Related party transactions disclosure and procedures: a critical analysis in business groups

Abstract

Purpose

In the light of the risks involved in related party transactions, transparent disclosure is particularly important. The impact of related party transactions is relevant for all types of company, but there is greater complexity in business groups where they can be easier to hide. Focusing on business groups, this study aims to analyze the accuracy and transparency of related party transaction information, its understandability, compliance with legislation and comparability. It also examines whether shareholders can be fully informed of all related party transactions by reading only the consolidated financial statement.

Design/methodology/approach

Three case studies are used. The units of analysis are three corporate groups in which the parent company is listed on the Milan Stock Exchange as of 1 July 2015. The authors use two different sets of information. The first is secondary data from company procedures, annual reports and other official documents. They analyzed the separate financial statement of each firm, including the separate financial statement of the parent company and compared all relevant information from the consolidated financial statement and the separate financial statement. The second set is primary data from face-to-face semi-structured interviews and observation.

Findings

This study underlines that there is no requirement for a specific classification of related party transactions disclosure, and as a consequence, it is not possible to compare information. An unambiguous framework for disclosure, established by regulation or legislation, for use by companies supplying related party transactions information would be useful.

Originality/value

The results offer possible recommendations for regulators to improve presentation of related party transaction information without increasing the amount of information required.

Citation

Marchini, P.L., Andrei, P. and Medioli, A. (2019), "Related party transactions disclosure and procedures: a critical analysis in business groups", Corporate Governance, Vol. 19 No. 6, pp. 1253-1273. https://doi.org/10.1108/CG-08-2018-0281