Ask any experienced auditor which section of a financial statement they read most carefully, and related party transactions will almost always be on the list. It's not because these transactions are inherently wrong — a company renting office space from a director, or a subsidiary borrowing from its parent, can be perfectly legitimate. It's because related party dealings are where independence breaks down first, where pricing can quietly drift away from fair value, and where undisclosed conflicts of interest tend to hide. A related party transaction audit in Nepal is really an exercise in verifying that the closeness between two parties hasn't been used to move value out of the company unfairly — or out of sight of the people reading its accounts.
What Qualifies as a Related Party
Nepali law defines "related" relationships fairly broadly, and it's worth knowing the specific categories because auditors test against exactly these definitions:
Directors and their close relatives — Section 2(z9) of the Companies Act, 2063 defines "close relative" precisely, covering spouse, parents, parents-in-law, siblings and siblings-in-law, aunts, uncles, children, grandchildren, and their spouses. A director's dealings with any of these people fall inside the related-party net.
Substantial shareholders — under Section 50, anyone holding 5% or more of a public company's paid-up capital with full voting rights is a "substantial shareholder," and their transactions with the company draw the same scrutiny as a director's would.
Associated, holding, and subsidiary companies — Section 175 specifically addresses transactions between associated companies, requiring disclosure of the date, parties, nature, and value of the transaction.
Key management personnel — under Nepal Financial Reporting Standards (NFRS, aligned with NAS 24 on related party disclosures), this includes the CEO, company secretary, and any officer with authority and responsibility for planning and controlling the company's activities, even without a formal director title.
Common Related-Party Transaction Types
In practice, most related-party issues an auditor encounters fall into a fairly narrow set of transaction types, each carrying its own risk:
Loans and financial assistance — a company lending to or borrowing from a director, shareholder, or affiliated company, often at interest terms that wouldn't be offered to an unrelated borrower.
Sales and purchases — goods or services bought from or sold to a related entity, where pricing can be quietly adjusted to shift profit between two related businesses.
Rent and property transactions — a company leasing premises from a director or a director's family, or entering a "substantial property transaction" as defined under Section 93, which specifically captures transactions exceeding NPR 120,000 (or 5% of total assets, whichever is lower) or annual rental arrangements of NPR 120,000 or more.
Management and consultancy fees — payments to a director, promoter, or affiliated firm for services rendered, where the underlying scope of work and reasonableness of the fee can be difficult to substantiate independently.
Disclosure Requirements in Financial Statements
Related party obligations in Nepal operate on two tracks that reinforce each other. Under the Companies Act, Section 92 requires directors to disclose, in writing and within a set period of appointment, any personal or family interest in the company's transactions, while Section 175 requires specific disclosure of the date, parties, nature, and value of transactions between associated companies. Certain substantial property transactions under Section 93 require prior approval from the general meeting before they can proceed at all. On the accounting side, NFRS requires related party transactions to be disclosed in the notes to the financial statements regardless of whether a price was charged, including the nature of the relationship, the amount of the transaction, outstanding balances at year-end, and any guarantees or commitments involved. An auditor checks both tracks — that the legal disclosure and approval steps were followed, and that the accounting disclosure in the notes is complete and accurate.
Independence Concerns: When the Auditor Has Ties to Related Parties
Related party scrutiny isn't limited to the company's own transactions — it extends to the auditor's relationship with the company as well. If an auditor, or the auditor's close relatives, hold shares in the company, sit on its board, have outstanding loans with it, or provide other services that create a financial dependency, that auditor's objectivity on exactly this topic becomes compromised. ICAN's Code of Ethics and BAFIA both build in restrictions on who is eligible to serve as an auditor for precisely this reason — auditor independence and related party scrutiny are two sides of the same governance concern, and a firm that fails one test usually can't be trusted on the other.
Red Flags Auditors Look For
A handful of patterns tend to draw immediate auditor attention when reviewing related party activity:
Pricing that clearly departs from what an unrelated party would have paid, without a documented commercial justification.
Transactions that surface only through bank statements or third-party confirmations, with no board minute, invoice, or contract behind them.
Loans to directors or shareholders with no fixed repayment schedule, no interest, or repeated rollovers.
Transactions concentrated suspiciously close to year-end, often timed to affect reported profit or asset values.
Circular transactions between related entities that appear to serve no independent business purpose beyond moving funds or profit around the group.
Extra Scrutiny for Listed (NEPSE) Companies
Listed companies face a further layer of oversight under the Securities Board of Nepal's (SEBON) corporate governance guidelines, which specifically address related-party transaction limits and mandatory disclosure to protect minority shareholders. SEBON's directives generally prohibit listed companies from extending financial transactions or forming partnerships with insiders who hold vested interests, and push for related-party dealings to be conducted at arm's length, disclosed transparently, and, where material, approved independently of the interested director's participation. For a listed company, a poorly documented related-party transaction isn't just an audit finding — it's a governance failure that SEBON actively monitors as part of its ongoing supervision of the capital market.
How to Document Related-Party Transactions Properly Before Audit
The single biggest factor in whether a related-party transaction sails through audit or triggers a qualification is how well it was documented at the time it happened, not after the fact. A practical approach includes:
1. Maintain a related-party register listing directors, close relatives, substantial shareholders, and affiliated entities, updated whenever the ownership or board structure changes.
2. Route every related-party transaction through a formal board resolution, with the interested director's disclosure and, where required, abstention recorded in the minutes.
3. Benchmark pricing against comparable third-party terms wherever possible, and keep that comparison on file.
4. Obtain independent valuations for significant property or asset transactions with related parties.
5. Prepare the related-party note for the financial statements as transactions occur through the year, rather than reconstructing it at audit time.
Conclusion
Related party transactions sit at the intersection of company law, accounting standards, and auditor independence rules in Nepal, which is exactly why they draw so much scrutiny. None of this means related-party dealing itself is a problem — plenty of legitimate business happens between directors, family members, and group companies. What separates a clean related-party note from an audit qualification is almost always documentation: whether the relationship was disclosed, the pricing was defensible, and the approval trail exists before the auditor ever asks the question.
If your company has ongoing dealings with directors, shareholders, or affiliated entities, it's worth reviewing your related-party documentation with your Chartered Accountant well before the audit begins.
Disclaimer: This article is for general information only and does not constitute legal or tax advice. Tax rules and their application can vary based on individual circumstances. Please consult an ICAN-registered Chartered Accountant before making any decisions related to related-party transactions or audit compliance.
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