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Governance Authority
Category: Ethics and Conduct

Related-Party Transactions

Also known as: RPT, Related Party Transactions, Related-Party Dealings
Simply put

A related-party transaction is a deal, arrangement, or relationship between a company and a person or entity that is able to influence or control it, such as a director, major shareholder, executive, or affiliated business. Because the parties are connected, these transactions may not occur on the same terms as dealings between independent parties, which raises concerns about fairness and conflicts of interest. Accounting and disclosure rules generally do not prohibit such transactions but require that they be identified and disclosed so that readers of the financial statements understand them.

Formal definition

A related-party transaction is any transaction, arrangement, or relationship, or any series of similar transactions, arrangements, or relationships, between a reporting entity and a related party, an individual or entity that has the ability to influence or control the entity. Common examples include borrowing or lending on an interest-free basis or at a rate significantly different from arm's-length rates, and transactions arising from events such as an IPO process. Under U.S. GAAP, such transactions are typically permitted but are subject to identification and disclosure requirements, generally within the financial statement footnotes; entities are expected to maintain systems to identify related parties and the transactions with them to ensure proper disclosure. The specific scope of what constitutes a related party, and the applicable disclosure obligations, varies by the governing accounting framework, regulatory regime, jurisdiction, and entity type. This entry is educational and not legal, audit, or compliance advice.

Why it matters

Related-party transactions sit at the intersection of governance, disclosure, and conflicts of interest because the parties involved, directors, major shareholders, executives, or affiliated entities, are able to influence or control the company. That connection means the terms may differ from those that would be negotiated between independent parties, for example borrowing or lending on an interest-free basis or at a rate significantly different from arm's-length rates. When such terms are not transparent, users of the financial statements cannot properly assess whether the company's reported results reflect genuine economic activity or arrangements that benefit an insider.

The governance concern is not that these transactions occur, accounting frameworks such as U.S. GAAP generally permit them, but that they be identified and disclosed so that readers understand their nature and terms. Undisclosed or poorly controlled related-party dealings can obscure conflicts of interest, distort financial statements, and undermine confidence in the integrity of a company's reporting. Certain events, such as an IPO process, can generate additional related-party transactions that need to be captured and disclosed.

Because the scope of what counts as a related party and the specific disclosure obligations vary by accounting framework, regulatory regime, jurisdiction, and entity type, the level of scrutiny and the required treatment are context-dependent. Boards, management, and assurance functions each have a distinct role in ensuring these transactions are surfaced and handled appropriately, making the topic a recurring focus for governance and disclosure controls.

Who it's relevant to

Boards and Audit Committees
The board and, where present, the audit committee typically hold oversight responsibility for how related-party transactions are identified, reviewed, and disclosed, given the conflicts of interest they can raise. Their role is generally one of oversight and challenge rather than day-to-day identification, and the specific committee responsibilities depend on the applicable governance framework and listing regime.
Management and Finance Teams
Management is generally accountable for maintaining systems to identify related parties and the transactions with them, and for ensuring these are properly disclosed, typically in the financial statement footnotes under U.S. GAAP. Finance and accounting teams carry out this identification and disclosure work, including capturing transactions that arise from events such as an IPO process.
Internal and External Auditors
Assurance functions assess whether related-party transactions have been appropriately identified and disclosed. Because such transactions may not occur on arm's-length terms and can be difficult to detect, they are often an area of heightened attention during audits. The scope of testing depends on the governing framework, regulatory regime, and the entity's circumstances.
Compliance and Legal Functions
Compliance and legal teams help interpret the disclosure obligations that apply to the entity, which vary by accounting framework, regulatory regime, jurisdiction, and entity type. They also support the management of conflicts of interest that related-party dealings can create. This entry is educational and not legal, audit, or compliance advice.

Inside RPT

Related Party
A person or entity with a relationship of control, significant influence, or close connection to the reporting entity, typically including directors, senior executives, controlling or significant shareholders, their close family members, and entities they control or influence. The precise definition varies across accounting standards, listing rules, and statutes, so the population of related parties depends on the applicable framework and jurisdiction.
Related-Party Transaction (RPT)
A transfer of resources, services, or obligations between the entity and a related party, whether or not a price is charged. Because such transactions occur outside a purely arm's-length relationship, they carry a heightened risk that terms may not reflect market conditions or may favor the related party at the entity's expense.
Conflict of Interest Dimension
RPTs frequently involve a director, executive, or controlling shareholder who stands on both sides of a transaction. Governance frameworks generally treat the management of these conflicts, through recusal, independent review, and disclosure, as central to protecting minority shareholders and the entity's interests.
Approval and Oversight Mechanisms
Many governance codes and listing rules call for RPTs above certain thresholds to be reviewed or approved by independent directors, an audit committee, or a dedicated committee, and in some cases by shareholders excluding the interested party. Requirements differ by jurisdiction, sector, and entity type.
Disclosure Requirements
Accounting standards and securities regulations in many jurisdictions require disclosure of material RPTs in financial statements and periodic filings, covering the nature of the relationship, the transaction, and outstanding balances. Disclosure obligations are typically legal requirements rather than voluntary practice, though thresholds and formats vary.
Roles Across the Governance Structure
The board and its committees (often the audit committee or an independent RPT committee) generally hold oversight and approval responsibility; management identifies, records, and executes transactions; and assurance functions such as internal audit test whether identification and controls operate effectively. Accountability for the propriety of an RPT usually sits with the board or the designated independent body.

