The hour of the accountant

Never before in the his-tory of the Indian accountancy profession, has there been a time like the present. Traditionally account-ants were staid backroom boys dabbling in conventional accounting (without the benefits of accounting standards) and helping people pick their way through the complex web of tax laws. The backroom boys have come to the forefront now. The critical person on nearly every board or audit committee of major corporates is a chartered accountant (CA)

Over the next two years, CAs in India would be spoilt for professional opportunities. There will be a new Companies Act; Indian Accounting Standards would progressively give way to complex International Financial Reporting Standards (IFRS); the Income Act looks prepa-red to undergo the greatest change it has in the last century even if a part of the proposed tax code were to be actually enacted; goods and services tax (GST) have the capacity to absorb more CAs in the indirect arena, than ever before; the arrival of Extensible Business Reporting Language (XBRL) would demand the services of a huge number of accountants for conversion and designing systems; with government accounting shifting to an accrual base there will be demand from both the accounting and auditing sides of the government, an area where today CAs are not significantly involved; increasing public-private partnerships, particularly in the infrastructure sector would require involvement of CAs as consultants, strategists and auditors; climatechange and sustainability initiatives of corporates would warrant attestation of sustainability reports; a growing demand for forensic audits, need for internal control certifications and validation of systems and processes — the demand for CAs is endless. Multi-disciplinary partnerships have officially been permitted by an amendment to the CA Act and limited liability partnerships have been introduced for the first time in the country. This will act as strong enablers for accountants to venture forth into non-traditional areas and conquer new markets. The accountants have really never had it so good.

However, where there are opportunities, there will also be threats. The dark side of the moon in this entire scenario is that the rate of knowledge obsolescence and skill-set irrelevance will be very high. Parallel to the explosive growth in opportunities for CAs, there will be a dearth in number of skilled accountants. Against an average of one accountant per 1,000 people of the population that most developed economies have, India has approximately only one chartered accountant for every 10,000. Today, when we are talking of CA interface even at the village panchayat level, this will be clearly inadequate. The other pitfall is the huge issue of expectation gap. Even other than the recent high profile cases in which a few chartered accountants are behind bars without any guilty finding against them for more than half a year, I am told, there are quite a few other cases where chartered accountants have been incarcerated on allegations of negligence/collusion while discharging their professional duties. This s a very worrying trend where the system is bypassing the disciplinary mechanism of the Institute and seeking to treat a professional negligence case as a criminal or economic offence.

The disciplinary system of the Institute ensures that there are people knowle-dgeable in aspects of audit and law who can fairly inqu-ire into a case against a professional. The police and administrative system and other investigating authorities for the most part would be at sea while dealing with cases involving intricate auditing regulations.

For another example of a desire for a quick fix solution, one can visit the official site of the Central Vigilance Commissioner (CVC). There, prominently on the home page, is a proposed Code of Ethics for CAs. The authors seem unaware of the detailed code of ethics promulgated by the ICAI. This ‘Code’ addresses certain specific issues regarding certification of valuation of inventory/ investment/other assets, related party transactions, status of sundry debtors/sundry creditors, status of loans and provisions and makes certain generalised remarks that appear to indicate that these are areas where the performance of CAs is below the mark and appears malafide leading to control lapses by banks in dispensation/ monitoring cre-dits. The code goes on to comment that since the ICAI has limited powers to punish, there should be a parallel track where such cases could be treated as criminal or economic offences. It also demands that the ICAI should publish a list of tainted/banned chartered accountants. While the inentions of the code are very clear it is a classic example of not only the consumers’ significant dissatisfaction (and mind you the Chief Vigilance Commissioner is no ordinary consumer) but also an illustration of how, in spite of the best intentions, in the hands of non-professionals, a good desire to codify ethical requirements end up as a half-baked effort addressing only certain specific areas.

The existence of the code speaks volumes of the consumer’s desire for better services and frustration with the limitations of the disciplinary system. It is in this era of explosive growth that we must pay attention to these writings on the wall otherwise we will stumble while attempting to enter the brave new world.

This article appeared in the 17 August 2009 edition of Business Standard, which is available at this link.

An agenda for MCA

Why is it that in India bad news hogs the headlines, whereas we tend to gloss over all the good things that we achieve? People would have read ad nauseam about the so-called “Satyam Scam” but I am yet to see any major newspaper highlighting the fact that while in the comparable ‘Enron scandal’ the company was liquidated, shareholders lost their money, old retired pensioners were impoverished, employees were driven out on the street and one of the world’s largest accounting firms collapsed rendering many more people jobless.

In India due to the efficient manner in which our Ministry of Corporate Affairs (MCA) functioned, not a single stakeholder suffered, and in quite an understated way, in a public-private partnership initiative which had few parallels, the company was rescued. How many of us know that with the MCA 21 e-initiative, India is among a few leading countries in the world to have computerised and e-enabled its corporate law administration data and processes. It is all the more astounding when we ralise that, in spite, of the sheer number of corporates and the number of permissions, exemptions, etc., that have to be filed and processed regularly, this system works efficiently.

Given its track record and professionalism, naturally, the expectations from the ministry in the coming months are very high. What would a citizen, like myself, want to see on the agenda of the ministry?

First and foremost, the ministry must steer through the Companies Bill. This bill has been in the works literally for decades and a quick and fast overhaul of the Companies Act is required to enable corporates concentrate on their core business and not get bogged down in the intricacies of procedural compliances.

The MCA must enable investors’ protection and class actions through legislative and judicial reforms.

As against developed economies which have an average of one chartered accountant (CA) for every 800 people in its population, India has an extremely low ratio of one CA for every 9,000 persons. With the emergence India on the global economic scene and the inclusiveness and deepening of reforms which would energise and stimulate entities functioning of the grassroot level in the villages, we would have to have more efficient accounting systems, control systems, systems for correlating outcomes with inputs and ensuring that every additional rupee is spent for the optimum effect. This would not be possible without ensuring that there is an efficient audit and accounting system at the smallest unit level and the present strength of CAs in the country is highly inadequate for that.

CAs, cost accountants and company secretaries have a huge overlap on syllabi and basic professional education. It is difficult to see why the three institutes cannot be merged into one while still retaining the specialism of its existig members (CAs to do audits, cost accountants to do cost audits and company secretaries to act as company law experts), while enabling each class of members to appear for a minimal “top up exam” and, thereby, acquire membership of the other class as well. This will significantly cut down administrative costs, consolidate hard and soft assets of the Institutes as well as lead to making the brightest and most competent in the profession available for serving the combined profession.

It will also minimise regulatory duplication of efforts by MCA and its nominees on various boards and sub-committees of the various Institutes. This proposal was first mooted by the joint committee on the future of the accountancy profession in 1967-68. While the council of Institute of Chartered accountant of India (ICAI) had unanimously accepted the amalgamation recommendation in 1967-68, Institute of cost & works accountants of India (ICWAI) went back and rejected this proposition. Again in 1970, the Government of India tried to unify the profession but could not succeed. The last attempt to my knowledge was in 1998-99.

