what is a related party transaction 
the term related party transaction refers to a deal or arrangement made between two parties who are joined by a preexisting business relationship or common interest companies often seek business deals with parties with whom they are familiar or have a common interest related party transactions are legal but may create conflicts of interest public companies must disclose these transactions investopedia jessica olahtypes of transactionsrelated parties who make transactions may be business affiliates shareholder groups or subsidiaries related party transactions can includethese transactions are not illegal but can cloud the business environment by leading to conflicts of interest they may show favorable treatment for close associates of the hiring business consider a company that contracts with a major shareholder s business to renovate its offices in some cases related party transactions must be approved by management consensus or a company s board of directors 1regulationsin the united states securities regulatory agencies ensure that related party transactions are conflict free and do not affect shareholders value or the corporation s profits negatively the securities and exchange commission sec requires that all publicly traded companies disclose all transactions with related parties such as executives associates and family members in their quarterly 10 q reports and their annual 10 k reports 2 many companies have compliance policies and procedures in place that outline how to document and implement related party transactions the financial accounting standards board fasb has accounting standards for related party transactions for public private and non profit organizations some of these standards include monitoring of payment competitiveness payment terms monetary transactions and authorized expenses 3related party transactions must be reported transparently to ensure that all actions are legal and ethical and do not compromise shareholder value exampleenron was a u s based energy and commodities company based in houston in the infamous scandal of 2001 the company used related party transactions with special purpose entities to help conceal billions of dollars in debt from failed business ventures and investments the related parties misled the board of directors their audit committee employees as well as the public these fraudulent related party transactions led to enron s bankruptcy prison sentences for its executives lost pensions and savings of employees and shareholders and the ruin and closure of arthur andersen the auditor for enron which was found guilty of federal crimes and sec violations 4this financial disaster led to the development of the sarbanes oxley act of 2002 which established new and expanded existing requirements for u s public company boards management and public accounting firms including specific rules that limit conflicts of interest arising from related party transactions 5