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

Document Type : Research Paper

Authors

1 Department of Economics and Accounting, Faculty of Management and Economics, University of Guilan, Rasht, Iran.

2 Department of Accounting, Lahijan Branch, Islamic Azad University, Lahijan, Iran.

3 Department of Audit, Shafaq Non-Profit Institute, Nashtarud, Iran.

10.22103/jak.2024.21883.3918

Abstract

Objective: Related parties' transactions are one of the managers' most common opportunistic behaviors and always bring ambiguities. This kind of transaction may take away the rights of the minority shareholders and misuse the organization's economic resources for the benefit of a special group. Related party transactions are company transactions with persons or organizations affiliated with that company, Such as managers, board members, major shareholders, and subsidiaries. Transactions with related parties include buying, 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 complex, companies may use these transactions to manipulate profits. This type of research shows that the quality of financial reporting is probably low in companies with more transactions with related parties. 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 auditors' acceptance of work. 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 transaction disclosure has been examined. We make three main contributions: First, it leads to the expansion and development of the literature on 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, this aspect is also innovative and can bring practical suggestions and research ideas for future researchers.
 Method: This research is applied in terms of purpose and descriptive correlation to answer hypotheses. The study's statistical population is all the companies listed on the Tehran Stock Exchange from 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, identifying transactions with related parties and verifying the nature and volume of the transactions increases the auditors' risk, which 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. Therefore, auditors consider audit risk at a high level and demand more fees for more effort to reduce audit risk. Also, regulations on disclosure of related party transactions 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 our research findings, 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 listed firms' approval of transactions with related parties.

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References

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History

  • Receive Date: 15 July 2023
  • Revise Date: 26 August 2023
  • Accept Date: 15 May 2024

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