Related-Party Transactions: How I Protect the Company (and Myself)

Related parties are a compliance spotlight

Any deal with a related party can look suspicious if it's not documented properly. Even when everything is legitimate, the lack of evidence is what creates audit findings and legal risk. Related-party transactions are closely scrutinized by auditors, regulators, and stakeholders because of their potential for conflicts of interest and manipulation of financial results.

My checklist

• Identify the relationship: ownership, management overlap, family ties—document it. This includes direct and indirect relationships that might not be immediately obvious.
• Get independent approval: I escalate to the right governance body (often outside the chain of influence). This ensures decisions are made objectively and in the best interest of the company.
• Confirm market terms: I keep benchmarks or comparable quotes. All related-party transactions should be evaluated as if they were with an unrelated third party.
• Disclose appropriately: financial statements and internal reporting must reflect the relationship. Proper disclosure ensures transparency and compliance with accounting standards.

Detailed identification procedures

I systematically identify all potential related parties:

Direct relationships:

• Parent company and subsidiaries
• Companies under common control
• Associates and joint ventures
• Key management personnel and their close family members

Indirect relationships:

• Entities controlled by key management personnel
• Trusts and estates of related parties
• Business partners of related parties
• Entities with shared board members

Documentation requirements for related-party transactions

I maintain comprehensive documentation for all related-party transactions:

Transaction documentation:

• Formal contracts with complete terms and conditions
• Board resolutions approving the transaction
• Fairness opinions when required
• Market analysis supporting transaction terms
• Ongoing monitoring reports

Relationship documentation:

• Charts showing organizational relationships
• Updates on changes in related-party status
• Annual confirmations of related-party relationships
• Policies defining related-party identification procedures

Approval processes and governance

Related-party transactions require special governance procedures:

Approval hierarchy:

• Small transactions: Department manager approval
• Medium transactions: VP/CFO approval
• Large transactions: Board of Directors approval
• Extraordinary transactions: Shareholder approval

Independent review:

• Committee review by disinterested parties
• External fairness opinions for significant transactions
• Legal review of transaction structure
• Audit committee oversight

Market benchmarking and pricing

I ensure all related-party transactions have market-based pricing:

Benchmarking procedures:

• Analysis of comparable third-party transactions
• Market pricing studies for similar arrangements
• Regular reviews of transaction terms
• Adjustments to align with market rates

Pricing documentation:

• Detailed analysis of pricing methodology
• Comparison to third-party rates
• Annual reviews and updates
• Justification for any deviations from market rates

Financial reporting and disclosure

Related-party transactions have specific reporting requirements:

Financial statement disclosures:

• Nature of the relationship
• Description of the transaction
• Amounts involved
• Outstanding balances
• Terms and conditions

Internal reporting:

• Monthly reports to management
• Quarterly reviews by audit committee
• Annual assessments by external auditors
• Continuous monitoring reports

Risk management for related-party transactions

I identify and mitigate risks associated with related-party transactions:

Financial risks:

• Credit risk from related-party receivables
• Market risk from non-arm's-length pricing
• Liquidity risk from related-party cash flows
• Operational risk from dependency relationships

Compliance risks:

• Regulatory compliance failures
• Accounting standard violations
• Tax compliance issues
• Corporate governance problems

Tax considerations

Related-party transactions have significant tax implications:

Transfer pricing:

• Compliance with arm's length requirements
• Documentation of pricing methodology
• Country-by-country reporting requirements
• Advance pricing agreements

Tax optimization:

• Legal tax planning within compliance requirements
• Proper documentation for tax authorities
• Coordination of multi-jurisdictional tax implications
• Ongoing compliance with changing regulations

Internal controls over related-party transactions

I implement strong controls to ensure compliance:

Prevention controls:

• Automatic identification of related parties
• Required approval workflows
• System controls preventing unauthorized transactions
• Regular updates to related-party databases

Detection controls:

• Monthly analysis of new vendors/customers
• Quarterly reviews of transaction patterns
• Annual confirmations of relationships
• Exception reporting for unusual transactions

Audit and compliance monitoring

Regular monitoring ensures ongoing compliance:

Internal audit:

• Annual audit of related-party procedures
• Testing of transaction approvals
• Verification of disclosures
• Assessment of control effectiveness

External audit:

• Annual review by external auditors
• Testing of key controls
• Verification of disclosures
• Compliance with audit requirements

Legal and regulatory compliance

Related-party transactions are subject to various regulations:

Securities regulations:

• SEC disclosure requirements for public companies
• Proxy statement requirements
• Insider trading considerations
• Materiality assessments

Corporate law:

• Fiduciary duty requirements
• Conflict of interest policies
• Board approval requirements
• Shareholder rights

Best practices for ongoing management

I follow these best practices for effective related-party transaction management:

Regular reviews:

• Monthly monitoring of new transactions
• Quarterly assessment of existing relationships
• Annual review of policies and procedures
• Continuous improvement of processes

Training and awareness:

• Regular training for finance staff
• Updates on regulatory changes
• Case studies and examples
• Clear policies and procedures