Insight

Eyes on related parties

Eyes on related parties | business consulting firms in dc | Weyrich, Cronin & Sorra

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

The hunt for related parties

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:

  • A list of the company’s current related parties and associated transactions,
  • Minutes from board of directors’ meetings, particularly when the board discusses significant business transactions,
  • Disclosures from board members and senior executives regarding their ownership of other entities, participation on additional boards and previous employment history,
  • Bank statements, especially transactions involving intercompany wires, automated clearing house (ACH) transfers, and check payments, and
  • Press releases announcing significant business transactions with related parties.

Specifically, auditors look for contracts for goods or services that are priced at less (or more) favorable terms than those in similar arm’s-length transactions between unrelated third parties.

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’s daughter an above-market salary and various perks that aren’t available to unrelated employees.

Audit procedures

Audit procedures designed to target related-party transactions include:

  • Testing how related-party transactions are identified and coded in the company’s enterprise resource planning (ERP) system,
  • Interviewing accounting personnel responsible for reporting related-party transactions in the company’s financial statements, and
  • Analyzing presentation of related-party transactions in financial statements.

Accurate, complete reporting of these transactions requires robust internal controls. A company’s 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.

Let’s talk about it

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.

© 2022

 

Related Insights

How the new SECURE 2.0 law may affect your business | business consulting and accounting services in cecil county | Weyrich, Cronin & Sorra

Management Advisory Services & Business Consulting

How the new SECURE 2.0 law may affect your business

If your small business has a retirement plan, and even if it doesn’t, you may see changes and benefits from a new law. The Setting Every Community…
Do you qualify for the QBI deduction? And can you do anything by year-end to help qualify? | quickbooks consultant in harford county md | Weyrich, Cronin & Sorra

Management Advisory Services & Business Consulting

Do you qualify for the QBI deduction?

If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred…
Timing is everything when it comes to accounting software upgrades | tax accountant in alexandria va | Weyrich, Cronin & Sorra

Management Advisory Services & Business Consulting

Timing is everything when it comes to accounting software upgrades

“Well, it still works, and everyone knows how to use it, but….” Do these words sound familiar? Many businesses stick with their accounting…

Connect with us

Use the form below to send us an email. WCS responds directly to all inquiries and general questions within 24 hours of posting.

This contact form is deactivated because you refused to accept Google reCaptcha service which is necessary to validate any messages sent by the form.