As in the practice in all other developed economies, the MCA should actively aid the development and empowerment of an independent regulator with oversight over the profession. The Quality Review Board may be empowered to take on this responsibility.

The MCA should give a fillip to practicing the profession of accounting in the limited liability partnership by advising all the Institutes under its remit to speed up enabling amendments to their regulations.

The MCA must above all ensure delivery of quality assurance by audit professionals to the investors in the country. That will only be possible by raising the bar on quality and expediting all disciplinary cases which are pure-play quality matters. This can only be done if other relative immaterial provisions of the Act which are all treated at par with issues of quality are eliminated.

The MCA must ensure that India with its 2nd largest profession in the world (largest if all Institutes converge) should be strongly represented on the Global Regulatory Bodies of the Accounting Professions, the International Federation of Accountants, International Accounting Standards Board and International Forum of Independent Audit Regulators, Such representation must be by the best, must ensure continuity and should not be looked upon as “spoils of the office” by members of the Institute.

A tall order, but the MCA has inspired confidence and there is no reason why they would not be able to deliver on this.

This article appeared in the 20 July 2009 edition of Business Standard, which is available at this link.

The other auditor: It's CAG

Supposing I tell you about an audit organisation with more than 100 offices in India and nearly 50,000 people on its rolls; an organisation which is the external auditor of the World Health Organisation (WHO), World Trade Organisation (WTO) and was the external auditor of the United Nations and Food and Agriculture Organisation. This organisation represents a group of auditors who in the last year issued 63,000 reports and could manage to earn an actual recovery of Rs 14,887 crore for its clients — you would say, I am day dreaming!

However, all of these and more is true. The audit organisation I am referring to is the office of the Comptroller and Auditor General of India (CAG). In the run up to the Union Budget 2009, I feel we must pause and think in terms of accountability and effectiveness of governance and this is where the CAG comes in. Contrary to popular perception and perhaps because of the low key manner in which the CAG functions, in addition to the traditional audits there are a large number of specialised studies like IT audits, environment audits, studies on performance audits (examples being on cleanliness and sanitation in Indian Railways; on rural water supply programmes; on the National Rural Employment Guarantee Act (NREGA) that are routinely under-taken by the CAG.

Returning to the question of accountability, do we realise that in 2007-08, the Union government made a provision for transferring more than Rs 50,000 crores directly to autonomous bodies, societies and NGOs who keep these accounts in banks outside the government system and unspent amounts whereof are not auditable, thereby inflating government expenditure to such extent. The CAG report talks about more than Rs 20,000 crore incurred in the major functions of the government, representing over 50 per cent of the total expenditure under these heads which is classified under “Other Expenditure” leading to opaqueness in government accounts.

The Department of Telecommunication (DoT) receives levy towards Universal Service Obligation (USO) for increasing teledensity in rural and remote areas. Though, the fund had disbur-sed only a part of the collections to eligible service providers, it showed a nil balance, whereas, the balance should have been more than Rs 14,000 crore. This matter has been repeatedly highlighted by the CAG. The practice of netting off suspense accounts results in understating the real magnitude of un-reconciled outstandings in the annual accounts of the government. Many of these suspense account entries have been pending for over 20 years and CAG reports have repeatedly harped on this. Unspent budgetary provisions (which clearly indicate either poor budgeting or shortfall in performance, or a combination of both) was in excess of Rs 1,00,000 crores which included unspent provisions for defence services, financial institutions, education, police, panchayati raj, telecommunication, health and family welfare. All of them thrust areas of the government!!

Though, the National Rural Employment Guarantee Act (NREGA) was one of the flagship programmes of the previous government and largely instrumental in the subsequent mandate it got, do we know that when CAG audited it, as many as 13 state governments had not formulated rules for carrying out the provisions of NREGA; dedicated programme officers had not been appointed in 102 out of a sample 141 blocks and documented annual plans had not been prepared in 175 out of a sample of 558 panchayats? However, on most grounds, the state of Andhra Pradesh seemed to have been setting benchmarks in best practices. An audit of the rural water supply programme reveals that during the period 2003-07, more than 150,000 habitations which had been fully covered with safe sou-rce of drinking water, a few years earlier, had slipped into the partly covered/non-covered (where there is no drinking water source, within 1.6 km) category.

All of these and much more is available on the public website of CAG and routinely tabled in Parliament and state legislatures. But how much public debate or awareness have we seen around these? In this era of transparency and inclusive growth, it is really amazing that no NGO or TV channel or pressure group of young dynamic parliamentarians cutting across party lines have come up to highlight such issues, encourage public debate and push for action as well as fixing responsibility. It is an irony that in a few days when all the Chambers of Commerce will be debating direct and indirect tax proposals which peripherally impact the multitude in hinterland India, there will be no debate on the findings of the Other Auditor on the inefficiencies in governance, outlays and outcomes, affecting the ‘Other India’.

This article appeared in the 6 July 2009 edition of Business Standard, which is available at this link.

Government: A time to account for

Just imagine – a mid-size listed company, which prepares its accounts on a cash basis, does not account for contingent liabi-lities, or depreciates its assets, or records its debtors and payables, and just prepares its cash flow statement. No investor would even touch such a company. Now ima-gine, that the expenditure of that company is more than 30 per cent of the country’s Gross Domestic Product and the stakeholders are a billion plus – yes, the entity we are talking of is the Government of India.

Historically, while govern-ments across the world used to prepare their accounts under the cash accounting system, over the past decade, many countries like Australia, Canada, Finland, France, Italy, United Kingdom, United States of America among others have moved towards accrual accounting. India has made certain tentative starts with pilot studies in different states and in some departments, but that is very insignificant, compared to the size and volume of the nation’s economy.

There have been some recent announcements indicating that the government would move to an acc-rual basis of accounting within a five year time frame, but this requ-ires coordinated action and sci-entific planning to really be achievable.

Advantages
Accrual-based accounting accounts for expenses and liabilities, incomes and assets, the moment they become due and not when cash is paid. This would lead to a recognition of elements like fixed assets, pre-existing un-recognised assets inclu-ding heritage assets, liabilities, deb-tors, creditors, etc., Depreciation which is never charged on government assets would also be recognised.

Obviously, this would lead to a much more transparent and accurate picture of the nation’s finances, improve budgetary control and accountability (this has to be accompanied with accrual-based budgeting), and enable the government to better financially manage its resources. At the end of the day, adequate management of resources and not merely managing cash flow is the only prudent way, in which, an economic entity can survive.

Information provided by the accrual system would enable the government to measure, control and manage potential obligations and contingent liabilities as well as manage debt and assets and utilisation thereof. Such a system would enable the government to develop transparent performance indicators which along with non-financial indicators and outcomes will be able to convert into key performance indicators for measuring the performance of politicians, bureaucrats, departments etc., This would also very clearly help the government in its perspective planning.

