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Set up related-party controls as a six-stage chain: determine the rules that apply to your construction business, maintain a current related-party register, screen transactions before anyone commits the company, obtain independent and documented approval, reconcile activity to the books and disclosures, and test and remediate the controls. The exact definition of a related party, approval threshold, exemption, filing and deadline depends on your company’s jurisdiction, accounting framework, group structure and listing status.
This guide gives controllers, finance leaders, internal auditors, compliance teams and audit committees a practical design. It uses construction examples such as subcontractors, equipment leases, development joint ventures, employee advances, guarantees and no-charge services, while keeping management responsibilities separate from external-auditor procedures.
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Why related-party controls matter in construction
Construction groups often operate through several legal entities and long-running projects. A parent may lease equipment to a subsidiary, a director may own a subcontractor, a project company may borrow from another group entity, or a family member of a key manager may supply materials. These arrangements can be legitimate and commercially sensible, but they create risks that ordinary accounts-payable controls may miss.
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- A transaction can be absent from the general ledger’s obvious vendor population when the counterparty is new, uses a trading name, or is routed through an intermediary.
- A service or guarantee supplied at no charge can still be a related-party transaction under a framework that covers transfers of resources, services or obligations regardless of price.
- A price that appears to be a market price does not automatically remove approval, conflict-of-interest or disclosure requirements.
- Several small transactions can become material when aggregated by counterparty, project, director or relationship.
- Late identification can leave the company unable to explain the business purpose, terms, balances or approvals when the accounts are closed.
The objective is risk reduction, reliable reporting, transparent governance and timely remediation. No control framework guarantees that fraud or an undisclosed conflict will never occur.
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Start with the rules and scope that apply
Before writing a procedure, map the requirements for every entity in scope. A construction group may have different obligations for a privately held operating company, a listed parent, a joint venture, a regulated lender subsidiary and a project company. Have counsel or the entity’s reporting specialist confirm the legal applicability rather than copying another company’s policy.
Build a requirements matrix
Record, for each entity and jurisdiction, the source of the rule, the owner, the event that triggers a review, the approval level, the disclosure destination and the next review date. Include:
- Country or state of incorporation and principal operations.
- Parent, subsidiary, associate, joint-venture and special-purpose-vehicle relationships.
- Listing venue and securities-law requirements, if any.
- Accounting framework used for statutory and consolidated reporting.
- Sector rules, financing covenants, shareholder agreements and board-reserved matters.
- Internal policy thresholds and escalation rules, clearly labelled as policy rather than law.
Keep the matrix under version control. When a listing status, ownership interest, accounting framework or legal entity changes, trigger a scope review instead of waiting for year-end.
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IAS 24 is an accounting disclosure standard. The IFRS Foundation describes related persons and entities through control, joint control, significant influence, key management and related-entity connections. It defines a transaction broadly:
“A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.”
That wording is why a free equipment loan, donated project-management support or an obligation assumed on another entity’s behalf may still need assessment.
PCAOB AS 2410 governs auditor work within its scope. It discusses auditors obtaining an understanding of the company’s processes for identifying related parties, authorizing or approving transactions, accounting for them and disclosing them. It is evidence of the control topics management should be able to explain; it is not a universal management approval policy.
FCA DTR 7.3 applies to issuers within that UK Handbook provision. It requires adequate procedures, systems and controls to assess whether a related-party transaction is in the ordinary course and on normal market terms, and it excludes the related party and specified associated persons from taking part in that assessment. Do not extend this rule to every UK entity or transaction.
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SEBI search results include February and June 2025 circulars concerning minimum information for audit committee and shareholder review. The June result is later, but the precise commencement and current text should be checked in the applicable SEBI/LODR materials before an India-specific procedure is issued.
AUASB ASA 550 explanatory material gives examples of management and governance controls, including assigned responsibility for identification and disclosure, timely governance discussion, independent approval, periodic internal-audit review and whistleblowing. Those are examples, not a universal mandated checklist.
Control 1: Maintain a complete related-party master list
The control population cannot be inferred from the general ledger alone. Use the definitions in the framework that applies to each reporting entity and document the reason a person or organization is included or excluded.
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Collect declarations at onboarding and when facts change
Require directors, key management and other people identified by the governing framework or policy to disclose relevant interests when they join, on a periodic cycle and whenever circumstances change. Ask for ownership, control, significant influence, close family relationships where relevant, positions held in suppliers or customers, and interests in joint ventures or project entities.
A practical master-list record contains:
- Legal name, trading names and unique identifier.
- Relationship category and the entity to which it relates.
- Ownership, control or influence basis.
- Effective date and, where applicable, end date.
- Key-management or family relationship details required by the framework.
- Source of the declaration or corporate record.
- Date of last confirmation and the person who reviewed it.
These database fields are implementation recommendations; IAS 24 and PCAOB AS 2410 establish the need to identify relationships, not a prescribed software design.
