How Forensic Accountants Analyse Related-Party Transactions in Suspected Fraud Cases

Related-party transactions can form a legitimate part of commercial activity. Companies may trade with businesses under common ownership, directors may have interests in connected entities, and group companies may transfer funds or provide services to one another.

However, where fraud or financial misconduct is suspected, transactions involving connected parties may require closer examination. Accounting records may not, by themselves, explain why a payment was made, what commercial purpose it served, or whether the recorded value accurately reflects the underlying transaction.

A forensic accountant may examine the available financial evidence to help establish what the records show, identify matters requiring further investigation, and assess different explanations for the transactions. Further information about the firm's forensic accounting services is available on the website.

This article explains some of the financial analysis that may be relevant when related-party transactions form part of a suspected fraud investigation.

What Is a Related-Party Transaction?

A related-party transaction generally involves two parties that have a particular relationship or connection. Depending on the circumstances and applicable accounting or legal framework, the relationship might arise through ownership, management, control, family interests, or another connection.

Examples may include:

• Transactions between companies with common ownership
• Payments between companies controlled by the same individuals
• Loans or advances involving directors or connected businesses
• Transfers of assets between connected entities
• Management or consultancy payments involving related businesses
• Transactions involving individuals who have a financial interest in more than one entity

The existence of a related-party transaction does not, by itself, establish fraud or wrongdoing.

The significance of a transaction will generally depend on its circumstances, supporting evidence, accounting treatment and the wider financial records available for review.

Why Related-Party Transactions May Require Financial Analysis

Transactions between connected parties can sometimes be more difficult to assess than ordinary third-party transactions.

An apparently straightforward payment may involve several connected entities, multiple bank accounts, intercompany balances or accounting entries made at different stages of the transaction.

A forensic accounting review may therefore consider:

• Who initiated the transaction
• Who authorised it
• Which entities were involved
• The stated purpose of the transaction
• The amount and timing of the payment
• The supporting documentation
• The accounting treatment
• What happened to the funds afterwards
• Whether the transaction was subsequently reversed or adjusted

The purpose of this analysis is not necessarily to reach a conclusion from one transaction. The transaction may need to be considered alongside the wider financial records and other available evidence.

How a Forensic Accountant May Analyse Related-Party Transactions

Identifying the Parties and Their Connections

The analysis may begin by establishing which individuals and entities appear to be connected based on the available records.

Depending on the circumstances, this may require review of available corporate records, accounting ledgers, ownership information, director information, correspondence, contracts and financial statements.

The objective is to understand the relationships relevant to the transactions being examined.

A transaction that initially appears to be between independent businesses may require further consideration if the available evidence indicates a connection that was not apparent from the initial records.

The firm's areas of forensic investigation provide further information about the financial investigation areas covered by the practice.

Reviewing the Accounting Ledger

The general ledger can provide an initial picture of how related-party transactions were recorded.

Relevant entries may include:

• Payments and receipts
• Loans and advances
• Intercompany balances
• Director accounts
• Professional or consultancy fees
• Asset purchases and disposals
• Journal entries
• Write-offs and adjustments

Ledger analysis can help identify transactions that require supporting documentation or further explanation.

A ledger entry alone may not establish the underlying commercial circumstances. It may therefore need to be compared with other financial and documentary evidence.

Comparing Accounting Records With Bank Transactions

Bank statements can provide another source of financial evidence.

A forensic accountant may compare ledger entries with corresponding bank transactions to establish whether recorded payments or receipts are reflected in the available banking records.

This may help identify matters such as:

• Differences between ledger and bank amounts
• Transactions recorded on different dates
• Payments that do not appear to have a corresponding entry
• Transfers between connected entities requiring further explanation
• Repeated or unusual payment patterns
• Transfers followed by further payments to other accounts

The significance of any discrepancy depends on the circumstances and the available evidence. A difference does not automatically indicate fraud or financial misconduct.

Examining the Commercial Purpose

The stated reason for a transaction may be compared with the available supporting evidence.

For example, where a payment is described as a consultancy fee, relevant questions may include:

• Is there a consultancy agreement?
• What services were reportedly provided?
• Are invoices available?
• Was the payment consistent with the agreement?
• Is there evidence that the services were performed?
• How was the amount determined?
• Was the transaction properly recorded?

The analysis is intended to test the available evidence rather than assume that a transaction was improper because it involved a connected party.

Tracing the Flow of Funds

Where the financial records permit, the movement of funds may be examined from the original payment through subsequent transactions.

This may involve reviewing multiple bank accounts or entities and establishing the sequence of transfers.

For example, a payment from Company A to Company B may subsequently be transferred from Company B to another connected entity. Understanding that sequence may help explain the movement of funds and identify matters requiring further investigation.

