THE PREVENTION OF MISLEADING ACCOUNTS THROUGH DISCLOSURES OF RELATED PARTY TRANSACTIONS

Abstract

The published annual report and accounts of a company are regarded as a main source of information for making investment and other decisions. One assumption used by readers of such accounts is that the financial statements reflect transactions which have been made at arm's‐length. However, the presence of related parties may mean that free market dealings do not exist. In this case the accounts are, at best, misleading and, at worst, fraud may have been perpetrated. Although a number of countries have issued accounting standards which require companies to disclose certain information in respect of related party transactions, this had not occurred in the UK by the summer of 1995. A proposal had been issued by the Accounting Standards Committee (ASC), but this received severe criticism and could not be amended before the ASC was disbanded. Its successor body, the Accounting Standards Board (ASB) has issued its own proposals, taking into account some of the earlier criticisms. The proposals attempt to define related parties, the transactions which are entered into and the disclosures which should take place. The most recent proposals have also received severe criticism mainly because of the additional work entailed for companies and their auditors in relation to the possible benefits to be gained by the users. An examination of the new proposals reveal that there are some definitional problems and that it is far from certain that the disclosures will do more than alert the reader to the presence of related party transactions, nor is it certain that the disclosures will provide information which is useful for sophisticated decision making and it would be naive to believe that such disclosures would prevent fraud.

Citation

COTTINGHAM, J. and HUSSEY, R. (1995), "THE PREVENTION OF MISLEADING ACCOUNTS THROUGH DISCLOSURES OF RELATED PARTY TRANSACTIONS", Journal of Financial Regulation and Compliance, Vol. 3 No. 4, pp. 350-357. https://doi.org/10.1108/eb024857