What is a ‘transaction’
Related party transactions is a bargain or agreement between two parties which are connected to the existing special relationship. For example, a transaction between a major shareholder and the Corporation, such as a contract for the company shareholder to perform repair work in the offices of the Corporation will be considered a bargain.
Breaking down the ‘trades’
Transactions are common in business. For example, companies often seek to secure transactions with persons with whom they are familiar or have common interests. Although these types of transactions are legitimate, the special relationship inherent between the involved parties creates potential conflicts of interest. However, there are rules to prevent unfair advantage given to related parties.
A number of regulatory procedures to ensure that related party transactions are conflict-free and do not adversely affect shareholder value. American public companies are required to disclose all transactions with related parties, such as supervisors, peers, and family members in their annual reports and 10-K. as a result of this additional duty in respect of reporting, many companies have specific policies and procedures for corporate standards to ensure that related party transactions should be properly documented and accepted.
Related parties and business services may take various forms. Some of the most common types of related parties include business partners, groups, shareholders, subsidiaries and minority owned by the company. Transactions with related parties can include sales, leases, contracts and loan agreements.
In large corporate situations, state companies are often the minority or the majority-owned by other entities. These entities may have similar business interests at the expense of the business community. In these cases, transactions between related parties can be formed, for example, a provider or supplier relations for mutual benefit of both companies.
Accounting standards and auditing
Management policies and procedures that monitor related party transactions and transactions include a number of factors. These factors are governed by accounting standards and auditing in the industry, and in many cases, these operations must be approved by management consensus or the Board of Directors of the company. Some of the specific standards and procedures for transactions with related parties include the monitoring of competitiveness of payment, terms of payment, cash transactions, and authorized expenses. In General, all related party transactions should be transparently reported to ensure that all actions are legal and ethical, and not to the detriment of shareholder value.
Although there are rules and standards for related party transactions, they are difficult to audit. Surgery is not always easy to identify and disclosure of related parties is the responsibility of the owner and management, which can retain the disclosure for personal gain. If owners or managers do not disclose the related parties and their interests, transactions may go undetected. Transactions with related parties can be hidden among other usual transactions, making it difficult to distinguish. Covert operations, and on the undisclosed relationship may cause incorrect overstatement of income and fraud. In addition, the company’s internal control system may not be sophisticated enough to properly track these transactions.
One example of fraudulent use of transactions with related parties include the infamous scandal with Enron, in which related-party transactions with “special purpose” was used to help hide billions of dollars in debt from failed business projects and investments. With related parties misled the Board of Directors, audit Committee, employees and the public. Fraudulent transactions that led to the bankruptcy of Enron, prison sentences for managers, lost pensions and savings of employees and shareholders, and the destruction and closure of “Arthur Andersen”, the Enron auditor that was convicted of Federal crimes and violations sec. Abuse of the relationship with related parties involves more than straight sides, as seen with enron. From this disaster was born of the Sarbanes-Oxley act of 2002, which established new and expanded existing requirements to the United States public company boards, management and public reporting companies, including rules that limit conflicts of interest arising from related party transactions.