September 2019

RELATED PARTY TRANSACTIONS: LESSONS FROM CASE STUDIES

Nandita Parekh
Chartered Accountant

This is a sequel to the article published in the BCAJ of August, 2019: ĎDe-layering Related Party Transactions through Internal Audití by CA Ashutosh Pednekar

 

This article (a sequel) gives practical approaches to identification of Related Parties (RPs), examining the legitimacy of Related Party Transactions (RPTs) and such other matters that internal auditors could integrate in their audits. Conflict of interest and RPTs have become a very important part of audits of companies. The author offers case studies that could inform the reader about some principles, techniques and tools to uncover the substance of transactions where RPs are involved

 

The way an organisation deals with its related parties speaks volumes about the culture and integrity of the decision-makers, i.e., the management. To an Internal Auditor, reviewing the dealings of a company with its related parties can provide an understanding of its culture and beliefs, its core values and transparency.

 

There are various pronouncements and regulations promulgated for guiding and monitoring identification and disclosures of RPs and RPTs. There are governance mechanisms that place an onerous responsibility on the Audit Committee of ensuring that all RPTs are at armís length pricing. Taxation laws and transfer pricing audit requirements further reduce the possibility of arbitrariness in the commercial terms agreed for RPTs. What, then, can the Internal Auditorís review of RPs and RPTs contribute that is not already covered by the various disclosure, approval and reporting protocols?

 

CASE 1: WHO IS A RELATED PARTY? SUBSTANCE OVER FORM?

 

Background

Ms Smart is the Internal Auditor of a large listed company. As part of the internal audit, she came across a transaction where the company had awarded a three-year exclusive contract to a PR agency called Connexions under which 70% of the contract value was paid upfront and the balance 30% was to be paid in three equal instal

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