Sent an email to CA Institute (eboard ) requesting them to publish (19-Jun-2012). No response. Had sent a reminder also. No response. I feel no obligation to wait any longer. After all , I am just stating facts and not denigrating my own bfrethren. Will go ahead now that I have waited for sometime.
Corporate accounting
and reporting and Ethics– Need for Chartered Accountants to introspect
Introduction
All around us there is this talk of lack of ethics , corruption,
inability of a normal Citizen to get justice in time , so on and so forth. The
biggest irony is that the normal citizen who talks about injustices in several
cases become the perpetrators in a different role. The same citizen who does
not get justice or of whom bribes are demanded becomes the perpetrator in a
different avatar. He could be the one complained about. We play different roles
and wear different suits. Ethical standards are different , one for preaching
and one for personal practice. Human mind is so innovative that they find
creative ways of justifying and rationalizing things.While each one of us talks
of hypocrisy, if we do a honest
assessment, just a miniscule percentage amongst us only would come with flying
colours.While this may be true of the entire society, the aim here is to take
stock of and introspect as to what needs to be done of the malaise to whatever
extent is prevalent in our own
profession, the Chartered accountants.
Ethics
or rather the lack of it amongst professionals
Let me start with something which had received wide publicity to set the
tone for the theme. In one of the episodes of his program “Satyameve Jayate”,
the Bollywood super star and celebrity, Aamir Khan brought
out the unsavory aspect of lack of ethics amongst some members of the medical
profession. This caused a huge furor within the medical profession, at least
with the Indian medical association which sought an apology. The unholy nexus
that exists between the Hospitals, the diagnostic centers and the doctors and
also various other tactics followed by some of the Hospitals geared towards
revenue and profit generation is a topic discussed in our drawing rooms,
offices and a matter, some of us would
have experienced in our own lives. This is not to paint the entire profession
with the same brush. You have several members of the profession rendering
yeomen service, but, that cannot take away the fact that there exists a fairly
significant number of people, professionally qualified doctors and others
associated in the medical profession indulging in practices which what one can
term as completely anti- patient. One also finds it difficult to digest the
fact as to why we have never heard of the same Indian medical association taking up cudgels against malpractices in the
medical profession. They might have done in a few cases but would never publicize
it. Good as well as bad have to be publicized. To say that there exists no
wrong doing and hence no need for punishment is just living in denial.
We
,the , Chartered accountants need to take stock of ourselves on the Ethics
front
It is also a fashion to talk of lack of ethics and wrong doings in all
professions other than their own ones. I have heard lawyers and Chartered
accountants and people from various other professions discussing freely and
with a lot of passion and righteous anger of sharp and downright fraudulent
practices amongst the “other professionals”. Let all of us, Chartered accountants
ask ourselves an honest question. Is there not lack of ethics and indulgence in
sharp practices amongst the Chartered accountants? CA s has great, some stated
and some unstated, fiduciary responsibilities to the society. Don’t we have unethical
practitioners amongst us? In fact, Finance professionals (not necessarily
Chartered Accountants), post 2008, with all the derivative and credit blow up
were and are now also one of the most reviled professionals. That of course is
a story for another day. My idea is more to deal with areas in corporate
accounting and reporting responsibility of Chartered accountants where there
have been failures and continues to be so and issue of ethics in the
profession.
Bigger wrongs
do not make lesser wrongs all
right
While co professionals talk of lack of ethics and corrupt practices
amongst “other professionals”, when a motley crowd of professionals (lawyers,
CA s and doctors etc ) are together they conveniently talk animatedly about the
lack of ethics and corruption levels amongst politicians and the funny aspect
is when the politicians meet, they talk of the huge levels of corruption at the
ministerial level. All these to justify their own misdemeanours ,which by their
own perception are small and in fact not
wrong at all, typical escapism and a perverted way of rationalizing our wrongs.
“Corporate
Governance issues” an euphemism for inflated financials and misreporting
One frequently comes across shares, which, in spite of apparently good
financial numbers are priced low in the stock market, even factoring in all
other factors like Industry, the business cycle etc. The reason, spoken in hush
hush tone is “Corporate Governance issues”. What are these Corporate Governance
issues? Corporate Governance by its very nature consists of the way the Company
is structured and decisions are taken and transacting of business in such a way
that the long term interest of the shareholders and various other stakeholders
are protected and furthered. Corporate Governance includes amongst other things
good business processes, good business practices, ethics, transparency and well
calibrated decisions by the Trustees (the Board) with the risk and return in
perspective on various decisions . Lack of these could be termed as lack of Corporate
Governance.
