The Role of Related Party Transactions in Fraudulent Financial Reporting

摘要

Motivated by auditing regulators' recent interest in related party transactions (RPTs), this study examines SEC enforcement actions that involved RPTs. Specifically, we compare fraud cases involving RPTs with comparable fraud cases that did not involve such transactions. We find that frauds involving RPTs had a lower impact on financial statements, but were more likely to involve misappropriation and to involve a top executive (CEO and/or CFO) in some aspect of the fraud. We also find weaker evidence that frauds involving RPTs persist for longer time spans. In addition, we provide a framework to document the types of related party transactions actually occurring in these fraud cases. Overall, the most frequent types of transactions in the enforcement actions were loans to related parties and payments to company officers for goods or services that were either unapproved or non-existent. Generally, related party transactions are not necessary as mechanisms for fraud, and their presence need not indicate fraudulent financial reporting. An implication is the importance of evaluating related party transactions within the broader corporate context.