Issues
While there would be many issues on the way, a major issue is that vested interests would not like the degree of transparency mentioned above. There are other very legitimate issues like training and the ability of people in the government to manage the transition to an accrual-based system; significant differences from the commercial basis of accounting like accounting for non-exchange transactions (for example, tax, transfers, subsidies where there is no direct give and take like in purchase transactions), accounting for implicit liabilities like pension obligations, which though incurred in part today, could be funded largely by non-exchange gains in future etc., However, the basic issue is one of mindset, vision and conviction.

Way Ahead
There needs to be a core implementation team at the national level with a time-bound mandate (say one year) for preparing a detailed implementation plan; this team sho-uld significantly draw upon the excellent technical capabilities of the Institute of Chartered Accoun-tants of India (ICAI) and experien-ced chartered accountants (CAs) in the country.

After preparing the basic framework, right down to the village level there should be implementation groups working as per the framework and anchored by a chartered accountant. The anchor should not only oversee but be responsible for training and mentoring.

For this purpose, not only the one and half lacs of CAs in the country, but the very large body of acco-unting technicians and cost accountants should also be used. Such a project would require enormous political commitment because reforms like these which are fundamental, deep seated and with a long lasting impact, unfortunately don’t have any short term visibility or fallout that can be of political advantage.

However, I am confident the politicians of a young India would have a vision, beyond an election-to-election time frame and the conviction to sponsor such a fundamental change.

As a member of the institute which has declared itself to be a partner in nation building, I am sure, all of us would be willing to lend our mite to this reform.

This article appeared in the 25 May 2009 edition of Business Standard, which is available at this link.

A sign of times to come?

“It was the best of times; it was the worst of times;” a historian may thus sum up, the last two months. The wo-rld reeling from depres-sion; divided by theories of greater regulations ver-sus greater stimulus; waking up to the reality of shifting of power from West to East and North to South; came together at the G-20 with a mature declaration that focused on fundamental changes to the financial and regulatory landscape and greater emphasis on risk management.

The accent was more on solutions which transcended political boundaries and actively promoted harmonised universal regulation and efforts; from, accounting to climate change; financial stability boards to tax havens; to strengthening multi-lateral institutions and processes.

Back home last month, the Rakesh Mohan Committee (RMC) came out with a landmark report on assessment of India’s financial sector. Observations in the report pertaining to the committee’s views on accounting and auditing standards; oversight mechanism over the processes of auditing; IFRS convergence and accrual based accounting, merit serious reading as the committee comprised a group of the country’s most experienced and influential bureaucrats. I am sure this report would go ahead to become a watershed in the regulation of financial markets and infrastructure.

The above areas commented upon by RMC have traditionally been overseen by the ICAI, as a Self Regulatory Organization (SRO). This has been the traditional model in most countries.

However, an SRO like ICAI has to continuously walk a tight rope between its role as a regulator and its role as an industry association seeking greater professional development opportunities for its members. The more ICAI’s role is seen as leaning towards the latter, greater will be the clamour for truncating its regulatory role as the tone of certain recommendations in the RMC report suggests.

The report also recommends quick convergence with IFRS; removal of ICAI’s functional control over both the Accounting Standards Board (ASB) and the Auditing and Assurance Standards Board (AASB); alignment of Indian Auditing Standards with International ones and auditors being made answerable to various regulators like RBI, SEBI, etc. for entities falling within their scope and by implication, not only to ICAI. It also talks about transforming the Quality Review Board (QRB) to an active independent oversight body.

I still maintain that most of the processes mentioned above (other than that of the independent oversight body) can be more efficiently addressed within the construct of the ICAI, provided clear Chinese Walls are set up. With this in mind, more than a decade ago, we had formed an independent company called ICAI Accounting Research Foundation (ARF). It is time that all the standard setting processes are migrated to the ARF and it is granted full functional autonomy.

Peer review as a quick test mechanism has become fashionable but there is lack of clarity with ICAI cond-ucting its own peer reviews, which are CA firm specific; SEBI conducting peer reviews which are listed company specific and QRB waiting in the wings to conduct its own peer review as an “independent oversight board”.

There is an urgent requirement for clarity in this matter. Also, in a recent technical publication, the
ICAI has held that a succes-sor auditor cannot view working papers of a predecessor auditor since that would tantamount to violation of client confidentiality. This is cont-rary to international norms and the RMC has also commented upon restricted access to work-papers.

The recent public difference of opinion between NACAS (National Advisory Committee on Accounting Standards) recommended and Government enacted change to AS-11 and ICAI’s views in this matter could have been avoided. Clearly as per Section 211(3C) of the Companies Act, any AS has to be first recommended by ICAI. The Central Government under the advice of NACAS can only choose from ICAI’s recommendations.
So, it may be argued that the manner in which the standard was finally notified, without ICAI’s endorsement violates this clause. That said, the amendment itself has been very well drafted and does not sacrifice the spirit of the standard as there is provision for a very transparent disclosure requirement. This should have provided the grounds for a reconciliation of views.

It is a sign of the times where NACAS is intruding into ICAI’s traditional domain of standard setting and ICAI’s role as the sole regulator of its members being questioned. Potentially different Accounting Standards can be notified under the Income Tax Act, SEBI already makes stipulations on accounting measurement and disclosures; the RMC is talking about elevating FEDAI to an SRO status while other agencies are getting active in peer reviews and high level committees are clamoring for independence to the Accounting and Auditing Standard setting processes.

According to me, the issue is one of perception, but in today’s world of limited attention spans, perception matters more than reality. The ICAI must progressively address and answer such perceptions else it runs the risk of being reduced to a professional/continuing education body only.

This article appeared in the 20 April 2009 edition of Business Standard, which is available at this link.

The right medicine?

The present crisis of confidence in the audit profession among users and stakeholders, arising from recent market events has to be addressed in a fair manner. The profession, regulators and all concerned have to determine – what is the right medicine?

A professional issue requires a professional response. Thus, the fundamental point is that the solution to the present expectation gap should come out from The Institute of Chartered Accountants of India (ICAI) itself. As a primary step, the Government should empower the ICAI. The institute has done sterling work over the last six decades and yet, over the last decade, on certain basic matters like setting Accounting Standards or Auditing Standards, the government has created separate bodies (such as NACAS) with a superior degree of authority.

Changes in syllabi of the Institute have to go through a long process of governmental approval when most of these are technical matters that the ICAI should solely deal with. It is the ICAI which has the wherewithal to understand what the professional issues involved are, and it is they who should be in charge of the solution.

There are certain other myths about the possible solutions to the perceived ills of the auditing framework. I intend addressing a few of them.

