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As the 2022 edition of Deloitte’s “Audit Committee Guide” points out, NYSE and Nasdaq rules require that an independent board committee review & oversee related-party transactions – and that responsibility often falls to the audit committee. Deloitte notes:

While these types of transactions often occur in the normal course of business, transactions among related parties are sometimes associated with the risk of misstatement or omission in financial reporting, whether by error or fraud. Auditors are required to scrutinize related-party transactions that may pose an increased risk of fraud. These include transactions involving directors, executives, and their families; significant unusual transactions that are outside the normal course of business; and other financial relationships with the company’s executive officers and directors. Audit committees must be alert to these transactions as part of their oversight responsibilities.

The Guide suggests that audit committees consider asking these 6 questions:

1. What are the business reasons for the transaction? Are these reasons in line with the company’s overall strategy and objectives?

2. Are the terms of the transaction consistent with the market? In other words, would these terms apply to an unaffiliated party?

3. When and how will the transaction be disclosed? How will investors view the transaction when it is disclosed?

4. What impact will the transaction have on the financial statements?

5. Which insiders could benefit from the transaction, and in what way?

6. Are outside advisers needed to help understand the implications of the transaction?

Visit our “Audit Committees” and “Related Party Transactions” Practice Areas for more guidance on these topics.

– Liz Dunshee