A related-party transaction is one that occurs between two parties that have some sort of special relationship prior to the transaction. A good example is if a subsidiary of a company sells raw materials to another subsidiary owned by the same company.
If a related-party transaction is characterized by transfer pricing manipulation or manipulation of capitalization structures, profits can be essentially removed from one jurisdiction and parked in another for financial benefit. That can have a negative impact on the rating of the entity in the higher tax jurisdiction and a positive effect on the entity in the lower tax jurisdictions.
It should be noted however that for audited statements, misleading transactions such as these are generally identified at the audit stage, and therefore, transactions (related-party or not), may make no difference to the financial position and performance of a firm
For geographical areas where related-party transactions can be significant, the main issue is not that there are a large number of related-party transactions. Rather, there is heightened concern around inaccurate / unrepresentative statements (such as reporting non-genuine transactions with related-parties, or banks disguising loans in the form of investment receivables). In cases like this, RapidRatings has had some success in the past with identifying fraudulent statements due to the wide range of ratios (68), which help to identify inconsistencies or contradictions. This stands in contrast to other models which use a fewer number inputs.