{"id":15934,"date":"2022-03-22T13:05:07","date_gmt":"2022-03-22T18:05:07","guid":{"rendered":"https:\/\/sfwpartnersllc.com\/?p=15934"},"modified":"2022-03-22T13:05:07","modified_gmt":"2022-03-22T18:05:07","slug":"eyes-on-related-parties","status":"publish","type":"post","link":"https:\/\/www.sfw.cpa\/news-and-guides\/eyes-on-related-parties\/","title":{"rendered":"Eyes on related parties"},"content":{"rendered":"

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Business transactions with related parties \u2014 such as friends, relatives, parent companies, subsidiaries and affiliated entities \u2014 may sometimes happen at above- or below-market rates. This can be misleading to people who rely on your company\u2019s financial statements, because undisclosed related-party transactions may skew the company\u2019s true financial results.<\/p>\n

The hunt for related parties<\/strong><\/p>\n

Given the potential for double-dealing with related parties, auditors spend significant time hunting for undisclosed related-party transactions. Examples of documents and data sources that can help uncover these transactions are:<\/p>\n

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A list of the company\u2019s current related parties and associated transactions,<\/li>\n
Minutes from board of directors\u2019 meetings, particularly when the board discusses significant business transactions,<\/li>\n
Disclosures from board members and senior executives regarding their ownership of other entities, participation on additional boards and previous employment history,<\/li>\n
Bank statements, especially transactions involving intercompany wires, automated clearing house (ACH) transfers, and check payments, and<\/li>\n
Press releases announcing significant business transactions with related parties.<\/li>\n<\/ul>\n
Specifically, auditors look for contracts for goods or services that are priced at less (or more) favorable terms than those in similar arm\u2019s-length transactions between unrelated third parties.<\/p>\n
For example, a spinoff business might lease office space from its parent company at below-market rates. A manufacturer might buy goods at artificially high prices from its subsidiary in a low-tax country to reduce its taxable income in the United States. Or an auto dealership might pay the owner\u2019s daughter an above-market salary and various perks that aren\u2019t available to unrelated employees.<\/p>\n
Audit procedures<\/strong><\/p>\n
Audit procedures designed to target related-party transactions include:<\/p>\n
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Testing how related-party transactions are identified and coded in the company\u2019s enterprise resource planning (ERP) system,<\/li>\n
Interviewing accounting personnel responsible for reporting related-party transactions in the company\u2019s financial statements, and<\/li>\n
Analyzing presentation of related-party transactions in financial statements.<\/li>\n<\/ul>\n
Accurate, complete reporting of these transactions requires robust internal controls. A company\u2019s vendor approval process should provide guidelines to help accounting personnel determine whether a supplier qualifies as a related party and mark it accordingly in the ERP system. Without the right mechanisms in place, a company may inadvertently omit a disclosure about a related-party transaction.<\/p>\n
Let\u2019s talk about it<\/strong><\/p>\n
With related-party transactions, communication is key. Always tell your auditors about known related-party transactions and ask for help disclosing and reporting these transactions in a transparent manner that complies with U.S. Generally Accepted Accounting Principles.<\/p>\n
\u00a9 2022<\/em><\/p>\n
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Business transactions with related parties \u2014 such as friends, relatives, parent companies, subsidiaries and affiliated entities \u2014 may sometimes happen at above- or below-market rates. This can be misleading to people who rely on your company\u2019s financial statements, because undisclosed related-party transactions may skew the company\u2019s true financial results. The hunt for related parties Given […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13,7,10],"tags":[8,11,12],"class_list":["post-15934","post","type-post","status-publish","format-standard","hentry","category-aa","category-articles","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15934","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=15934"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15934\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=15934"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=15934"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=15934"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}