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Explain the issue of related party transactions

Explain the issue of related party transactions not being arm's length transactions and the risk that transactions with related parties might not be valued at the same amount as they would be with an independent third party. Is it simply because the actual amount of the transaction would be higher with a third party?

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You can thank Enron executives for giving related party transactions a bad name, which is also the reason why all related party transactions must be disclosed on a company's financial statements. A related party means that the company has some prior connection to the party that they're going business with, or engaging on a deal with, but it is not an arm's length transaction. In an arm's length transaction, the parties are completely independent, and remain so during the entire deal. You could say that the related party transaction is a complete opposite of an arm's length transaction. The arm's length transaction is conducted at just that - an arm's length away. It is used to immediately dismiss any notion of pressure or incentives from the other party in conducting the transaction. An arm's length transaction would be a very low audit risk. It would be hard to have fraud in an arm's length transaction, and ...

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Explain the issue of related party transactions not being arm's length transactions and the risk that transactions with related parties might not be valued at the same amount as they would be with an independent third party. Is it simply because the actual amount of the transaction would be higher with a third party?

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