Validate, distribute and resolve uncertain matches
Assign an owner in finance, legal or compliance to investigate spelling variations, ownership changes, dormant entities, beneficial owners and counterparties with similar addresses or bank accounts. The owner should approve additions and removals, retain the evidence and publish a dated version of the list.
Send approved updates to procurement, estimating, project controls, treasury, sales, accounts payable, payroll, contract management and consolidation teams. A list that exists only in the controller’s folder is not an operating control. Configure a clear route for employees to ask whether a prospective counterparty is related.
Control 2: Screen before commitment—and again when terms change
Screening must occur before a contract is signed, a purchase order is released, funds are advanced, a guarantee is issued or a journal entry is posted. Re-screen when a counterparty’s ownership changes, a contract is amended, a renewal is negotiated, a project moves between entities or a new director or key manager joins.
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Embed the screen in construction workflows
- Vendor and subcontractor onboarding.
- Customer, developer and joint-venture onboarding.
- Purchase requisitions, purchase orders and change orders.
- Equipment, land, office and vehicle leases.
- Intercompany loans, cash pooling and guarantees.
- Consulting, design, engineering and project-management agreements.
- Payroll, management compensation, employee advances and expense claims.
- Manual journals, period-end accruals and consolidation entries.
Use a mandatory related-party question and a match against the master list. Where the answer is uncertain, stop the workflow and create an exception ticket rather than allowing the project team to proceed on an assumption.
Register the facts needed for approval and reporting
Capture the counterparty, relationship, transaction type, project and business purpose, proposed terms and value, currency, expected balances, contract reference, proposed approvers, accounting treatment, amendments and disclosure category. Include no-charge services and obligations, and transactions routed through an intermediary when the underlying relationship or benefit may still matter.
PCAOB AS 2410 highlights business purpose, terms, documents, established approvals and exceptions as matters auditors may examine. Use those topics to make the company’s own record understandable, but do not describe the auditor’s procedures as a management rule.
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Separate ordinary recurring activity from significant, unusual or conflicted transactions. Your policy should specify which matters a project manager may approve, which require finance or legal review, and which must go to an independent board or committee. Thresholds must be set from the applicable law, listing rules, financing documents and the entity’s risk assessment; do not import a monetary threshold from another jurisdiction.
Make conflicts visible before a decision
The proposed approver should disclose any direct or indirect interest. Require recusal where the governing rule or policy requires it, record who left the discussion, and route the matter to an independent decision-maker. For issuers covered by FCA DTR 7.3, the related party and an associate, director or employee of the related party must not take part in the specified assessment.
Document the decision, not just the signature
An approval memorandum or minutes should state:
- The business need and project context.
- Alternatives considered, including why an unrelated supplier or lender was not selected.
- Material commercial terms, duration, termination rights, security and payment schedule.
- Price, valuation, tender or market support where relevant.
- Conflict disclosures, recusals and the identity and authority of the independent approver.
- Accounting and disclosure consequences identified before commitment.
- Conditions, monitoring requirements and a named follow-up owner.
“Ordinary course” and “normal market terms” are conclusions to be assessed under the applicable rule, not automatic exemptions from approval or disclosure.
Control 4: Record, reconcile and disclose accurately
Give related-party activity an account code, project tag or register flag that survives from procurement through payment and consolidation. The controller should be able to extract all activity by counterparty, relationship, project, account and reporting period.
Perform close reconciliations
At each reporting close, reconcile the register to accounts payable and receivable, loans, guarantees, leases, payroll and management compensation, intercompany balances, journal entries and consolidation data. Investigate unmatched items, duplicate counterparties, balances with no contract reference and transactions posted after approval. A reviewer independent of initiation and posting should sign off the reconciliation and retain the exception resolution.
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Prepare disclosures from the correct framework
Build a disclosure checklist from the standard and legal requirements that apply to the reporting entity. Depending on the framework and materiality context, the checklist may require the nature of the relationship, transaction amounts, outstanding balances, commitments, terms, guarantees or other information needed to understand potential effects. IAS 24’s objective is to draw attention to those possible effects; it does not make one universal disclosure table suitable for every company.
Keep a tie-out from each disclosure line to the register, ledger and supporting agreement. Have the reporting reviewer confirm that aggregation has not concealed a material relationship and that comparative information and commitments are handled consistently.
Control 5: Monitor, test and remediate
Monitoring should operate throughout the year and intensify around reporting close. Review new declarations, master-list changes, transactions below individual thresholds that could aggregate, contract amendments, unusual journals, overdue related-party balances, missing approvals and transactions recorded as “miscellaneous.”
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Internal audit or a control owner independent of transaction processing can test whether:
- Declarations were obtained and updated.
- The counterparty screen ran before commitment.
- Approvals preceded execution and were made by authorized, unconflicted people.
- Business purpose, terms and market support are retained.
- Accounting entries and balances agree with contracts and the register.
