01-01-2015, 02:27 PM
Related party transaction to boost profits and trick investors
just learnt a bit about related party transaction. The CEO/CFO can set up a bonus company, buy stuff from the listed company and artificially boost up the listed company's profits.
investors will see wa this company got high profit, and value it higher. damm tricks
The way to identify this is to read foot notes in the annual report and see their declarations.
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DEFINITION of 'Related-Party Transaction'
A business deal or arrangement between two parties who are joined by a special relationship prior to the deal. For example, a business transaction between a major shareholder and the corporation, such as a contract for the shareholder's company to perform renovations to the corporation's offices, would be deemed a related-party transaction.
INVESTOPEDIA EXPLAINS 'Related-Party Transaction'
American public companies are required to disclose all transactions with related parties such as executives, associates and their family members in their annual 10-K report. While the great majority of related-party transactions are perfectly normal, the special relationship inherent between the involved parties creates potential conflicts of interest which can result in actions which benefit the people involved as opposed to the shareholders. For example, in the infamous Enron scandal, related-party transactions with "special-purpose entities" were used to help the company misreport their accounting numbers.
just learnt a bit about related party transaction. The CEO/CFO can set up a bonus company, buy stuff from the listed company and artificially boost up the listed company's profits.
investors will see wa this company got high profit, and value it higher. damm tricks
The way to identify this is to read foot notes in the annual report and see their declarations.
============================================
DEFINITION of 'Related-Party Transaction'
A business deal or arrangement between two parties who are joined by a special relationship prior to the deal. For example, a business transaction between a major shareholder and the corporation, such as a contract for the shareholder's company to perform renovations to the corporation's offices, would be deemed a related-party transaction.
INVESTOPEDIA EXPLAINS 'Related-Party Transaction'
American public companies are required to disclose all transactions with related parties such as executives, associates and their family members in their annual 10-K report. While the great majority of related-party transactions are perfectly normal, the special relationship inherent between the involved parties creates potential conflicts of interest which can result in actions which benefit the people involved as opposed to the shareholders. For example, in the infamous Enron scandal, related-party transactions with "special-purpose entities" were used to help the company misreport their accounting numbers.