Related Party Transactions and Audit Risk: Does Regulations on Related Party Transaction Disclosure Matter?

Related Party Transactions and Audit Risk: Does Regulations on Related Party Transaction Disclosure Matter?





Abstract

Objective: Related parties transaction is one of the most common opportunistic behaviors of managers, which always brings ambiguities with it. This kind of transactions may take away the rights of the minority shareholders and be used as a tool to create a misuse of the economic resources of the organization for the benefit of a special group. Related party transactions are transactions of a company with persons or organizations affiliated with that company; Such as managers, board members, major shareholders, and subsidiaries. Transactions with related parties include activities such as buying and selling, and exchanging assets. In general, there are two different perspectives on the role and impact of related party transactions in companies: the perspective of transaction efficiency and the perspective of conflict of interest. Because related party transactions are difficult to audit and are complex in nature, companies may use these transactions as a tool to manipulate profits. This type of research shows that in companies with more transactions with related parties, the quality of financial reporting is probably at a low level, and as a result, such companies will have to re-present financial statements. So, the related party transactions can be one of the factors affecting audit risk and acceptance of work by auditors. This study examines the effect of related party transactions on audit risk in companies listed on the Tehran Stock Exchange. The audit fee has been used as an audit risk indicator. Also, the moderating effect of the approved regulations on related party transactions disclosure has been examined. We make three main contributions: First, it leads to the expansion and development of the literature of the research conducted in this field in the capital market of Iran. Second, considering that the regulations on related party transaction disclosure have not been examined within the scope of this research; in this aspect, is also innovative and can bring practical suggestions and research ideas for future researchers.



Methods: This research is applied in terms of purpose and descriptive correlation in answering hypotheses. The study's statistical population is all the companies listed on the Tehran Stock Exchange in the years 2006 to 2021. Using the screening method, the financial data of 112 companies were collected (1792 observations). A multivariate regression method based on panel data was used to test the research hypothesis, and Eviews software was used for data analysis.



Results: The results showed that related party transactions have a positive and significant effect on audit risk, and the approved regulations on related party transactions disclosure have caused a more significant impact of related party transactions on audit risk. These results argue that transactions with related parties have a positive and significant effect on audit fees, and the higher the amount of related party transactions in the studied companies, the more fees are paid for auditing; because in this case, auditors should make more efforts to reduce the audit risk caused by transactions with related parties. Because the existence of related party transactions increases the audit risk, and identifying transactions with related parties and verifying the nature and volume of the transactions increases the auditors' risk, as a result, increases the audit fee. In determining the audit fee, auditors consider the risk characteristics of their employer and cover the related risks through higher fees.



Conclusion:The result of this research confirms the conflict of interest view. Considering the positive relationship between related party transactions and audit risk, it is argued that the view of companies in doing transactions with related parties is based on conflict of interest and opportunism. The result of this research confirms the conflict of interest view. Considering the positive relationship between related party transactions and audit risk, it is argued that the view of companies in doing transactions with related parties is based on conflict of interest and opportunism. Therefore, auditors consider audit risk at a high level and demand more fees for more effort to reduce audit risk. Also, regulations on related party transactions disclosure positively strengthen the effect of related party transactions on audit fees. In other words, after the approval of the regulations on related party transactions disclosure in 2011, the effect of transactions with related parties on audit fees (audit risk) has increased. According to the findings of our research, independent auditors are recommended to consider the criterion of the value of transactions with related parties in determining the audit risk before acceptance and in the planning stage. Potential investors are advised to pay attention to the role of related party transactions in evaluating companies and making investment decisions. Also, it is suggested that the stock exchange organization should carry out sufficient supervision regarding compliance with the information disclosure requirements and the approval of transactions with related parties by the listed firms.



Keywords: Related party transactions, Audit risk, Audit fees, regulations on related party transactions disclosure.



Paper Type: Research Paper.