Thursday, March 15, 2012

Is a person having significant influence (to an entities) considered a related parties

We received a very good question from our Accounting & Auditing blog's royal readers with regard to related parties, as follows:

"I would like to inquire that related company or related party does not necessary to own shares in the other company but also have great influence in the decision making. Am I right? What if they do not own shares but has great influence in the decision making, does it still consider as related?"

According to International Accounting Standard 24, the definition of a related party does not only include shareholders, but also many other parties. A person who may exercise significant influence over the entity's decision making is also considered a related party.

Why is it important to identify an individual having significant influence as a related party? This is because we need to consider whether the transaction entred into between the Company and the invidiual ( having significant influence) are conducted on an arms-length basis. There are instances / cases where the said transactions were not entered into on an arms-length basis but not detected by audit committee or auditors.

Hence, the responsiblity of auditors include obtaining the list of related parties from audit client, identify potential related parties not identified by management, pay reasonably sufficient attention to related parties transactions, and ensure that related party transactions are disclosed appropriately in accordance with IAS 24.

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