Related party transactions and audit risk

Abstract

Related Party Transactions (RPTs) are perceived as genuine transactions, which fulfill the economic needs of a company. However, the controlling shareholders may use RPTs as a tool for transferring the firm's resources for their private benefit. The dual effect of RPTs, i.e., transaction efficiency and conflict of interest between the controlling shareholders and minority shareholders, increase audit risk and as a result, increases the audit fee. The Companies Act, 2013, and Clause 49 of the SEBI listing agreement mandate arm's length principle of pricing of RPTs. However, there are situations in which the regulations are silent about the method of pricing, and this increases the risk of auditors for auditing RPTs. This study intends to examine the relationship between RPTs and audit risk in India, based on a sample of 1,182 firms covering a period from 31 March 2011 to 31 March 2018. Panel data methodology has been applied for empirical analysis and the results show that higher audit fee is an indication of resource transferring RPTs. The results prove that instead of reducing the complexity associated with RPTs, the new RPTs regulations increase audit fee as a result of the increases in audit risk.

The influence of the chairman and CEO effectiveness on operating performance: Evidence from Malaysia

“…The independent variables for all models are the Chairman variables age, title, tenure, and ownership. Similar to Abdul Rasheed et al (2021), this study uses control variables for all the models: firm size, asset tangibility, firm age, financial leverage, audit firm and board size. Models 3 and 4 include CEO effectiveness as moderator of the relationship…”

“…Control variables are included to reduce the possibility of omitted-variable bias (Afrifa & Tauringana, 2015). Thus, we control for firm size, asset tangibility, firm age and financial leverage, audit firm and board size (Abdul Rasheed et al, 2021;Afrifa & Tauringana, 2015). There is a significant negative relationship between firm size and performance (Dony et al, 2019).…”

Audit fees and related party transactions: Evidence from Indonesia

“…On the positive side, these transactions can enhance firm value by enabling multiple parties to share resources, improve transaction efficiency, and bolster asset returns (Habib et al, 2017;Al-Dhamari et al, 2018). Conversely, they can exacerbate conflicts of interest between controlling and minority shareholders, elevate audit risks, and ultimately lead to higher audit fees (Rasheed et al, 2021). These transactions are particularly susceptible to agency conflicts, and many Indonesian firms engage in them, often due to family ownership dominance.…”

“…Consequently, firms engaged in numerous related party transactions present auditors with more significant challenges, potentially violating the reasonableness assumption and encouraging auditors to view these transactions as significant red flags (Kohlbeck & Mayhew, 2017). Rasheed et al (2021) reveal a positive impact of related party transactions on audit fees due to their complexity and associated risks. These findings align with research conducted by Al-Dhamari et al (2017) in Malaysia and Habib et al (2015) in China.…”

Research on Audit Risk Prevention and Control in Ruihua Accounting Firm

“…Siew H (2021) proposed using Bayesian methods for quantitative risk analysis of audit business and put forward specific management models [2]. Rasheed Abdul P. C (2021) conducted research indicating that accounting firms can establish more rigorous and standardized audit risk control systems to ensure the ability and effectiveness of audit reports issued by relevant auditors in risk control [3].…”