Are Related Party Transactions Red Flags?

52 Pages Posted: 23 Apr 2014 Last revised: 18 Mar 2016

See all articles by Mark J. Kohlbeck

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting

Brian W. Mayhew

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: March 1, 2016

Abstract

This study investigates whether or not related party transactions serve as a “red flag” that warns of potential financial misstatement. We hand collect related party transactions for S&P 1500 firms in 2001, 2004, and 2007 and find a positive correlation between these transactions and future restatements, suggesting restatements are more likely when a firm engages in related party transactions. The association is concentrated among transactions that appear to reflect tone at the top rather than arguably more necessary business transactions. We also find RPT firms pay lower audit fees. However, Tone RPT firms that subsequently restate pay higher audit fees, providing evidence that auditors recognize the individual restatement risks of these firms.

Keywords: Related Party Transactions, Audit Risk, Restatements, Audit Fees

JEL Classification: M41

Suggested Citation

Kohlbeck, Mark J. and Mayhew, Brian W., Are Related Party Transactions Red Flags? (March 1, 2016). Available at SSRN: https://ssrn.com/abstract=2427439 or http://dx.doi.org/10.2139/ssrn.2427439

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting ( email )

777 Glades Avenue
KH 119
Boca Raton, FL 33431-0991
United States
561-297-1363 (Phone)

Brian W. Mayhew (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-2714 (Phone)
608-263-0477 (Fax)

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