Accounting and Auditing for Related Parties and Related Party Transactions – A Toolkit for Accountants and Auditors (prepared by the staff of the AICPA)

One of the more important and yet more difficult aspects of a financial statement audit is the identification of related parties and transactions with related parties. This aspect of the audit is important because of (1) the requirement under generally accepted accounting principles to disclose material related party transactions and certain control relationships, (2) the potential for distorted or misleading financial statements in the absence of adequate disclosure, and (3) the instances of fraudulent financial reporting and misappropriation of assets that have been facilitated by the use of an undisclosed related party. An undisclosed related party is a powerful tool in the hands of an unscrupulous person. Related parties, such as controlled entities, principal stockholders or management can execute transactions that improperly inflate earnings by masking their economic substance or distort reported results through lack of disclosure, or can even defraud the company by transferring funds to conduit related parties and ultimately to the perpetrators.

The guidance for the related parties is covered in FASB’s Accounting Standards Codification (ASC) 850, Related Party Disclosures (formerly FAS 57, Related Party Disclosures).

A company needs to analyze and consider all of the related party relationships to determine who would actually consolidate a variable interest entity. Details for these considerations are provided in ASC 810, Consolidation (formerly FIN 46R, Consolidation of the Variable Interest Entities).

You can access the AICPA guide at the following link:
http://ftp.aicpa.org/public/download/news/relpty_toolkit.pdf

[References: AICPA’s Accounting and Auditing for Related Parties and Related Party Transactions - A Toolkit for Accountants and Auditors, FAS 57, ASC 850, FIN 46R, ASC 810]

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Posted by Sunil Thukral on March 28, 2010. Filed under 810 Consolidation, 850 Related Party Disclosures. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry