Which of the following is NOT a red flag of related party transaction that may be...

Which of the following is NOT a red flag of related party transaction that may be a sham?

		The CEO of a privately-held company sold a plot of land to the company. It will be used for the company's new distribution center. The purchase price was based on an independent appraisal. The transaction was approved by independent board members.
		The CEO of a privately-held company sold a plot of land to the company. The land is a summer vacation home that the CEO uses for corporate entertaining. The CEO's family uses the property for vacations in the summer. The agreements state that the purchase price is fair market value. The sale price was within the CEO's authority, so no board vote was taken on the transaction.
		Company A has invested in a joint venture with Company B. The Joint Venture is a separate legal entity. Company A sells products to the Joint Venture company. At the same time, the Joint Venture Company also provides services to the Company A. The sales to the Joint Venture are more profitable than most of Company A's business.
		A software company sells English-language publishing software. Near the end of the quarter, they entered into a partnership agreement with a Bulgarian distributor. The distributor will provide a substantial up front payment for the rights to sell the software in Bulgaria. The sale is material to the quarterly results.
		All of these are red flags of potential sham transactions.

Expert Solution

The correct answer is:

The CEO of a privately-held company sold a plot of land to the company. The land is a summer vacation home that the CEO uses for corporate entertaining. The CEO's family uses the property for vacations in the summer. The agreements state that the purchase price is fair market value. The sale price was within the CEO's authority, so no board vote was taken on the transaction.

This is due to the fact that CEO has complete authority over setting the fair market value and there were no double checks on his authority, which usually falls down to the board, which in this case were not carried out.

ekkarill92 answered 2 years ago

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