Governance Under the Spotlight: Managing Related Party Risk

Related party transactions are a routine part of many businesses. They are often entirely legitimate and commercially sensible. However, they remain one of the most consistently scrutinised areas of financial reporting.

Where disclosures are incomplete or unclear, the risks are not just technical—they can extend to regulatory challenge, reputational damage and loss of stakeholder confidence.

What is a Related Party and Why It Matters

A related party is any individual or entity with the ability to influence a company’s decisions. This typically includes:

• Directors and key management
• Shareholders with significant influence
• Group companies and entities under common control
• Close family members of those individuals

The underlying principle is simple: where relationships could influence transactions, transparency is expected. Unlike transactions between independent third parties, related party arrangements may not be conducted on normal commercial terms. Even where they are, users of the financial statements need visibility.

Why This Area Is Under Increasing Scrutiny

Related party disclosures sit at the intersection of accounting, governance and company law. As a result, they attract particular attention from regulators.

Recent developments have only heightened this focus:

• Greater regulatory scrutiny of financial reporting
• Enhanced powers for Companies House under recent reforms
• Increased accessibility of financial information through digital filing
• Ongoing emphasis on director accountability and transparency

In practice, this means that disclosures are more visible and are more likely to be challenged, than ever before.

Where Risks Commonly Arise

In our experience, issues rarely arise because transactions are inappropriate. More often, they arise because relationships or disclosures are incomplete.

Common areas of difficulty include:

• Identifying all relevant relationships
  Particularly where group structures, indirect interests or family connections are involved
• Judging what needs to be disclosed
  Transactions may be small in value but still significant due to the individuals involved
• Consistency of information
  Disclosures must align with board minutes, statutory records and director declarations
• Assumptions around “arm’s length”
  Even where terms are commercial, this must be considered and supported

These challenges can lead to omissions that only become apparent during audit or regulatory review.

The Consequences of Getting It Wrong

Where related party disclosures are not handled correctly, the impact can extend beyond the accounts themselves. Potential consequences include:

• Regulatory challenge or enquiry
• Delays in audit or filing
• Reputational concerns with lenders, investors or stakeholders
• Increased scrutiny in future reporting periods

Importantly, issues in this area can raise wider questions about governance and oversight, even where underlying transactions are entirely appropriate.

A Growing Area of Focus

"The direction of travel in UK corporate reporting is clear: greater transparency, stronger governance and increased accountability," says Negin Balajam, Auditor at Arnold Hill & Co LLP.

"Related party disclosures are a key part of that picture. They provide insight into how a business is run, how decisions are made, and whether transactions are conducted fairly. As expectations continue to evolve, this is likely to remain an area of ongoing focus for regulators, auditors and stakeholders alike."

How We Can Help

Understanding related party relationships - and ensuring they are appropriately reflected in financial reporting - can be more complex than it first appears.

If you would like to discuss how this may apply to your business, or review your current approach, please get in touch with our team.

Author, Negin Balajam  - Auditor

Negin.Balajam@arnoldhill.co.uk