- Disclosures tie to reconciliations and the applicable checklist.
Use a risk-based sample that includes new vendors, high-value projects, unusual terms, no-charge arrangements, guarantees, manual journals and transactions near policy thresholds. Track every failure to an owner and due date. Assess whether a missed item affects financial reporting, a filing, a covenant or legal compliance, and escalate significant issues to the audit committee or other governing body.
Provide a safe escalation channel
Employees should be able to report suspected undisclosed interests, pressure to bypass approval or unusual project arrangements without routing the concern through the interested manager. Whistleblowing procedures, governance discussion and periodic internal-audit review are among the control examples described in ASA 550 materials.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Adaptable related-party control matrix
Use this matrix as a design aid, then tailor it to the entity’s legal requirements and risk assessment.
| Risk | Example control | Evidence to retain | Owner / reviewer |
|---|---|---|---|
| Related party omitted | Periodic and event-triggered interest declarations; finance or legal validates and distributes the master list | Signed declarations, list change log, review record | Legal, compliance or finance; independent reviewer |
| Transaction bypasses screening | Required related-party field and counterparty match during onboarding and requisition or contract workflow | Workflow log, match results, exception ticket | Procurement, accounts payable or system owner; controller |
| Interested party influences review | Conflict disclosure, recusal and independent approval under the applicable rule | Minutes, recusal record, approval memorandum | Governance secretary; independent committee |
| Weak or undocumented business rationale | Reviewer challenges purpose, alternatives, terms and unusual features before approval | Business case, benchmark or valuation support, contract | Business sponsor; finance or legal; independent approver |
| Incomplete accounting or disclosure | Register-to-ledger and balance reconciliations; disclosure checklist and tie-out | Reconciliation, journal support, draft-disclosure tie-out | Controller; reporting reviewer |
| Control failure persists | Periodic sample testing and tracked remediation | Test workpapers, issue log, closure evidence | Internal audit or control owner; audit-committee oversight |
What documentation should be kept?
Retain enough evidence for an informed reviewer to reconstruct the decision and the accounting result. A complete file normally includes the declaration or corporate record establishing the relationship, the screening result, business case, alternatives, contract and amendments, pricing or valuation support, conflict and recusal records, approval minutes, purchase orders, invoices, payment or journal evidence, reconciliation, disclosure assessment and remediation correspondence.
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Set retention periods through the applicable records policy, statute, listing rule, financing covenant and litigation hold process. Restrict access to personal and ownership information, but ensure that internal audit, the controller, legal counsel and the governing body can retrieve the evidence promptly.
Common failure modes and corrective actions
“The vendor is not in the general ledger, so it cannot be related”
Corrective action: compare declarations, corporate records and beneficial-ownership information with onboarding data; then update the master list and re-screen open contracts.
“The transaction is free, so there is nothing to disclose”
Corrective action: assess transfers of services, resources and obligations under the applicable framework, including no-charge equipment, staff, guarantees and project support.
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Corrective action: require interest disclosure, recusal where required and an independent approver with authority appropriate to the transaction’s significance.
“The terms are market terms, so no further work is needed”
Corrective action: retain the comparison or valuation, document the ordinary-course assessment where relevant, and complete the approvals and disclosure analysis separately.
“The balance was below the threshold”
Corrective action: test aggregation by counterparty, relationship, project, reporting period and amendments. Thresholds are not a substitute for identifying the relationship or considering qualitative significance.
“The auditor will find anything important”
Corrective action: treat PCAOB and ASA material as describing auditor work and useful control topics, while management remains responsible for its own identification, approval, accounting and disclosure processes.
A practical rollout for a construction group
- Map the perimeter. List every legal entity, project company, joint venture, listing status, accounting framework and governing document. Assign a policy owner and obtain a legal or reporting-specialist applicability review.
- Build the first master list. Collect declarations from directors and key management, compare them with ownership and group records, resolve uncertain matches and publish a dated version.
- Place screening gates. Add the related-party question and master-list match to vendor, subcontractor, customer, contract, requisition, lending, guarantee and journal workflows. Define who can release an exception.
- Standardize approval files. Create an approval memorandum with fields for purpose, alternatives, terms, valuation or market support, conflicts, recusals, decision and follow-up.
- Connect the register to close. Add account codes or tags, reconcile the register to subledgers and consolidation data, and assign a reporting reviewer who did not initiate or post the transaction.
- Test and improve. Sample transactions and declarations, log failures, evaluate reporting or legal impact, close remediation and report significant issues to governance.
Revisit the design when the group acquires an entity, enters a new jurisdiction, changes listing status, adopts a new accounting framework, launches a major joint venture or experiences a control failure. Proportionality matters: a smaller contractor may use a controlled register and documented committee review, while a multinational group may need automated matching and separate entity-level workflows. Both still need the same six outcomes—complete identification, pre-commitment screening, independent approval, reliable records, accurate reporting and active remediation.
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