Due diligence tips – Are you paying enough attention to related-party transactions
Abstract: Related-party transactions played a major role in accounting scandals that happened at Enron and Tyco International. But such scandals aren’t unique to large public companies that engage in complex business transactions. In fact, unaudited private firms may be at even greater risk. Lenders typically act as gatekeepers for small borrowers and scrutinize their related-party transactions as part of their regular due diligence procedures. This article describes common related-party transactions and suggests ways to unearth undisclosed related-party relationships and unusual transactions. A sidebar encourages lenders to monitor performance-based executive compensation for financial misstatement risks, too.