Rotation of Audit Firms
Though, this appears to be a very easy solution, essentially, ensuring “a fresh pair of eyes” looking at the financials of a company every few years but, implementation-wise this is not so simplistic. Among all the G-20 countries only Italy mandates firm rotation and it has been tried and abandoned by Spain, Brazil and Korea. The practical problem is that an auditor requires developing cumulative knowledge of the company to increase audit effectiveness, especially for very large companies straddling various countries; and are multi-locational and multi-product producing. Rotation also increases costs.

By the time an auditor has invested and mastered the learning curve, it is time for someone new to come in and begin learning anew. In a country like India where more than 30 per cent of firms are sole proprietary firms, and a large majority of other firms are small/medium practitioners who have since ages been serving their group of clients with admirable independence and integrity, rotation would ensure that all these firms would rotate out and thus loose their clients, without any surety of gaining new clientele, whereas for the very large practices, rotation would always end up increasing the number of audit clients.

Joint Audits
Again, out of all the G-20 countries only France has a tradition of joint audits. Denmark abandoned this in 2005. In the Indian scenario, auditing standards governing a joint auditors’ responsibility is very different from the global standards. Globally, each joint auditor is responsible for the entire balance sheet but as per Indian standards each joint auditor is responsible for the work done by him. The reader of the balance sheet cannot ascertain which part of the work has been done by which firm and in a tricky scenario; gray areas and issues could easily obfuscate the efforts to determine liability for negligence. Also, under the Indian scenario, it is possible for the management to cut and dice the areas of coverage by individual joint auditors in a manner in which the whole picture is not easily visible to any single audit firm. A classic example is the ‘Bank Scams’ of 1990-92 when more than 250 audit firms were prosecuted and perhaps no more than a handful found guilty. In fact, mandatory rotation, compulsory joint audits and appointment by a Central Agency, could not prevent the large scale scam in the Banking Sector, then.

Peer Reviews
The best mechanism in the current context is strengthening and deepening peer reviews both by ICAI as well as other regulators. However, the pitfall is in the choice of the reviewers. For effective results, one must ensure that the reviewer has sufficient domain knowledge and experience of working with companies of similar size and complexity. Otherwise, the very institution of peer review will soon loose its lustre.

Rigorous follow up and consequence Management: The ICAI must ensure rigorous follow up and visible deterrent steps against any firm/indivi-dual violating professional ethics. Recent fast paced steps taken by the ICAI are a positive indication that it is on the right track.

Oversight
India does not have any Independent Oversight Board which is required for India to be treated at par with other developed countries. This is a EU mandated requirement and post 2010 will impact Indian auditors whose companies are listed in the EU. Incidentally India is the country with the largest number of firms in the world who audit more than 200 companies listed in various EU Exchanges. An independent oversight body when formed could apply for membership of the IFIAR (International Forum of Independent Audit Regulators), thus, globally mainstreaming the Indian profession.

Last but not the least, we have to concentrate on costs of regulation and the size and materiality of the entities being regulated. In a very pragmatic move EU has rece-ntly proposed that entities with a balance sheet total equivalent to Rs 3 crore net turnover upto Rs 6 crore sho-uld be exempted from extensive reporting rules which are not in proportion to their accounting specific needs and create a cost burden and hinder the efficient use of capital. It is time our Micro Small and Medium Enterprises Ministry (MSMED) took similar initiatives for India.

This article appeared in the 16 March 2009 edition of Business Standard, which is available at this link.

The end of innocence

The success story of corporate India today largely began, in the India that was Bharat, when enterprising families scaled their businesses upward, in the first flush of independence and were later on stimulated with the elixir of liberalisation. On this journey one of the most pivotal figures on the horizon was the ‘auditor-Saab’. Like the trusted family doctor, the auditor acted as consultant, tax advisor, investment strategist, internal auditor and sometimes as an accountant!

The integrity of the roles or independence were never either questioned, or compromised. But time and business since then have changed to a great extent. Demand for specialists and sophisticated skills have heightened a lot. Market requirements of assurance, independence and stakeholder’s ability to seek recourse have totally changed this picture of discourse today.

Though India remains one of the few major economies of the world, where litigation against an auditor is virtually unheard of, the signs are on the wall. The Companies Bill, introduced in Parliament in 2008-end and the market events in the opening hours of 2009, have perhaps signaled the turning point in audtors roles, responsibilities and liabilities.

If the proposed Companies law has its way, then the auditor or his relatives, including brothers and sisters and lineal ascendants and descendants, cannot hold any security in any company in the group where even a single company is being audited by the auditor. Regulators have seem to have overlooked the practical aspect of audit firms keeping a track of the extended families of each of their partners and their shareholding and the government ensuring compliance with this requirement. Also, there is always the soap opera possibility, of an estranged brother buying shares in group companies to spite his auditor sibling!

While powers, duties and prohibited services, of an auditor have been listed in the proposed Act, some of the expectations from an auditor are much more open-ended than any comparable legislation. For example, an auditor’s report must contain any qualification, reservation or adverse remark relating to “maintenance of accounts and other matters connected therewith”.

Given the regulators penchant for taking a very low threshold view of materiality is fraught with the risk of inconsistent interpretation and raising expectations from an audit well beyond the threshold of an auditor’s capacity to deliver, within a normative audit framework. Prohibited services include generic descriptors like “investment advisory services”, “management advisory services”, etc. It is desirable that an auditor should be prohibited from acting as broker dealer, promoter or underwriter on behalf of an audit client, or “act in the capacity of management”.

But there are many things that an auditor traditionally does, like advising and scoping due diligence processes, providing advisory services for market analysis, provide guidance of existing regulatory and listing rules, identifying attributes for a potential strategic partner etc, which may all be captured under the proposed definition of prohibited services. This will not only make it extremely difficult and costly for companies, to secure such advisors, but also has the potential of raising an entry barrier to the audit profession, particularly for young bright professionals.

The main concern is that contravention relating to the clauses pertaining to auditors’ reporting responsibility, prohibited services, etc. would lead to the quadruple whammy of imprisonment of the auditor; a fine extending upto Rs 25 lakhs; entail refund of the total revenue received by him; and make him liable to pay damages not only to the company but to any other affected person. The last one particularly, seeks to expand the auditors “duty of care” beyond the recipients of the audit report, to literally the whole world.

How many audit firms would be able to annually pay the premium or willing to carry the huge risk that these requirements entail? Also, recent demands for mandatory joint audit and rotation would increase audit risk since it would decrease auditors’ familiarity with his client and his coverage area. A decade ago, 50 per cent of new professionals joined auditing profession every year. Today, according ICAI figures, more than 90 per cent are opting to join industry.

The question is, are audits about to get much costlier for companies? Will market expectations force introduction of forensic audits? Will peer reviews become wide spread and as onerous as an audit? Are the days of innocence truly over?

This article appeared in the 19 January 2009 edition of Business Standard, which is available at this link.

A seat at the high table

Last month witnessed two significant events essential for the coming of age of the Indian accounting profession.

