Related party disclosure is one note in the accounts and it generates a disproportionate share of audit friction. The reason is structural: the auditor cannot identify related parties without management’s help, and management routinely underestimates who counts.
The definition is wider than people think
Most directors think of related parties as the group companies. The definition extends considerably further.
Group entities. Parent, subsidiaries, fellow subsidiaries. Straightforward.
Associates and joint ventures. Including the group’s interests in them.
Key management personnel. The people with authority and responsibility for planning, directing and controlling the entity. Usually the board, and often others: a finance director who is not on the board, a general manager with real authority.
Close family members of those people. Children, spouse or domestic partner, dependants of either. Note that this includes the spouse’s dependants.
Entities controlled or jointly controlled by any of the above. This is the one that catches people. If a director’s spouse owns a company that supplies you, that company is a related party. If a director owns the property you lease, the landlord is a related party.
Post-employment benefit plans for the benefit of employees of the entity.
What actually has to be disclosed
Three things, broadly.
Relationships involving control, disclosed whether or not there were transactions. Parent and ultimate controlling party get named even in a dormant year.
Transactions and outstanding balances, including commitments. Nature of the relationship, amount of the transactions, balances outstanding including terms and conditions and whether they are secured, provisions for doubtful debts, and expense recognised for bad or doubtful debts.
Key management personnel compensation, in aggregate and by category depending on the framework applied.
The omissions we find every year
Director loan accounts. Overdrawn director’s current accounts, or loans in either direction, disclosed as a net figure or not at all. Movements matter, not just the closing balance, and there are separate legal and tax consequences to loans to directors.
Property leased from a director or connected company. Extremely common in owner-managed businesses and regularly omitted because it feels like an ordinary rent payment.
Management charges within a group. Charged, sometimes not documented, occasionally not at a consistent rate, and disclosed inconsistently at each end.
A spouse or child on the payroll. Employment is a related party transaction. It does not need justifying in the accounts, but it does need disclosing where the individual is a related party.
Transactions with a company a director “helps out with”. Directorship or significant influence in another entity that trades with you. Directors often do not think of a non-executive role elsewhere as creating a related party.
Guarantees. A director personally guaranteeing a company facility, or the company guaranteeing an obligation of a connected entity. Frequently missed because no cash moves.
The ultimate controlling party. In a structure with trusts or multiple holding entities, working out who ultimately controls, and disclosing it, is sometimes genuinely difficult and often skipped.
How to make this straightforward
Keep a standing related party register. One document listing every director and key manager, their close family, and the entities each of them controls or influences. Update it when the board changes rather than reconstructing it annually.
Ask directly, in writing, every year. A short questionnaire to each director asking about their other directorships, shareholdings, close family and any transactions with the company. It takes ten minutes to complete and it is the auditor’s primary evidence.
Flag transactions as they happen. A supplier onboarding process that asks whether the supplier is connected to any director catches most of it at source.
Do not net things off. Disclosure is of transactions and balances, not of the net position after offsetting.
Why the auditor pushes on this
Related party transactions are a recognised fraud risk, because they are how value leaves a company without appearing to. That is not an accusation, it is why the standards require specific procedures. An auditor who accepts a related party note without probing has not done the work.
Answering thoroughly and early is faster than answering repeatedly. The register is twenty minutes a year and it removes the entire conversation.