How Forensic Accountants Analyse Related-Party Transactions in Commercial Disputes

Related-party transactions can become an important issue in commercial disputes where payments, loans, asset transfers or business arrangements involve individuals or entities connected to one another. These transactions may be commercially legitimate, but their financial effect, terms or supporting documentation may require closer examination when a dispute arises.

For solicitors, understanding the financial evidence surrounding related-party transactions can help identify issues that may require investigation or expert analysis. The relevant questions will depend on the nature of the dispute, the relationships between the parties and the records available.

This article explains how a forensic accountant may analyse related-party transactions in commercial disputes, including the records that might be relevant, the comparisons that can be undertaken and the limitations that may affect the conclusions.

What Are Related-Party Transactions?

Related-party transactions are transactions between parties connected through a relationship that might be relevant to the financial or commercial arrangement. The nature of the relationship will depend on the circumstances and the applicable accounting or legal framework.

Examples may include transactions involving:

• A company and one of its directors
• A business and an entity controlled by a shareholder
• Companies under common ownership or control
• A company and a connected business partner
• Transactions involving director loan accounts
• Payments between businesses within the same corporate group
• Transfers of assets between connected entities
• Loans or advances involving individuals connected to a business

The existence of a relationship does not, by itself, establish that a transaction was improper. Connected parties may enter into ordinary commercial arrangements for legitimate reasons.

However, where a transaction is disputed, it may be necessary to examine its purpose, financial treatment, terms and effect on the business concerned.

Why Related-Party Transactions May Matter in Commercial Disputes

Related-party transactions may become relevant where the financial interests of a company, its shareholders, directors or other parties are in dispute.

For example, a dispute may concern whether a company received appropriate consideration for an asset, whether a payment was properly recorded or whether a transaction affected the financial position of a business.

Issues may arise in several contexts.

Commercial and Contractual Disputes

A dispute may involve payments or transfers between connected businesses, particularly where the parties disagree about the purpose or financial effect of an arrangement.

The forensic accountant may be asked to examine the available records and assess how the transactions were recorded and what their financial consequences were.

Shareholder and Director Disputes

Transactions involving directors, shareholders or connected entities may be relevant where the parties disagree about the company's financial position or the treatment of particular payments.

The analysis may involve examining director remuneration, loan accounts, management charges or transfers between connected businesses.

Insolvency-Related Disputes

Where a company has entered insolvency proceedings, transactions involving connected parties may require examination as part of a wider review of the company's financial affairs.

The forensic accountant may be asked to analyse transaction dates, amounts, counterparties and supporting documentation. Whether a transaction raises a legal issue will depend on the applicable law and the circumstances of the case.

Identifying the Relevant Relationships and Transactions

An initial step may involve identifying the parties connected to the business and determining which transactions fall within the agreed scope of the review.

Relevant information may include:

• Company ownership records
• Details of directors and shareholders
• Corporate structure information
• Related-company records
• Accounting ledgers
• Director loan account entries
• Bank transactions
• Contracts and agreements
• Records of asset transfers
• Relevant board minutes or management records

The purpose is to establish the relationships that may be relevant to the disputed transactions and identify the financial records that require examination.

Where several companies or individuals are involved, it may be necessary to distinguish between transactions undertaken by different legal entities. Common ownership does not mean that the entities' financial records or obligations can automatically be treated as interchangeable.

Reviewing the Accounting Records

Once the relevant transactions have been identified, a forensic accountant may examine how they were recorded in the accounts.

This could involve reviewing:

• General ledger entries
• Journal adjustments
• Director loan accounts
• Intercompany balances
• Management accounts
• Annual financial statements
• Bank statements
• Invoices and credit notes
• Loan agreements
• Records of repayments or settlements

The analysis may consider whether the accounting entries correspond with the supporting documents and whether the amounts can be reconciled across the available records.

For example, a payment recorded as a loan may require consideration of the related agreement, repayment history and corresponding accounting entries. The accounting description alone may not establish the full nature of the arrangement.

Similarly, a management charge between connected companies may require examination of the underlying agreement, the services described and the calculation of the amounts charged.

The appropriate analysis will depend on the transaction and the financial question being addressed.

Examining the Commercial Purpose and Terms

A related-party transaction may require closer examination where its commercial purpose or terms are disputed.

Depending on the assignment, a forensic accountant may consider:

• The stated purpose of the transaction
• The contractual terms
• The amount paid or received
• The timing of the transaction
• The services or assets involved
• The basis on which charges were calculated
• The supporting financial records
• The treatment of the transaction in the accounts

Where relevant information is available, the accountant may compare the transaction with other arrangements entered into by the business.

For example, a recurring management fee charged by a connected entity may be examined by reference to the agreement, the services described and the calculation of the amounts charged.

Such a review may help clarify the financial basis of the transaction. It does not necessarily establish whether the arrangement was legally authorised or commercially reasonable, as those questions may require wider evidence and legal analysis.

Comparing Related-Party Transactions With Other Financial Information

Comparisons with other records may help identify differences that require further explanation.

Depending on the circumstances, the forensic accountant may compare related-party transactions with:

• Payments to independent suppliers
• Charges for comparable services
• Historical transactions
• Budgets and management forecasts
• Contractual payment terms
• Bank transactions
• Financial information from connected entities

For example, if a connected company charged a business for services, available invoices and agreements may be compared with the accounting entries and evidence of payment.