To start with, The Institute of Chartered Accountants of India (ICAI) signed an MoU with the Institute of Chartered Accountants of England & Wales (ICAEW) permitting the members of either institute to acquire membership of the other by clearing a minimal number of exams. This, definitely, is a great achievement for the ICAI, and the entire leadership behind it deserves to be congratulated. This is a goal, which was being pursued for more than one and a half decades. Mutual recognition between India and the UK was undone in the early ‘90s by measures taken by the Board of Trade in the UK and the Indian leg of the recognition was withdrawn in the mid ‘90s. At the same time when industry, trade & commerce was increasingly becoming borderless, Indian accountants were fenced within the political boundaries of India. This MoU has the potential of defeating the isolation decade and making the Indian profession become a truly global player.

The European Commission (EC) made a landmark announcement last week. The Generally Accepted Accounting Principles (GAAP) of six countries in the world — United States, Japan, Canada, India, China and South Korea — were declared to be equivalent to International Financial Reporting Standards (IFRS). This followed a positive opinion given by the European Parliament and all member states to the European Securities Committee in the previous month. While this is a testimony to the application and rigor of Accounting Standards in India, it also acknowledges the fact that the fundamental genetic material of Indian accounting standards are the purveyor of IFRS.

Though these developments would definitely bring cheer in these gloomy times, but at the same time, there is a pertinent clause added to it. In its announcement, the EC said that the situation in four of these six countries, i.e., India, China, Canada and South Korea, would be reviewed no later than 2011. Also the EC would regularly monitor the ongoing status of equivalence and report to the member states and Parliament. Thus, we cannot remove our foot from the accelerator of convergence to global standards.

India’s growing clout in the accounting world has a lot to do with its status as an emerging economy with a strong growth rate and deep-pocket investors who are venturing abroad. It is a matter of pride that India has more than 200 companies, many of them medium sized, whose debt or equity is listed in Europe.

Membership of this exclusive club brings many responsibilities and expectations. In addition to converging with IFRS by 2011; and continuing to satisfy EC equivalence criteria in the forthcoming equivalence tests, we would have to converge our auditing standards, - particularly the standards for joint audits. The market place, regulators and ICAI will have to move towards the international goal of ‘qualification free’ public balance sheets, where accounts are recast in order to remove audit qualifications before they are accepted in a public domain. The MCA in its new Companies Bill has proposed independence requirements, which would help in achieving convergence with global independence standards. The logical extension of all such convergences is to encourage multi-disciplinary partnerships and the government has already done its bit by amending the CA Act to permit it.

This week, the Securities Exchange Commission (SEC) has also voted on the necessity of its 500 largest companies to file financial reports from 2009 using the Extensible Business Reporting Language (XBRL). Similar adoption of XBRL by a number of the other developed countries would mean that India would also have to soon walk on that path. Sebi has already constituted a committee and I feel, this will be the next big thing that will occupy our attention.

A seat at the high table comes with a lot of obligations, but also with unique opportunities. Opportunities to place the concerns of the emerging economies on the world stage; opportunities to take leadership in developing SME (Small, Medium Enterprise) focused standards; opportunities to highlight the talent in the country; opportunity to open up new horizons of global mobility for our professionals. We only hope and fervently wish that all such opportunities are grasped with both hands and we do not falter on any of the heightened expectations that the world has from us.

This article appeared in the 22 December 2008 edition of Business Standard, which is available at this link.

Expectations from the auditor and the Companies Bill 2008

The Companies Bill 2008, now pending with Parliament has initiated certain significant steps towards accountability, transparency and rationalisation of measures relating to audit and accounts. Some significant measures have been addressed by the Companies Bill 2008. It’s heartening to see that some of these are broadly in line with similar international requirements.

The Bill has notified a list of services as prohibited services that an auditor of a company can never provide. Further, the provision of prohibited services or deficiency in conducting the audit would expose an auditor to a hefty penalty and knowing or wilful contravention can additionally attract imprisonment for one year. Such a conviction would additionally require the auditor to refund all remuneration received by him to the company and become liable to make good the loss arising out of his incorrect / misleading report to any other affected person.

I believe this clause itself in the near future would perhaps lead to a great shake up within the profession. In addition, for listed companies, a framework for internal control is required to be mandated by the board and an audit certification of such internal control is separately required. By definition, every annual financial statement must be accompanied by a report of the Committee on Directors’ Remuneration. Thus, payment to directors would come under focus.

The Bill envisages that a Chartered Accountant (CA) audit firm may also have partners, who will not themselves be CAs. This seems in line with the ICAI movement towards enabling multi-disciplinary partnerships. In a very welcome move, the government has dropped Schedule VI from the Bill and consolidation of accounts has been mandated.

These have been long awaited reform. Family-owned / closely-held businesses with complicated structuring, may find living in a regime of mandatory consolidation quite challenging. While this has been a significant initiative by the Ministry of Company Affairs, there are certain matters of detail and certain prima facie lapses in drafting of the Bill. To cite an example, contrary to international norms and existing Indian law, an auditor can now hold securities, up to prescribed levels, in the company he would audit. This appears to be a step backwards. There was a lot of disquiet on the existing law prohibiting the auditors’ indebtedness in excess of Rs 1000. Inexplicably, instead of relaxing this guideline, the threshold has been removed and any indebtedness at all has been prohibited. This would make it practically very difficult for firms to be appointed auditors of telecom, electricity and other utility companies, since normal monthly consumer bills would render an auditor ineligible. However, on a contrary note, the Bill states that an auditor can provide a guarantee or security for indebtedness of a third party and even have a business relationship with his audit clients up to prescribed limits.

The Bill requires the auditor to report whether financial statements comply with ‘auditing standards’. This is a clear error since financial statements are drawn up as per ‘accounting standards’ and have nothing to do with auditing standards. There is a responsibility cast by the Bill on the auditor to provide in his report, “any qualification or adverse remark relating to the maintenance of accounts and any other matters connected therewith”.

KEY PROPOSALS
* Only the boards of companies can pre-approve any additional services that an auditor can render and a list of services have been notified as prohibited services
* A Chartered Accountant audit firm may also have partners, who will not themselves be Chartered Accountants
* The Bill requires the auditor to report whether financial statements comply with ‘auditing standards’. This is a clear error

Now, the last bit of this clause is too openly worded specially for a situation where a wrong auditors’ report would lead to severe penal consequences. Continuing a previous drafting error, the Bill requires the auditors to report “the observations or comments of the Auditors, which have any adverse effect on the functioning of the Company”. It is extremely unlikely that observations of Auditors will have an adverse effect on the functioning of the Company! Perhaps, the intention is to report upon those observations of Auditors, which pertain to matters having adverse effect on the Company.

It is high time this particular mistake is rectified before the Bill is enacted as Law. The Bill stops short of making the bold requirement that audit reports should not be qualified and for any proposed qualification, the management should go back and recast their accounts.

