It is interesting to know that a week after the Satyam-Maytas called-off deal, the Institute of Chartered Accountants of India (ICAI) thought of undergoing a change in their existing auditing standards involving SA 550, which deals with the related parties transactions. ICAI has recently approved of a revised auditing standard- SA 550 on lines with the international auditing standards issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants.
The big question that emerged was valuation of Maytas. Who did it and on what basis was it done. Even though Satyam might have refused to disclose which audit or consulting firm valued the assets of the two firms, Maytas Properties Ltd and Maytas Infra Ltd, ICAI said auditing standard SA-550 has been issued so that an auditor can check at what amount the transfer of a major asset has taken place and whether it is or not at an amount materially different from that obtainable on normal commercial terms. In case of Satyam-Maytas deal, Maytas was valued at a whopping $1.6 billion.
SA 550 guides an auditor on whether the transaction in business between two related parties has been properly accounted for or not. SA 550-Related Parties is aimed to strengthen current auditing practice in this area by emphasising on the need for an auditor to understand related party relationships and transactions in order to identify the risks of material mistatement to which these may give rise to, and directing the auditor to focus work effort on the assessed risks of material mistatement, including those due to fraud. SA 550 is applicable from April 1, 2010.
Vijay Kapoor, secretary to auditing and assurance standard board, ICAI said, ?The institute has been issuing auditing standards benchmarked with the internationally recognised auditing standards issued by the International Auditing and Assurance Standards Board (IAASB).? If a transaction has taken place between two related parties, the company would have to disclose the name of the related party, description of the relationship, description of the nature of the transaction, the volume of transaction and any other element which is necessary for understanding of the financial statement, he added.
SA 550 defines related party as defined in the accounting standard AS-18 of ICAI. AS-18 requires every enterprise to disclose the name of the related party and nature of the related party?s relationship irrespective of the fact whether the transaction has taken place or not. Notified by the government of India, AS-18 says that if there are two related parties, then the transaction should be of arms-length. If that is not the case then the related disclosures have to be made. Moreover, for the information of the shareholders, it is required that they incorporate it in the balance sheet.