The National Financial Reporting Authority (NFRA) in its Audit Committee Interaction Series 3 – Related Parties has released an article and it highlights the NFRA’s increased scrutiny of related-party transactions (RPTs) and its intent to tighten audit procedures in this area. The NFRA’s concern stems from major frauds involving RPTs, indicating a need for auditors to be more vigilant. It emphasized the need for auditors to exercise greater scrutiny concerning related party transactions, particularly in alignment with Standard on Auditing (SA) 550. This stems from concerns that related party transactions, due to their inherent potential for conflicts of interest, have been a source of significant financial irregularities. Auditors are therefore expected to move beyond superficial reviews and delve deeper into the substance of these transactions.

The auditor needs to obtain an understanding of the entity’s related party relationships and transactions sufficient enough to be able to conclude whether the financial statements, insofar as they are affected by those relationships and transactions:

• • achieve a true and fair presentation
  • are not misleading

This involves rigorous evaluation of whether these transactions are conducted at arm’s length, meaning on terms equivalent to those between independent parties. Furthermore, auditors should meticulously examine the adequacy of disclosures in the financial statements, ensuring they provide a transparent and accurate representation of the related party relationships and transactions. Auditors are required to focus on:

• Identification: Auditors must thoroughly identify all related parties and transactions using inquiries, minutes, and documents.
• Arm’s Length Proof: Auditors require evidence to support management’s arm’s length claims, such as market data or valuations.
• Disclosure & Documentation: Auditors ensure clear RPT disclosures in financials, emphasizing robust documentation for arm’s length compliance.

Make Transfer Pricing a flawless green light show

Auditors are intensifying their focus on related party transactions. Don’t just hope for the best – prepare for the worst. Companies must have readily available, robust transfer pricing documentation and analysis that unequivocally proves all related party transactions were conducted at arm’s length, as if between independent entities. When auditors arrive to verify authenticity, your company should be fully equipped to demonstrate clear, undeniable compliance with arm’s length principles, eliminating any room for doubt or challenge.

This comprehensive transfer pricing documentation is not just a regulatory formality; it’s your company’s frontline defence. It provides a clear, auditable trail of how arm’s length pricing was determined, demonstrating due diligence and minimizing potential tax disputes. Think of it as your fire-resistant suit, ensuring you emerge unscathed from the auditor’s scrutiny.

BCL for the help!

For expert guidance in navigating this complex transfer pricing challenges and safeguarding your business against potential risks, engage with BCL India. Our specialized services can help you establish and maintain compliant, defensible transfer pricing policies, ensuring you’re prepared for increased regulatory scrutiny.

Our suite of transfer pricing solutions comprises of:

• Applicability Determination
• Transfer Pricing Audit Support
• Executing comprehensive Transfer Pricing studies as prescribed by the Indian regulatory authorities
• Master File and CbC Reporting
• Providing guidance and support for establishing GCCs in India.