There are various disclosure requirements and provisions in the Bill which makes an auditors’ task very onerous. The basic tone throughout the Bill is one of investor friendliness and protection and the Audit profession has been called upon to assume far greater responsibilities, the downside being far greater consequences for failure. It is important to iron out the obvious minor flaws so that the broader vision laid down can be realised. I do hope the profession in our country would also prove equal to the task.

This article appeared in the 24 November 2008 edition of Business Standard, which is available at this link.

India in 2008: Treading on egg shells

When at the turn of this century our great grandchildren look back, possibly the annus horribilis, 2008 would be more of a defining point for the 21st century, than 1929 was for the 20th century.

It is difficult to predict what world order will emerge from this churning, but for a student of history it is certain that going forward the world would be a different place.
While definitely we have not yet come to a eureka moment where one can confidently predict that the Indian economy and the Indian currency would be one of the strongest in the world in the 21st century, there is ground for guarded optimism.

A very strong financial sector; strong fundamentals; a youthful nation and an economy substantially fuelled by internal consumption and capital formation. These are the foundations we are destined to build on.
At this critical point, the two things that can trip us are unjustified expectations and short-sighted leadership. I intend focusing on the former today.

We must realise there would be short-term issues this year; some of us would be affected more than others. If we anticipate and prepare for some of these issues, we can ride the gusts of wind and not rush headlong into a stampede arising from unfulfilled and unrealistic expectations. What are some of these issues?

The sources and costs of finance would be under stress and long-neglected covenants, dismissed as fine print earlier would receive greater scrutiny and could be leveraged by leaders.

Companies would have to test their compliances with financial/operational targets they had held out for. Industries hit by global recession would face sales slowdown and would have to challenge inventory obsolescence.

They would have to revisit plans for augmenting working capital; counter party risks in the form of impacted debtors may surface in balance sheets of entities in the form of receivable write-offs and stretched debtor turnover days.

Commodity, fuel and interest cost increases would lead to rise in cost of sales and compress margins. Due to this, analysts and companies would need to revisit cash flows, forecasts and performances. Resultantly, there would be a consequential impact on impairment of tangibles and intangibles. Due to contraction in demand, idle capacity costs would get charged-off, hence impacting revenues.

Suppliers and purchasers may invoke liquidated damages or delayed payment related contractual terms which in the past may have been waived. Further, the impact of maturing derivative contracts on some balance sheets would need to be closely watched. In addition, there could be short-term reduction in margins, profitability, capital expenditure, bonuses, rate in growth of salaries, stagnation in property values and consequent second-hand contraction of demand. That said it is important to realise that there is no reason for panic, while there is cause to be realistic.

This year would be quite unlike previous years. Therefore, it would be unfair for investors or the market place to get impatient and measure growth rates or results in comparison with the immediate past periods. The media would also have to factor these expectations and be more subdued in its reporting. We have to set the right tone of our expectations, only then will India be able to stand up and display to the world the resilience, maturity and depth of the Indian market. This has already been displayed by our financial sector and we must follow suit.

If we do this, we would have successfully passed the first test on our way to become leaders of the new world.
The second test that of moving beyond the bane of short-sighted leadership would require involving leaders across the political spectrum and obtaining agreement on certain common economic premises and ways of achieving them and arriving at a bi-partisan agenda, elevating this above the cut and thrust of politics.

That would in short require the emergence of an economist Gandhi — a subject beyond the modest ambitions and length of today’s column.

This article appeared in the 10 October 2008 edition of Business Standard, which is available at this link.

Great expectations

Given the initial press release by the government about the directions and the thrust of the now finalised Companies Bill, it is clear that potentially this has the ability to become the most significant piece of corporate legislation in the past few decades. From what is evident, there has been a structured thought process; targeted towards rationalisation of processes; clear separation of procedural non-compliances from substantive issues; leveraging and extending the Ministry’s highly successful e-enablement endeavours of MCA-21, for empowering corporate stakeholders.

Of particular interest would be the efforts to spark investor activism and enable investors to take part in “class action suits”. Companies, the legal systems of the country and investors would have to mature overnight in this brave new world.

From early indications, the profession of independent valuers will receive a great fillip. Right from valuation of non-cash considerations for allotment of shares to fair valuations in case of business combinations, and valuations of property, plant and equipment, intangibles, as well as off Balance Sheet assets and liabilities - valuers would play a most critical role. The valuation profession would have to step up to the plate as corporate India looks set to be entering the subjective world of fair valuation. Uniform valuation standards and oversight would be required, but above all, the country would need many more valuation professionals.

It is a bit of a let down that early pronouncements , while talking in somewhat great detail about the convergence/adoption of international best practices on trade law and valuation frameworks, skirts the issue of convergence of global accounting and auditing frameworks. There have been statements on recognition, of both auditing and accounting standards. This seems to indicate that the Act may still retain the right, to prescribe through subordinate legislation, the accounting framework. This falls short of the MCA’s self declared position of converging to IFRS by 2011. However, pending availability of the entire Act the jury is still out on this one.

Preliminary indication of procedural de-bottlenecking, like speeding up the incorporation process, removal of limits in the number of partners of professional firms, and providing a single forum for approval of all mergers and acquisitions were overdue and are welcome. But, as with most such good intentions, final judgement would await actual execution. The challenge is whether the mind sets and skill sets of the officials implementing these can be changed overnight.

When discussions on this Act begun a couple of years back, there was great focus on reducing the size of the Act and the number of sections. The temptation to achieve this by liberal use of the “as may be prescribed” phrase appears great. This would leave the door open for proliferation of rules and regulations and frequent amendments therein. If this happens, very soon we are going to land back again in a web of complexity which the present Act wants to undo.

For the first time in recent memory, initial news of the provisions in the new Act have sounded the right notes and raised great expectations. We hope we shall not be let down.


This article appeared in the 08 September 2008 edition of Business Standard, which is available at this link.

Nostradamus of the accounting world

Prescience or the ability to see into the future is a gift sparingly given to humans. It is a mixed blessing, for such people are often inadequately recognised in life. Pesi Narielvala was the only such person I was privileged to personally witness up close. A philosopher among accountants, an orator par excellence, his vision was astounding. He realised, for accounting to become a universal language, it must be codified. Single-handedly, he started the technical directorate of the Institute of Chartered Accountants (ICAI), dictating landmark professional standards such as the Guidance Note on Expenditure during Construction. This was way back in 1970, when the International Accounting Standards Board, the US Financial Accounting Standard Board and our own Accounting Standards Board were yet to be formed. The framework for Special Reports and Certificates developed by him is the only framework that even today Indian accountants rely on when issuing a certificate or even an examination report for an IPO.

