What is related-party transaction fraud?

• A. Transactions with related parties at non-arm's-length terms used to conceal losses or siphon funds.
• B. Related-party transactions are always legitimate and require no disclosure.
• C. Transactions with unrelated parties at arm's-length terms.
• D. Related-party transaction terms that maximize market value.

Answer: (A)

Related-party transaction fraud happens when a company enters into deals with people or entities connected to it, and the terms are not at arm's length in order to hide losses or siphon funds. Arm's-length terms mean the deal would be what an independent, unbiased party would agree to under normal market conditions, with each side treated as separate and competing on equal footing. When transactions with related parties are guided by personal interests or hidden incentives, they can shift profits, inflate revenues, or move assets in a way that misrepresents the true financial position of the entity.

Legitimate related-party transactions can occur, but they must be disclosed and conducted at arm's length, with transparent accounting and proper oversight. The other choices describe normal or unrelated interactions, or general aims that don’t involve deception or concealment, so they don’t capture the fraudulent misuse of related-party deals.