The extent to which funds can be traced will depend on the quality and completeness of the available records.

Analysing Patterns Across Multiple Transactions

A single related-party transaction may have an ordinary commercial explanation. A wider review may provide additional context.

Forensic accounting analysis may therefore consider transactions collectively rather than examining each entry in isolation.

Repeated Transactions

Repeated payments involving the same connected parties may warrant examination of the underlying agreements, invoices and accounting treatment.

Timing of Transactions

The timing of payments may be compared with relevant financial or corporate events where reliable records are available.

Similar Transaction Amounts

Repeated transactions involving similar amounts may be examined alongside their stated purpose, supporting documentation and accounting treatment.

Transfers Between Connected Entities

Where several related businesses are involved, mapping transactions between the entities may help establish the overall movement of funds.

These patterns should be treated as areas for further analysis rather than evidence of fraudulent conduct by themselves.

What Happens When Records Are Incomplete?

Financial investigations do not always begin with a complete set of accounting records.

Records may be missing, fragmented across systems, unavailable for particular periods or inconsistent between accounting and banking information.

In these circumstances, a forensic accountant may attempt to reconstruct relevant parts of the financial history using the available evidence. This may be relevant where a matter involves fragmented financial data reconstruction.

Depending on the records available, this could involve comparing:

• Bank statements with ledger entries
• Invoices with payments
• Intercompany balances with underlying transactions
• Financial statements with underlying accounting records
• Opening balances with subsequent transactions
• Transaction dates with supporting correspondence

The resulting analysis should make clear what is supported by the records and what remains uncertain.

Distinguishing Financial Irregularities From Evidence of Fraud

A financial discrepancy does not necessarily mean that fraud has occurred.

Differences can arise from accounting errors, timing differences, incomplete records, incorrect coding, legitimate adjustments, system changes or other explanations.

Forensic accounting analysis may help assess different possible explanations by testing the available evidence.

This may involve asking:

1. What does the accounting record show?
2. What does the underlying transaction evidence show?
3. Is there a documented explanation for the transaction?
4. Are the records internally consistent?
5. Is there evidence supporting the stated commercial purpose?
6. Are there alternative explanations?
7. What evidence would be needed to resolve any remaining uncertainty?

This approach can help keep the financial analysis focused on evidence rather than assumptions.

Common Evidence Used in a Related-Party Transaction Review

The evidence available will vary from case to case. Depending on the circumstances, relevant material may include:

• Bank statements
• General ledgers
• Trial balances
• Journals
• Invoices
• Contracts
• Loan documentation
• Financial statements
• Management accounts
• Company records
• Payroll information
• Tax records, where relevant and available
• Emails and correspondence
• Payment instructions
• Accounting system exports

The relevance and reliability of each source should be considered in the context of the particular investigation.

Questions a Forensic Accountant May Help Address

Where related-party transactions are disputed, financial analysis may help address questions such as:

• Which entities or individuals appear to be involved based on the available records?
• What amounts were transferred?
• When did the transactions occur?
• How were the transactions recorded?
• What supporting documents are available?
• Can the movement of funds be established from the available records?
• Are there discrepancies between accounting and banking records?
• What explanations are supported by the financial evidence?
• Which aspects remain uncertain because of missing or incomplete information?

The precise questions will depend on the dispute, investigation or proceedings involved.

Limitations of Related-Party Transaction Analysis

Forensic accounting analysis depends on the quality, completeness and reliability of the evidence available.

A lack of documentation may make it difficult to establish the purpose or circumstances of a transaction. Similarly, incomplete banking records may limit the extent to which funds can be traced.

Financial analysis also needs to be distinguished from conclusions that depend on legal findings, witness evidence or other matters outside the accounting evidence.

A careful analysis should therefore distinguish between:

• Facts established by the available records
• Calculations derived from those records
• Matters supported by documentary evidence
• Assumptions used in the analysis
• Alternative explanations
• Matters that cannot be established from the available evidence

Conclusion

Related-party transactions can form part of ordinary commercial activity, but they may also require detailed financial examination when their purpose, accounting treatment or movement of funds is disputed.

A forensic accountant may analyse the relationships between parties, accounting records, bank transactions, supporting documents and wider transaction patterns. The analysis can help clarify what can reasonably be established from the financial evidence, what requires further investigation and where limitations remain.

The existence of a related-party transaction should not, by itself, be treated as evidence of fraud. Its significance depends on the circumstances, supporting evidence and the wider financial information available.

Where a matter requires a forensic accounting expert, relevant case information can be provided through the firm's instruction process.

Disclaimer: This article provides general information about forensic accounting analysis and is not legal, accounting or investigative advice for any particular matter. The appropriate approach will depend on the facts, evidence and applicable legal or procedural requirements.

Last Reviewed: September 2026