At a time when it was unheard of, Pesi in his capacity as President of ICAI was instrumental in forming the Accounting Standards Board. In fact, he stood up to great opposition by the chambers of commerce and the industry to the basic concepts of standardisation. Today, when the industry and regulators have finally acknowledged the importance of standards, their justified grouses have not been heeded by anybody apart from Pesi who recognised these issues and stood by the industry despite their initial opposition towards him. In ICAI’s journal some time back, Pesi justified industries unrest regarding the accounting profession treating industries as “soft targets” while promulgating standards, but doing lesser than what it should have to “sell” these standards to the tax authorities, regulators and other groups, whose attitude towards standards compounded industries problems in implementation. Pesi was convinced that professional excellence had to receive primacy over ICAI’s tendency to seek equal distribution of work amongst its members. Not a popular view, but one which will survive the test of time. He was apprehensive about the rate of growth in the availability of information not matching with our capacity to develop applications to make meaningful use of it.

He often remarked that the complete change of mindset that technological advances warranted was not adequately evidenced since “one may change ones mind several times a day but one is fortunate to possess the wisdom to change ones mindset even once in a lifetime”. On the archaic issue of prohibition of advertising by accounting professionals, Pesi was confident that ultimately the need for the consumer to know the product he was buying would triumph. As recent amendments indicate this is actually materialising.

A keen supporter of globalisation, Pesi was convinced that it entailed giving up narrow sectoral and nationalistic concepts of sovereignty. He argued that when we could converge on standards of aviation, nutrition and environment what was so sacrosanct about accounting and auditing that we felt insecure about adopting international standards. Further, he prophesied that mere convergence of accounting would not work and would be a disaster if it was not accompanied by a convergence of interpretations, performance standards, and monitoring standards. In fact, counter intuitively he argued that convergence of knowledge standards - where highest quality of standards are known and practiced by professionals,- would not help, unless there was convergence of standards of understanding among the stakeholders and lay users.

Always a student, Pesi was a rank holder in the examinations of economics and law of Calcutta University in the 1940s and the English Institute of Chartered Accountants. At the age of eighty plus he took up and mastered IFRS, the new body of professional standards and in one of his last public appearances captivated the audience at a chamber of commerce with his technical insights thereon.

His prescience was legendary, in the 1980s he singled out a freshman speaker at a conference and said “you will go a long way in the profession”, 10 years later that person became the youngest in history to head a major accounting profession in the world. A person of strict discipline- he would complete reading all his daily papers, fold them and place them in the dustbin before half past ten in the morning, - on the August 8, he called his secretary of the past three decades in the morning and made her write down how he would like to divide some of his possessions among all his attendants and loyal helpers who had been with him over the years. At the end of this before he sat down to lunch, he said to her, “Anne, now I can die in peace”. He did so, — in the night, — after dinner.

This article appeared in the 01 September 2008 edition of Business Standard, which is available at this link.

Mainstreaming the accounting profession: Mindsets and mind blocks

With an institute that has grown to be the second largest in the world, the time has come when Indian Chartered Accountants (CA) can dominate the world stage like accounting professionals from no other country.

At an individual level the Indian CA has taken the world by storm. Indian CA professionals are as proficient in understanding and implementing International Accounting Standards (witness the outsourcing of accounting to India) as the best in the world.

For the world to witness and experience our potential as CAs, we need to speak the global language of common standards, common practices, common attitude and outlook. That said, it is in areas where regulatory enablement is required that we are woefully falling behind, preventing us from achieving our standing in the global accounting arena.

‘Made in India’ rules and guidelines are rising the walls of “country specificity” isolating the Indian profession, at a time when the profession should be out there conquering the world.

Regulators of the profession seem to think that all national and international laws and regulations must necessarily be amended to be made India-centric. As a result these laws end up shackling the profession in its bid to internationalise itself. Witness the recent proposed amendments to the CA Regulations.

In a welcome move the Government of India had in 2006 amended the CA Act to allow CAs to form multidisciplinary partnerships with non CAs. This has for long been a global norm, but was prohibited in India. The Institute of Chartered Accountants (ICAI) was given the power to propose the categories of individuals a CA may partner with. While the ICAI has taken the correct step of proposing partnering with lawyers, architects, actuaries, engineers, cost accountants and company secretaries; it has undone the drive for internationalising the profession by specifying that such engineers, architects, actuaries, lawyers e.t.c., must only be members of the relevant Indian professional body established under the respective governing Acts in India.

As a result, for example an Indian CA who wants to render cross border multidisciplinary services and bid for international contracts, would be ineligible under these regulations if he wants to tie up with professionals from those countries. However, most International Agency funded global contracts (like those funded by the Asian Development Bank, World Bank etc) stipulate partnering with a minimum number of domestic consultants.

Regulating quality of services delivered by Auditors is a matter of universal concern. The International Federation of Accountants (of which ICAI is a member) has issued for international usage a ‘Statement of Quality Control’ 1 (ISQC) laying down expectations from Regulators in this matter. The ICAI has modified this statement and issued an “Indian Version” for usage by Indian CAs. It is interesting to note the areas of modification.

The ISQC recognises that a variety of experts may possess the ability to evaluate the quality control processes in a firm while the Indian standard differs and says that only a member of the Indian Institute can evaluate the quality. Further, the ISQC recognises that other organisations that specialise in providing Quality control services would also be recognised as experts for evaluating the quality processes in a firm, a concept very relevant in today’s fascination with ISO certifications. In a stark contrast to this the ICAI says that only its own members can evaluate their own quality.

Imagine a simple case of providing cross border services of translating a set of financial statements to a foreign GAAP. The ICAI would have us believe that the person who can evaluate the quality of work pertaining to the Foreign legislation, (very often in a different language) could only be a member of the Indian institute. It is increasingly common nowadays to seek Assurance from an audit firm on matters other than audits and reviews of historical financial statements.

It is in these types of engagements that the profession is witnessing growth and for these assignments it is very critical to use non financial experts to ensure quality execution. With this significant amendment to the quality control standard, only a member of ICAI can vouch for the quality control in such areas. This goes against the very grain of multidisciplinary partnerships that the Government is trying to usher in.

The Public Companies Oversight Board (PCAOB) recently announced that all firms registered with it, including innumerable Indian firms, would need to declare and file annual reports of billings by the firm, percentage of billings from audits and names of clients on the PCAOB’s website. This would run totally counter to the advertising rules legislated by ICAI last month where disclosure of client names and billings by the firm would tantamount to advertising.

The time has come for us to abandon age old guidelines and liberalise the profession. Could there be any truth in the view that the Information Technology industry of India could go forth and conquer the world because it did not have any regulator? And the mandarins did not understand information technology well enough to raise the walls of India specific laws? Is there a lesson in here for the Accounting profession?

This article appeared in the 11 August 2008 edition of Business Standard, which is available at this link.

Advertisement ? thus far and no further?

Auditors and Advertisement? Even a few months ago this would have been blasphemy to most accountants. In the past, accounting professionals were not even allowed to advertise their existence as a professional, let alone the services rendered by him and this was strictly interpreted.

