What Does an Arms-Length Auditing Approach Mean?

What Does an Arm’s Length Auditing Approach Mean?

The wisdom of an arm’s length transaction, common in real estate, is also relevant to financial auditing. In fact, it’s an approach we recommend here at Brown Auditing Services in New South Wales. Arm’s length transactions ensure fair outcomes that reflect market conditions. Moreover, getting your company audited using an arm’s length basis ensures an impartial process and a more accurate outcome.

What is an Arm’s Length Transaction?

An arm’s length transaction refers to business deals where the two parties are not associated, where they act independently and in their own self-interest. The idea is that transacting on an arm’s length basis avoids one party pressuring or influencing the other. It also assures other people that there is no collusion between the unrelated and unaffiliated parties, both of whom should have equal access to the information and resources needed to make sound decisions about the deal.

Examples of an Arm’s Length Transaction

The benefit of transacting on an arm’s length basis is that it ensures fairness by avoiding insider trading and undue influence, or for either party to accept terms differing from those currently accepted in the market. If two strangers engage in a property transaction, for example, and both parties have the same information and equal bargaining power, the final agreed-upon price is likely to be close to the market value despite each party having opposing interests (highest possible price for the seller vs lowest possible price for the buyer).

On the other hand, non-arm’s length transactions might include a parent selling their car to their child, or the founder of a large, publicly traded company appointing their family member to an important position over other more qualified candidates. These scenarios are unlikely to result in fair market values or reasonable business practices.

Applying Arm’s Length Transaction Principles to Auditing

Engaging an impartial external auditor to investigate your company’s finances instead of using internal audit processes is similarly beneficial. While not a transaction, the same principle of impartial, dispassionate, fair assessments of factual information are key to achieving an accurate audit report that serves its important purpose.

Internal audit processes can make it difficult to assess information impartially and without bias, particularly when you’re too familiar with the day-to-day operations of a business. It’s common for external company audits to spot things that internal audits miss. Where those more familiar with the company might avoid certain lines of questioning, auditors are more likely to question details to uncover potential problems. This is especially true in areas, other than financial reports, that may affect accurate reporting, such as particular company processes and the norms of information exchange within a business.

Audit Reporting Services in NSW

To find out more in answer to ‘what is an arm’s length transaction?’ or to learn how our auditors can help you, call the team at Brown Auditing Services on 0428 661 200 or contact us online. We offer no obligation consultations in NSW and other suburbs across New South Wales.