What Is a Related-Party Transaction?

The term related-party 澳洲幸运5官方开奖结果体彩网:transaction refers to a deal or arrangement made between two parties who are joined ♛by a preexisting business relationship or common interest. Companies often seek business deals with parties with whom they are fa🐲miliar or have a common interest.

Related-party transactions are legal but may create 澳洲幸运5官方开奖结果体彩网:conflicts of interest. 澳洲幸运5官方开奖结果体彩网:Public companies must disclose these transactions.

Types of Transactions

Related parties who make transactions may be 澳洲幸运5官方开奖结果体彩网:business affiliates, shareholder groups, or 澳洲幸运5官方开奖结果体彩网:subsidiaries. Related-party transactions can include

• Sales
• Leases
• Service Agreements
• Loan Agreements

These transactions are not illegal but can cloud the business environment by leading to conflicts of interest. They may show favorable treatment for close associates of the hiring business. Consider a company that contracts with a major 澳洲幸运5官方开奖结果体彩网:shareholder's business to renovate its offices. In some cases, related-party transactions must be approved by management consensus or a company’s 澳洲幸运5官方开奖结果体彩网:board of directors.

Regulations

In the United States, securities regulatory agencies ensure that related-party transactions are conflict-free and do not affect shareholders' value or the corporation's profits negatively.

The 澳洲幸运5官方开奖结果体彩网:Securities and Exchange Commission (SEC) requires that all publicly traded companies disclose all transactions with related parties such as executives, associates, and family members in their quarterly 10-Q reports and their annual 10-K reports. Many companies have compliance policies and procedures in place that outline how to document and implement related-party transactions.

The 澳洲幸运5官方开奖结果体彩网:Finan𓆉cial Accounting Standards Board (FASB) has accounting standards for related-party transactions for public, private, and non-profit organizations. Some of these standards include monitoring of payment competitiveness, payment terms, monetary transactions, and authorized expenses.

Example

Enron was a U.S.-based energy and commodities company based in Houston. In the infamous scandal of 2001, the company used related-party transactions with special-purpose entities to help conceal billions of dollars in debt from failed business ventures and investments. The related parti🔴es misled the b♋oard of directors, their audit committee, employees, as well as the public. 

These fraudulent related-party transactions led to Enron's 澳洲幸运5官方开奖结果体彩网:bankruptcy, prison sentences for its executives, lost pensions and savings of employees and shareholders, and the ruin and closure of Arthur Andersen, the auditor for Enron, which was found guilty of federal crimes and SEC violations.

This financial disaster led to the development of the 澳洲幸运5官方开奖结果体彩网:Sarbanes-Oxley Act of 2002, which established new and expanded existing requirements for U.S. public company boards, management, and public accounting firms, including specific rules that limit conflicts of interest arising from related-party transactions.

The Bottom Line

A related-party transaction is conducted between two parties that have a preexist♓ing business relationship. These transactions carry the potential for conflicts of interest, so the activity is monitored by regulatory bodies such as the SEC and the FASB.