What is it about?
This paper examines the impact of Related Party Transactions (RPTs) on audit risk. RPTs include sale and purchase of goods, transfer of assets, liabilities, providing guarantee, etc. RPTs are considered as genuine business transactions, which reduce transaction costs and facilitate resource allocation between-group affiliated firms. However, the controlling shareholders may use RPTs as a tool for transferring the firm’s resources for their private benefit and manipulating firm’s earnings and assets. In India, Satyam scandal shows the consequences of RPTs, the Chairman inflated the profit figures and assets and the failed acquisitions was his last attempt to write off the inflated figures. The various consequences and effects of RPTs increase audit risk and it questions the effectiveness of governance mechanism. The results of the study show that the presence and volume of RPTs increase audit risk.
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Why is it important?
This paper examines the impact of Related Party Transactions (RPTs) on audit risk. RPTs include sale and purchase of goods, transfer of assets, liabilities, providing guarantee, etc. RPTs are considered as genuine business transactions, which reduce transaction costs and facilitate resource allocation between-group affiliated firms. However, the controlling shareholders may use RPTs as a tool for transferring the firm’s resources for their private benefit and manipulating firm’s earnings and assets. In India, Satyam scandal shows the consequences of RPTs, the Chairman inflated the profit figures and assets and the failed acquisitions was his last attempt to write off the inflated figures. The various consequences and effects of RPTs increase audit risk and it questions the effectiveness of governance mechanism.
Perspectives
This paper examines the impact of Related Party Transactions (RPTs) on audit risk. RPTs include sale and purchase of goods, transfer of assets, liabilities, providing guarantee, etc. RPTs are considered as genuine business transactions, which reduce transaction costs and facilitate resource allocation between-group affiliated firms. However, the controlling shareholders may use RPTs as a tool for transferring the firm’s resources for their private benefit and manipulating firm’s earnings and assets. In India, Satyam scandal shows the consequences of RPTs, the Chairman inflated the profit figures and assets and the failed acquisitions was his last attempt to write off the inflated figures. The various consequences and effects of RPTs increase audit risk and it questions the effectiveness of governance mechanism. The results of the study show that the presence and volume of RPTs increase audit risk.
Professor Iqbal Thonse Hawaldar
Kingdom University
Read the Original
This page is a summary of: Related party transactions and audit risk, Cogent Business & Management, January 2021, Taylor & Francis,
DOI: 10.1080/23311975.2021.1888669.
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