Relevance of forensic auditing in detecting fraud in related party transactions: a case study of the Duration Gold Mining Group

Abstract

Apart from their declared motives, related parties transactions (RPTs) can mask stakes related to the enrichment of one party at the expense of other parties that are not involved in the transaction. They may, thus, lead to the expropriation of minority shareholders, to the benefit of controlling shareholders, directors or administrators. These groups can make profits by selling to the firm (or buying from it), assets, goods or services, at prices higher (lower) than the market price. They can also obtain loans on favourable terms, use the firm’s assets as security for their personal loans, and even dilute the interest of minority shareholders by acquiring additional shares at preferential prices. Both profits and assets can be transferred via transactions between firms belonging to the same group. The transfer of wealth goes from firms located at the bottom of the pyramid towards those located at the top, where the ownership rights of the principal shareholders are higher. Although the duty of the auditor has long been emphasized, and various related party transactions disclosure standards, the unrelenting prevalence of dubious business contracts gives evidence that the currently enacted mechanisms are not foolproof. There is no distinct feeble link; each portion of the series has its identifiable distinct challenges that renders each mechanism either difficult to put into practice or to enforce. Consequently, forensic (fraud or investigative) auditing has recently been emphasized as an investor protection mechanism against abusive related party transactions. This research therefore sought to analyse the relevance of forensic auditing in detecting fraud in related party transactions.