Common questions

Answers to the questions practitioners most commonly ask about RPT.

Are related-party transactions prohibited or inherently improper?
No. Related-party transactions are not inherently improper or prohibited in most jurisdictions. They are common and can be legitimate and value-adding, but they carry a heightened risk of conflicts of interest and potential harm to the entity or minority shareholders because the parties may not be dealing at arm's length. For this reason, they are typically subject to enhanced identification, approval, disclosure, and review requirements rather than an outright ban. The specific treatment depends on jurisdiction, sector, listing rules, and applicable accounting standards, and whether a given transaction raises concern generally turns on its terms, fairness, and the adequacy of the governance process applied.
Is approving related-party transactions the board's job or management's job?
It depends on the transaction and the applicable framework, and the roles should not be conflated. Management typically identifies, negotiates, and executes transactions in the ordinary course, and is responsible for the systems that flag related-party relationships. Oversight and approval of significant or sensitive related-party transactions is generally reserved to the board or a designated committee, often composed of independent or disinterested directors, with interested parties recusing themselves. Some jurisdictions or listing rules set thresholds above which independent approval or shareholder approval is required. The board's role is generally one of oversight and, for material matters, decision-making, not day-to-day operational management of each transaction.
How can an organization identify related parties in the first place?
Identification typically relies on a combination of mechanisms rather than a single control. Common approaches include maintaining a register of related parties, obtaining periodic conflict-of-interest and relationship declarations from directors and key management personnel, cross-referencing vendor and customer master data against known related parties, and requiring disclosure at the point a transaction is proposed. The precise definition of a related party varies under applicable accounting standards, company law, and listing rules, so organizations generally align their identification criteria to the definitions that apply to them. This entry is educational and not a substitute for advice on the specific definitions binding on your entity.
What approval process is typically appropriate for a related-party transaction?
Processes are generally risk- and materiality-based. Lower-value, ordinary-course transactions may be handled under pre-approved policies with periodic reporting, while significant or unusual transactions typically require review and approval by disinterested directors or a designated committee, and in some cases shareholder approval where thresholds set by law or listing rules are met. Good practice generally includes recusal of interested parties, assessment of whether terms are consistent with arm's-length dealing, documentation of the rationale, and independent input where warranted. Where the process applies, and any mandatory thresholds, depend on the jurisdiction, entity type, and applicable rules.
What disclosures are usually expected for related-party transactions?
Disclosure requirements arise from more than one source and should be distinguished. Applicable accounting standards generally require disclosure of related-party relationships and transactions in the financial statements, including the nature of the relationship and information about the transactions and outstanding balances. Separately, company law, listing rules, and governance codes may require disclosures to the board, to shareholders, or to regulators, sometimes in advance of a transaction. The exact content, thresholds, and timing vary by jurisdiction and framework, so entities generally map the specific disclosure obligations that apply to them rather than assuming a single standard.
How should assurance functions test controls over related-party transactions?
Assurance work generally distinguishes control design from operating effectiveness. Testing typically considers whether controls are designed to identify related parties, route transactions through the appropriate approval channel, and produce required disclosures, and then whether those controls operated as intended over the period. Common procedures include reviewing the completeness of the related-party register, sampling transactions to confirm approvals and recusals occurred, and reconciling disclosed transactions against underlying records. Internal audit typically provides independent assurance over this process, distinct from management's ownership of the controls. The appropriate scope and depth depend on the entity's risk profile and the auditor's professional judgment.

Common misconceptions

A related-party transaction is inherently improper or prohibited.
RPTs are common and often legitimate and beneficial to the entity. The governance concern is not their existence but whether they are conducted on fair terms, properly identified, conflict-managed, approved through appropriate channels, and disclosed. Frameworks generally seek to control and disclose RPTs rather than ban them.
Management approval and internal recording are sufficient to handle a related-party transaction.
Because RPTs typically involve conflicts of interest, many frameworks expect review or approval by independent directors, the audit committee, or shareholders excluding the interested party. Management ordinarily owns identification and execution, but oversight and approval of significant transactions generally rest with an independent body rather than with management alone.
One global rule governs how related parties are defined and RPTs are disclosed.
Definitions, thresholds, approval procedures, and disclosure obligations differ across accounting standards, listing rules, and national statutes. What qualifies as a related party or a reportable transaction depends on the applicable framework, jurisdiction, sector, and entity type, and requires professional judgment applied to specific facts.

Best practices

Maintain an up-to-date register of related parties, refreshed through periodic director and officer declarations and change notifications, so that transactions can be reliably flagged against the current population under the applicable framework.
Establish a clear policy setting thresholds and pathways for RPT identification, review, and approval, specifying when independent directors, the audit committee, or shareholders excluding the interested party must be involved.
Require interested directors and executives to recuse themselves from deliberation and voting on transactions in which they have a conflict, and document the recusal in the relevant minutes.
Assess whether the terms of material RPTs are consistent with arm's-length conditions, using independent review, benchmarking, or third-party valuation where appropriate and proportionate.
Confirm that RPT disclosures in financial statements and regulatory filings meet the requirements of the applicable accounting standards and listing rules for the relevant jurisdiction.
Include RPT identification and control effectiveness within internal audit's scope to test whether transactions are being detected and routed through the correct approval channels, and escalate exceptions to the responsible oversight body.