For a start, updating and/or adopting a defined and properly structured RPT framework and guidelines is critical. Streamlining all touch points and internal stakeholders around their duties and responsibilities in a collective RPT reporting function can help. Driving awareness by constant communication to all key stakeholders on the risks associated with RPT will sustain the momentum.
Role of technology
RPT data collection and monitoring can be automated so that it occurs in near to real time, flagging potential issues to finance and business teams much sooner than a purely manual approach. Companies can consider digitizing low-value and time-consuming manual tasks, such as promoter, board and key management personnel’s periodic declarations for mapping and identifying related parties and other simple data processing activities. This way, key stakeholders would spend more time assessing governance related threats or missed/erroneous reporting.
Next is automated analytics to ensure consistency in the risk indicators that need monitoring, without which outliers might go unnoticed or be acted upon too late. These insights can be presented in easy to comprehend formats via dashboards to senior management and boards. Importantly, an improved understanding of the intricacies of RPT related risks help to develop more effective mitigation measures.
A successful integration of data, technology and analytics can prove to be a big asset to organizations. Also important is a combination of internal personnel and external advisors to blend company knowledge and information about best practices to craft a robust reporting and monitoring design.
An Indian headquartered diversified business conglomerate with multiple legal entities and business divisions was increasingly finding itself in related party situations. It did not have any documented mechanism to identify those RPTs entered during the ordinary course of business as per criteria defined in section 188 of Companies Act, 2013 vis-à-vis those that required specific approvals. The organization lacked an early warning system to flag these unapproved transactions or pricing mismatches, despite having delineated finance, tax and corporate secretarial teams inhouse. The organization was heavily dependent on manual processes resulting in human errors and gaps in communication.
EY was brought in to examine the RPT function within the organization and suggest remedial measures. The team analyzed the RPT function lifecycle covering RPT policy, RPT process and controls, data availability and structure, technology and systems, people and performance, and scored them from “Basic” to “Leading”.
A deep dive into the results helped understanding the maturity of the organization’s RPT function and benchmarking against industry best practices. It also surfaced quick fixes and potential automation hotspots. Improvement measures included digitalization of key management declarations, rule based and automated related party identification and transaction identification, system based transaction level approval tracking and maintaining a repository of relevant documentation by integration of various data sources, providing near to real time reporting and monitoring of RPT.
(Arpit Lodha, Senior Manager-Tax, EY India has also contributed to this article.)