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BRAC University Journal, Vol. IV, No. 1, 2007, pp. 31-37

ASSOCIATION BETWEEN CORPORATE GOVERNANCE AND
RELATED PARTY TRANSACTIONS: A CASE STUDY OF
BANKING SECTOR OF BANGLADESH
Mohammad Zakir Hossain Sharkar
BRAC Business School
BRAC University, 66 Mohakhali C/A
Dhaka – 1212, Bangladesh
and

Md. Abdus Sobhan
Department of Accounting & Information Systems
University of Dhaka
Dhaka-1000, Bangladesh
and

Shahida Sultana
School of Business Studies
Southeast University, 64/B, Banani
Dhaka-1213, Bangladesh

ABSTRACT
This paper critically examines the relationship between corporate governance and related party transactions (RPTs). RPTs have become a global hot topic due to the link between undisclosed RPTs and the collapse of some high profile companies. This paper analyses the current literature and establishes a relationship between corporate governance indicators and the number of RPTs by using Bangladesh banking sector data.

Key words: Corporate governance, Related Party Transactions, Bangladesh Banking Sector.

I. INTRODUCTION
The use of undisclosed related party transactions
(RPTs)1 can facilitate fraudulent financial reporting
and misappropriation of assets. The recent failure
of giant corporations in the USA again confirmed
this. For example, Enron used special purpose
entities controlled by its CFO to manipulate
income and transfer cash, and Adelphia guaranteed
related party debt and provided extensive loans to
its executive (Kohlbeck and Mayhew 2004) [1]. As
1

“Related party transactions include transactions between (a) a parent company and its subsidiaries; (b) subsidiaries of a
common parent; (c) an enterprise and trusts for the benefit of employees, such as pension and profit sharing trusts that are managed by or under the trusteeship of the enterprise’s
management; (d) an enterprise and its principal owners,
management and the members of their immediate families;
and (e) affiliates” (FASB 57, 1982).

a result, Congress passed section 402 of the
Sarbanes Oxley Act, which banned most loans to
executives and directors. This act has become
controversial because RPTs are not always harmful
for the performance of the company. Sometimes it
becomes inevitable for the company to enter into
RPTs to maximize the benefits to the shareholders.
So an alternative view is that strengthening
corporate governance2 -rational payment to the
2

"Corporate governance is the system by which business
corporations are directed and controlled. The corporate
governance structure specifies the distribution of rights and responsibilities among different participants in the
corporation, such as the board, managers, shareholders and
other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives
are set, and the means of attaining those objectives and
monitoring performance."-UTS centre for corporate
governance, University of Technology Sydney

Mohammad Zakir Hossain Sharkar, et al
fraud risk. American Institute of Certified Public
Accountants (AICPA, 2001) [5] also describes
RPTs as a mechanism used by major shareholders
and management to overstate income and provide
inaccurate financial results to market participants.
It is now mandatory for a company to disclose all
material RPTs including the nature of the
relationship, a description of the transaction, the
dollar amount of transaction for each income
statement period presented, the amount due to and
due from the related parties at balance sheet date;
but disclosure is not required when the transactions
are eliminated in consolidation (FASB 1982, 1) [4].
Though Securities and Exchange Commission,
USA (SEC- USA) relies on Generally Accepted
Accounting Principles (i.e., FASB 57) it requires
disclosure of any RPTs involving a dollar amount
exceeding $120,000 and in which the related party
has...
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