Empowering the Audit Committee and the Auditor in Related Party Transactions

Abstract

Currently, the European approach addressing related party transactions is exclusively relying on the disclosure and partial control of the transaction. Listed European corporations must provide in a (financial) summarized overview of these transactions that have taken place in the accounting period. The external auditor controls the transaction in so far it is fair and not misleading. The European Commission considers this approach insufficient to address the risk of extracting private benefits from the corporation and harming the other stakeholders, and in particular, the minority shareholders. The European Commission considers the implementation of an alternative strategy for related party transaction, mandating a disinterested corporate body to approve the self-dealing. However, I believe that the Commission’s proposal will more than likely not overcome the major shortcomings of solely disclosing the transactions. I suggest involving the external auditor and the audit committee. The external auditor’s duties can be broadened as to include the reasonable assurance that the envisaged related party transactions are economic fair transactions. Further the audit committee monitoring duties can include the work of the auditor regarding related party transactions. The audit committee can serve as the body that approves the related party transaction. This procedure can help to mitigate to overcome the negative effects of certain types of related party transactions.

Keywords: Related party transactions, disclosure, IAS 24, ISA 550, Shareholder Rights Directive, external auditor, audit committee

JEL Classification: K22, G38, M41, M48