Related party relationships a default feature of business and commerce. Therefore, disclosure of related party transactions, outstanding balances and relationships are crucial as they may affect assessments of an entity's operations and the entity's risks and opportunities by users of financial statements. Related party transactions activities include transactions such as leasing of property, sharing of assets & resources, sales, purchases, transfers of realty and personal property, group procurement to take advantage of economies of scale, shared-services received or provided on accounting, management, engineering, legal services, transfers of research and development, license agreements, intercompany borrowing and lending, providing bank guarantees or collateral, inter-company billings based on allocations, treasury management techniques, so on and so forth.
There are rules and standards for related-party transactions, which tend to be difficult to audit. Owners and managers are responsible for disclosing related parties and their interests. As such, many companies have compliance policies and procedures in place that outline how to document and implement related-party transactions. Related-party transactions must get reported transparently to ensure that all actions are legal and ethical and do not compromise shareholder value. These types of transactions are not necessarily illegal. Some, but not all, related party-transactions carry the innate potential for conflicts of interest, as they show favourable treatment for close associates of the hiring business. These transactions also limit competition in the marketplace. Concealed transactions and undisclosed relationships could lead to improperly inflated earnings, even fraud. Generally, these affect the interests of shareholders, particularly minority shareholders.
The regulatory agencies scrutinize them. Unchecked and the misuse of related-party transactions could result in fraud and financial ruin for all parties involved. The income tax authority also examines related-party transactions for any conflicts of interest. If it finds conflicting, then the Authority will not allow any tax benefits claimed from the transaction. This financial disaster led to the development of the Internal Control over Financial Reporting regulations, which established new and expanded existing requirements for large company boards, management, and accounting firms, including specific rules that limit conflicts of interest arising from related-party transactions.
With the increasing efforts of the Govt. to tighten the noose over such transactions, it is essential that the professionals and other stakeholders not only be aware of the provisions concerning the same but also take the serious note of it. The cost of ignoring non-compliances will lead to high ramifications – in all respect. India is known for scams & fraudulent activities. These measures are nothing but steps to curb such financial fraud activities. Hope the readers are well informed now, or should we say “well warned.