A case in example is that of an eminent past President of the Institute who was hauled up for severe disciplinary action, since the biographical notes of the author in the book he had written, mentioned that he was practising as a professional in his own name.

However, in a dramatic break from the prison of the past, the current young council of the Institute of Chartered Accountants (ICAI), in a landmark announcement this month, permitted Chartered Accountants to advertise and notified guidelines for this.

Prohibition of advertising was warranted in an age when the profession was small, the service offerings and capabilities were uniform throughout the profession and a CA was like a family general practitioner. With the profession's strength rapidly approaching the two lakh figure; portfolio of services and capabilities varying from firm to firm and clients seeking industry and subject matter specialism; not allowing advertising amounts to denial of the right to information to a consumer and curtails his freedom to make an informed choice. It also militates against the young professional who is unable to actively build his own brand as against already established brands.

However, all said and done accounting is a serious profession. Hence a permission to advertise cannot be a carte blanche for frivolity, flippancy, or misrepresentation. It should never ever raise false expectations – either from the profession or from the individual service provider. Hence it is understandable that the ICAI will tread cautiously. This seems evident in the guidelines, when in a relic from its regulatory past the ICAI has tried to prescribe the maximum font size as 14 for advertisements.

Where these guidelines fall significantly short of regulatory expectation worldwide is that these guidelines specifically prohibit disclosure of names of clients. Further, the guidelines would not enable a Chartered Accountant firm to disclose their total billing and specifically their fees from audit assignments.

This is directly in conflict with the requirements in force (e.g. EUs 8th Directive) and elsewhere which mandate that all firms of auditors must disclose in their public transparency report the names of all public interest entities that they audit as well as their total earning, indicating separately the amount of earnings from audits conducted by them.

This would lead to a situation where Indian audit firms would not be able to comply with these international requirements for transparency reports and thus would not be allowed to register in such jurisdictions. This would effectively disentitle Indian audit firms from conducting audits and issuing reports for Indian companies which are registered on Exchanges in Europe.

While advertising in the profession requires to be regulated, the broader question which one must keep in mind is that it is the ICAI's duty to ensure delivery of quality services; to ensure that firms invest in quality and expertise; to assure that professionals deliver quality services to clients, thereby uplifting the image of the profession at large. This has to be done by strongly investing in a robust system of quality review and inspection and taking visible action to enforce quality standards in the profession. This would be the greatest advertisement for the profession.

In today's time and place, it is not the duty of the ICAI to ensure equitable distribution of available work – the market place is competent to do that and work would find its own levels in the market place, based on different requirements of the consumer including price sensitivity, capability and the consumer's perception of the value that he is going to get from his service provider.

Accordingly, the Institute should believe in the maturity of the market and focus more on its critical role of maintaining quality. It's encouraging to see recent steps like the agreement in principle to permit Chartered Accountants to form multidisciplinary practices; relaxation in the advertisement guidelines and strengthening the peer review and financial report review systems. These are indication that the ICAI is moving in the right direction. But there is a much greater need for strengthening the pace of reform and fast forwarding the integration of the Indian profession with its global counterpart.

This article appeared in the 23 June 8 edition of Business Standard, which is available at this link.

A requiem for Schedule VI

The Ministry of Corporate Affairs (MCA), after the well deserved success of its flagship MCA-21 e-enablement project, is committed towards the simplification and transparency of corporate reporting.

As a step towards this, it is planning to revise and simplify Schedule-VI of the Companies Act which prescribes the presentation and disclosure requirements for financial statements. This simplification is a credible goal, particularly for companies which are not ‘public interest entities' as this would considerably remove costs and other associated impediments for small and medium businesses. However, time has come to ask whether the Schedule-VI format is relevant at all today?

Globally, professional bodies of accounting standard setters prescribe accounting formats. The advantages are obvious. This is a specialised area which requires professional input; and has to be updated frequently to keep pace with changes in the economic and commercial environment. A schedule to a law, which has to be debated and amended only by Parliament obviously does not offer the flexibility required. Also given the scheme of things, an accounting legislation may not be the highest priority of our Parliamentarians.

Today, the prescriptions of Schedule-VI are far removed from the reality of what financial statements mean. It is only a legal figment that accounts in India comply with Schedule-VI. For starters, Schedule-VI does not even have any prescribed format for a Profit & Loss Account; it does not require a cash flow statement; it does not require disclosure of accounting policies; it does not require disclosure for leases; it does not warrant disclosure of deferred taxes or disclosure regarding impairment losses or intangibles. Further, the Schedule VI was conceived in an era when nobody had even heard of derivatives and so remains blissfully unaware of derivatives and disclosure of potential losses therein.

On the other hand, the Schedule-VI requires detailed disclosure of inventories, capacity, production and turnover for every significant item produced or traded. This is not required under any global framework and is potentially disadvantageous for the Indian industry vis-à-vis its global competitors as it forces companies operating in India to disclose their confidential operating data. These disclosures were conceived in a "Licence Raj" era and serve no useful purpose today when alternate Segment Reporting data is already available.

Similarly, there is redundancy in data disclosures pertaining to dues from or transactions with, related parties (eg, companies under the same management, director/officers of the company etc.) where there is an existing parallel and more efficient framework of related party disclosures which is warranted by Accounting Standards and is globally acceptable. A lot of clutter such as requirement to disclose CIF values of imports, and earnings and expenditure in foreign currency continues to be mandated by the Schedule VI. These are essentially relics of the insecure foreign exchange days of the sixties and the seventies.

While on one hand the MCA is trying to reinvent the Schedule-VI, on the other hand multiplicity and confusion in the standard setting process in the country is increasing. ICAI's Accounting Standards Board is setting Standards; the National Advisory Committee of Accounting Standards (NACAS) is considering and notifying Standards; the MCA is notifying Rules (Accounting Standards Rules, 2000) that directly contradict Schedule-VI thereby creating a legislative conflict by specifying that a Rule will override an Act !!; the RBI is issuing provisioning & income recognition guidelines; SEBI is mandating presentation and disclosure formats of interim and annual results; and the ICAI is busy issuing ‘announcements', impacting accounting but without either the due diligent process of formulating Standards or investing these announcements with the authority of a mandatory pronouncement.

If the MCA really wants to move to an internationally comparable regime of accounting and transparency, it should not waste its resources in trying to write presentation and disclosure standards into laws. Rather it should repeal both the Schedule-VI to the Companies Act and the IIIrd Schedule of the Banking Regulation Act.

The MCA should invest in laying down rigorous laws around processes of standard setting, ensuring the independence and professionalisation of designated standards setters, unification of Accounting Standards within the country and harmonisation of standards internationally. It is time we all spoke same language. It is time we gave a decent farewell to Schedule-VI.

This article appeared in the 26 May 2008 edition of Business Standard, which is available at this link.