Learning from America's mistakes

[Guest guest]

Learning from America's mistakes

 

Uday Chatterjee discusses government efforts to clean up corporate

governance and accounting standards in India

By now, we are all familiar with the stories of Enron, Arthur

Anderson, Worldcom and a host of other American corporate giants

that are reeling under the weight of one scam after the other. The

underlying similarities in all these cases are one - greed and

regulators' inability to prevent the culprits from committing

misdeeds.

 

In all the above cases, it has been the CEO or the CFO of the

companies who have used creative accounting to overstate his or her

company's profits. High profits meant that the company's stock

remained high in the market place and this enabled the CEOs and the

CFOs to cash in on their stock options at ridiculously high prices.

Simplistic, but true.

 

Which brings us to the situation prevailing in India. Are our

accounting standards good enough? Do our regulators have enough

powers to curb a rogue CEO/CFO from doing an Enron? Most certainly,

no.

 

Let us first look at the American scenario. Corporates in the US

have to write their accounts under what is known as "generally

accepted accounting principles" (GAAP), which is regarded as the

most stringent standard in the corporate world, and all other

countries are far behind in their standards.

 

Today if any Indian company, which has prepared its accounts under

local standards, were to adapt GAAP, the company's profits would be

understated by something like 30 per cent. Therefore, there is

clearly a need to look into our levels of corporate governance and

accounting standards.

 

Ficci recently organised a seminar in New Delhi - National

Conference on Corporate Governance and Accounting Standards. There,

the emerging role of CFOs and the Institute of Chartered Accountants

of India (ICAI) was discussed.

 

Speaking in the conference, ICAI president Ashok Chandak said his

institute has taken a position that an independent public company

accounting oversight board (PCAOB), on the lines of the one in the

US, is not necessary in India. "Because a legal framework already

exists in the country for disciplining erring auditors and a

fraudulent management."

 

ICAI also held that the suggestions already made by the institute to

the government for making corporate governance effective in India

addressed to a large extent the concerns emerging from cases of

corporate failure in the US.

 

He said the need for setting up a PCAOB was felt in the US in the

absence of any federal legislation and appropriate mechanism

mandated under the law for disciplining erring auditors and a

fraudulent management.

 

After the recent cases of corporate failure in the US, the much-

advocated US GAAP in India came under close scrutiny and was exposed

for its inadequacies. "The accounting standards issued by ICAI in a

way address adequately the shortcomings that have been pointed out.

In generality, the US GAAP is rule-based and not based on

principles, but the accounting standards in India are principle-

based," Chandak said.

Besides recommending the revamping of the existing disciplinary

mechanism, ICAI has already suggested to the Indian government that

the system of joint auditors be introduced to increase the

effectiveness of the audit. Some of the suggestions made by ICAI to

enhance independence of auditors include fixation of auditor's

remuneration in the Act itself rather than by the management.

 

Besides non-acceptance of a qualified audit report by the Registrar

of Companies, the Securities and Exchange Board of India and other

regulators, ICAI has also suggested that auditors' qualifications

should be given effect to while determining the distributable profit

for fixation of remuneration to directors and for declaration of

dividends.

 

ICAI's suggestion regarding setting up of a PCAOB indicates that

ICAI does not want, in any way, to control the accounting turf

diluted. Notwithstanding its recommendations, the central government

has decided to establish the Government Accounting Standards

Advisory Board (GASAB) for the centre and states. This was revealed

by Comptroller and Auditor General of India V N Kaul in the

conference.

 

The board will be headed by the deputy comptroller and auditor

general (accounts) and the members will be the controller general of

civil accounts, the controller general of defence accounts, the

financial commissioner (railways) and the additional secretary

(budget).

 

For wider representation, the other members of the board will

include the deputy governor of the Reserve Bank of India, the

president of ICAI, the director general of NCAER and principal

finance secretaries of four states by rotation.

 

Kaul said the main responsibility of the board is to formulate and

propose standards that will improve transparency and usefulness of

financial reports. Department of Company Affairs secretary Vinod

Dhall said the government will not like to have excessive

interference in the company affairs but liberalisation has

necessitated a stronger role of government regulators.

 

The decision to set up an advisory board is welcome. It will be able

to function as a watchdog body and there will be no convergence of

interests as it often happens in the case of auditors and companies.

 

Now we can only hope that the board is also empowered to ensure that

erring officials are pulled up before any misdeeds are created.

Otherwise, it will end up as yet another toothless body.