Related-Party Transactions
Candlefocus EditorThe federal government has responded to the potential for fraud and abuse in related-party transactions by requiring companies to disclose them to investors, creditors, and other stakeholders. According to the Securities and Exchange Commission (SEC), financial statements must reveal all related-party transactions and the nature of the relationship between the transaction's participants.
To protect shareholders, companies must demonstrate that any related-party transactions benefited the company as much as transactions with unrelated parties would. If a related-party transaction is not arms-length, meaning that it is not conducted in the same way that an unrelated party transaction would be conducted, companies must show that it was fair to the company and not unduly biased in favor of the other involved company.
Related-party transactions may be beneficial for the companies involved as well as for the shareholders. For example, two companies may decide to enter into a related-party joint venture, allowing both to take advantage of each other's resources and capabilities. However, obscuring financial details from investors and creditors through related-party transactions or using them to benefit board members or related companies is unethical and often illegal.
In conclusion, related-party transactions, when conducted properly, may be beneficial for companies and their stakeholders. But because of its potential to result in fraud and financial ruin, these transactions must be transparent and monitored to ensure that they are fair and not unduly biased in favor of any involved parties. Regulators must be vigilant in keeping track of related-party transactions and any potential conflicts of interest must be disclosed to protect all parties involved.