to obtain the maximum benefit without imposing 
            unreasonable burdens, and I believe we have struck an appropriate 
            balance. 
            Cost-benefit analysis has been a much discussed topic recently in 
            the context of financial regulation. Many believe, and I agree, that 
            it is difficult to monetize or otherwise quantify the benefits of 
            such regulations. Nevertheless, we can explain the benefits and 
            consider the costs of implementing our proposals. In that vein, I 
            encourage commenters to provide us with your views on the benefits 
            to investors of the amendments that we have proposed, as well as to 
            let us know whether management or auditors anticipate significant 
            cost increases as a result of the additional procedures. Are some 
            firms already performing the proposed procedures, even if not 
            currently required? If not, consider whether you can try to apply 
            the proposed standard and provide us with feedback on your 
            experiences. Are there other procedures that firms or audit 
            committees have found effective in these areas? Do investors or 
            audit committees believe that we have missed any steps that should 
            be required? Do audit committee members believe that more should be 
            done, or that additional items should be discussed by the auditor 
            and the audit committee? 
            I look forward to receiving thoughtful comments on these 
            questions and many others posed in the release. In the meantime, I 
            would like to join my fellow Board members in thanking members of 
            the Office of the Chief Auditor and of the Office of General Counsel 
            for their hard work, particularly Greg Scates, Brian Degano, Nick 
            Grillo, Karen Burgess, Bob Burns, and Nina Mojiri-Azad. As usual, 
            their work is exemplary. I would also like to thank the staff of the 
            SEC who took time to provide their views; we always benefit from 
            their expertise and perspective.