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To Whom Does “Related Parties” Refer In A.S. No. 18?

In June of last year, the Public Company Accounting Oversight Board adopted Auditing Standard No. 18 which “establishes requirements regarding the auditor’s evaluation of a company’s identification of, accounting for, and disclosure of relationships and transactions between the company and its related parties.”  Because A.S. #18 is effective for audits of financial statements for fiscal years beginning on or after December 15, 2014, many companies and their auditors are now beginning to address compliance.

Although A.S. #18 is focused on “related parties”, it doesn’t define the term.  Instead, the PCAOB in a footnote directs auditors to “the definition of the term ‘related parties’ and the financial statement disclosure requirements with respect to related parties”.  Many lawyers may jump to the conclusion that this is a reference to Item 404 of Regulation S-K.  That regulation, however, uses and defines the term “related person“, not “related parties“.  Regulation S-X purports to define “related parties” but does so only by referring to the FASB ASC Master Glossary.  17 C.F.R. § 210.1-02(u)  Although access to the FASB Accounting Standards Codification is free, a user must first set up an account.  One can only wonder why the PCAOB thought it made sense to route practitioners through Regulation S-X rather than directly to the FASB ASC Master Glossary.  The SEC’s reference to the FASB ASC Master Glossary also raises the question of whether the Administrative Procedure Act’s rulemaking requirements would apply to any changes to the definition subsequently adopted by the FASB.

Why “refer” and “relate” are more than just related

Etymologically, the word “related” is the same as the word “refer”.  Both are different forms of the Latin word referre, which means to carry (ferre), and back (re).  Latin verbs change to reflect the number, tense, voice and mood.  In most cases, the conjugation of verbs follows one of four standard patterns, conveniently named the first, second, third and fourth conjugations.  Some verbs are irregular and refero is one of these.  Hence, the past participle of refero is relatus.  

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