August 2019

DE-LAYERING RELATED PARTY TRANSACTIONS THROUGH INTERNAL AUDIT

Ashutosh Pednekar
Chartered Accountant

Virtually every business has transactions with related parties. They are a business necessity. Businesses have related entities and they transact in a regular and routine manner. These could be genuine transactions executed in the same manner as any other transaction with a non-related party. However, of late the phrase Related Party Transaction (RPT) has taken on a kind of negative connotation. Is it justified? Perhaps not. Is it true? Perhaps not. Is it due to a few events – real as well as alleged – where the blame for a business failure / business loss is placed on related party transaction/s? Perhaps.

 

Firstly, it is not correct to paint all RPTs with the same brush. Further, to ensure that an RPT is genuine and fulfils business needs, laws and regulations are already in place. The Companies Act requires approval of RPTs by the Board of Directors and confirmation that they are at arm’s length. Similarly, SEBI (Listing Obligations and Disclosure Requirements) Regulations prescribe a comprehensive mechanism for the manner of dealing with related party transactions, from approval to monitoring. The Income-tax Act requires a justification of the transaction to ensure that there is no disallowance while computing taxable income, as well as to ensure that there is no adjustment in a transfer pricing assessment. Accounting standards – both Indian and international – necessitate disclosures of RPTs. All in all, there are sufficient checks and balances in various regulations that businesses have to adhere to vis-à-vis RPTs.

 

A scrutiny mechanism is in place to achieve / assess compliance with the requirements. This scrutiny takes place at various levels and in diverse manners. Each scrutiniser’s objective is different and that impacts the manner and detailing of scrutiny. The various genres of scrutinisers and their objectives can be summarised as under:

 

Management – they have primary responsibility to assert that the RPT is necessary, genuine, at arm’s length pricing and at par with any other business transaction. They are also responsible for seeking the required approvals, from the Board of Directors / Audit Committee of the Board, as the case may be, before entering into RPTs;

Board of Directors – assertions of internal control over financial reporting and adequacy of internal financial controls re

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