The scope for meaningful comparison will depend on whether sufficiently comparable information exists. Differences in the services provided, contractual arrangements, timing or commercial circumstances may affect the usefulness of a comparison.

A difference does not, on its own, establish that a transaction was improper. It may instead identify an issue requiring further investigation or explanation.

Tracing Payments Between Connected Entities

Where funds have moved between related parties, the analysis may extend beyond the initial payment.

A forensic accountant may examine the movement of funds through bank accounts and accounting records to understand how a transaction was reflected across the entities involved.

This may include:

• Identifying the originating account
• Establishing the recipient of a payment
• Reviewing the dates and amounts of transfers
• Comparing bank transactions with ledger entries
• Examining subsequent transfers
• Reviewing repayments or offsetting entries
• Reconciling intercompany balances

For example, a payment from one company to another may be recorded as an intercompany loan. Further analysis may involve examining whether the recipient recorded a corresponding amount and whether subsequent transactions are consistent with the available loan documentation.

Tracing a payment can help establish its movement between accounts or entities. It does not necessarily establish the ultimate beneficial use of the funds or the legal character of the transaction.

Where the work involves following funds through connected entities, Sterling Forensic's asset tracing services might be relevant to the scope of the instruction.

Considering the Financial Effect on the Business

In some disputes, the principal question concerns how related-party transactions affected a company's financial position or reported performance.

The analysis may examine whether particular transactions affected:

• Reported revenue
• Operating expenses
• Profitability
• Cash flow
• Assets and liabilities
• Intercompany balances
• Outstanding loans
• Working capital

For example, recurring charges paid to a connected entity may affect the reported profitability of the business making the payments. The financial significance of those charges will depend on their nature, amount, accounting treatment and the purpose of the analysis.

Where a business valuation is involved, the treatment of related-party transactions may also be relevant to the assessment of maintainable earnings. Any adjustments would need to be considered in the context of the available evidence and the valuation methodology adopted.

Further information about Sterling Forensic's business valuation services is available on its website.

Working With Incomplete or Inconsistent Evidence

Related-party transaction reviews may involve gaps in the records or differences between the accounting information and supporting documentation.

For example:

• An agreement may be unavailable
• A payment may not have a clear supporting invoice
• Intercompany balances may not reconcile
• The accounting treatment may differ between entities
• Records may cover different periods
• The purpose of a transaction may not be clearly documented

In these circumstances, a forensic accountant may compare the available information, identify discrepancies and consider whether additional documents are required.

Where the evidence does not establish a particular fact, the analysis should reflect that limitation. Assumptions and unresolved questions may need to be identified rather than treated as established conclusions.

Distinguishing Financial Findings From Legal Questions

A forensic accountant's role should be defined by the purpose and scope of the instruction.

The accountant may be asked to analyse the financial records, calculate amounts, examine transaction patterns or explain the financial effect of particular arrangements.

However, questions about directors' duties, legal authorisation, the validity of an agreement or whether a transaction gives rise to a particular legal remedy may require legal analysis.

The forensic accountant can provide relevant financial findings within their expertise, while the legal significance of those findings depends on the applicable law and the wider evidence.

Where expert evidence is required, the report should explain the work undertaken, the evidence considered, the methodology applied and any material limitations relevant to the conclusions.

Sterling Forensic provides expert witness reports for proceedings within its England and Wales practice.

What Solicitors May Need to Provide

When instructing a forensic accountant to review related-party transactions, solicitors may wish to identify the financial questions that require consideration and provide the relevant background.

Useful information may include:

• The parties involved and their known relationships
• The transactions in dispute
• The relevant dates and accounting periods
• Available financial statements and ledgers
• Bank statements and transaction records
• Contracts and supporting documentation
• Details of any disputed accounting treatment
• Relevant correspondence
• Previous financial analyses or expert reports
• Any applicable deadlines

The instruction should distinguish between established facts, allegations and questions requiring financial analysis.

It may also be helpful to identify whether the task involves reviewing specific transactions, analysing the overall financial effect of an arrangement or tracing payments between connected entities. These objectives may require different records and methods of analysis.

Conclusion

Related-party transactions can raise important financial questions in commercial disputes, particularly where the parties disagree about the purpose, terms, accounting treatment or financial effect of an arrangement.

A forensic accountant may examine ownership relationships, accounting entries, supporting documents, payment records and relevant comparisons to establish what the available evidence shows. The analysis may also identify discrepancies, unresolved questions and limitations that need to be considered.

The existence of a related-party relationship does not itself establish misconduct. Conclusions should be based on the relevant evidence and the scope of the engagement, with financial findings distinguished from legal questions.

For solicitors considering a forensic accounting review, clearly defining the transactions and financial issues in dispute can help establish the appropriate scope of work. Further information about Sterling Forensic's forensic accounting services is available on its website.

Disclaimer: This article provides general information only and is not legal or accounting advice. The appropriate analysis of related-party transactions will depend on the circumstances of the individual matter, the available evidence and the scope of the forensic accounting instruction.

Last Reviewed: October 2026