The “Corporate Governance issues” that the market players talk of is
completely different. It is understood by all the players but rarely spelt out
in so many words. “Corporate Governance issues” they talk of is nothing but
manipulation of financial numbers. To be fair to the Professional accounting
bodies and accounting fraternity and the people framing the accounting
regulations, a number of changes have been brought out to ensure that Companies
do not take refuge under practices which used to be inadvisable but not
prohibited. Consolidation of accounts , segment reporting and few others have
furthered the cause of transparency and investor information to make an
informed investment decision What one is
talking about is downright manipulation of accounts and misreporting which are
swept under the carpet under the garb of aggressive accounting. Just have a
look at the financials of the Companies which supposedly have “Corporate Governance issues”. You will see
bloated current assets in most cases and in some cases bloated fixed assets and
several other cases “Goodwill” which were possibly an Associate Company making
losses bought over or merged at a premium. A look at the cash flows of such Companies is
very revealing. Year after year, you have these Companies show profits but the
operational cash flow continues to be negative year after year.
Number
manipulation -Innocuousness of the start and snow balling impact.
Dressing up of numbers starts
with a typical and apparently extenuating and appealing reason like “compulsions from the Banks” (to
ensure continuation of the working Capital loan) and a more typical and
convincing remedy, “we will make it up next year”.
Next year the story is repeated with a different story line. This time
it could be potential foreign associations in the offing for which a good set
of numbers are a must.
The very next year, there could be a potential Private equity investor
intending to invest. The numbers have to appear good for a good valuation. The
belief is that once the PE investor puts in money, the Company with the extra
cash would be able to turnaround.
Move to the next year, the compulsion is a potential strategic investor.
We need a good set of numbers to ensure a good valuation and keep the dilution
levels low. In some of these cases, the strategic investor buys out the
promoters partially and pumps in additional equity for expansions. You can see
the reason.
The year after that could be a case of “impending listing”. Once listed
the financials massaging get on to a quarterly frequency. The story continues.
These Companies or rather the promoters keep looking for one big deal to
sweep all the past sins under the carpet and make money for themselves. This is
nothing more than a lottery.
The justification includes the aspect of trying to protect the employees
of the Company. The promoters claim that they have a duty to protect the
Company in the short term to protect the interests of the employee.This is an
emotionally appealing justification but the underlying reason is just selfish
and protection of themselves.
In all these cases, you do have qualified Chartered accountants working
as part of the Company and churning out these numbers. The combination of being
a trained accountant and being focused on ensuring good numbers pushes them to
find innovative ways of inflating the profits and going around the audit. Are
the auditors backed by very smart set of Chartered accountants missing out the
obvious? There are two reasons. You have one set of auditors whose cost
structure is so high that they can spend the least amount of time to ensure
maximization of revenues Vis –a Vis their cost and there is another set of
auditors who have grown with the Company and who can’t afford to antagonize the
client lest they lose the client.
Some known
cases
You have had several live cases of some of these Companies which had
“Corporate Governance issues” surviving in the short term and to the outside
world, sometime, even thriving for some time and going turtle after a few
years. Few of the retail companies were clear cases of accounting manipulation and
many more listed Companies resort to sale of controlling interest or sale of
part of the business to raise cash and reduce debt. They apparently took debt for
expansion but the truth most times is quite different. Debts have been taken to
fund losses or get cash to replace cash losses.
All these Companies, I am sure have had involvement of Chartered
accountants, some of them employed full time and some of them involved as
auditors and several others as part of lending Banks and institutions. It is
sad but true that they have been sometime active perpetrators or sometimes
silent spectators and in rare cases unknowing spectator. Whichever way you look
at it is a huge failure either in discharging their fiduciary responsibility to
the Shareholders, the investors and potential investors and the society at
large or sheer incompetence. Incompetence is a very small percentage one would think.
It is mostly a case of active perpetration or turning a blind eye to the whole
thing.
I see most of the professional bodies lauding the great work done by
their respective members, most of it may be true but there is need to come down
heavily on wrong doings. Not only is it necessary to punish, it is more important
to publicize such punishments.
Even in United State of America which calls or at least called itself a
very evolved financial regulatory system, you had the biggest scams. Theyare
tightening their laws and have in fact
been coming down heavily on Corporate and Financial frauds including “Insider
trading”.
Difficulties
in being ethical in a world where you can survive only by currying favors
Wherever one goes or whoever one approaches ,say,for completion of a tax
assessment or an appellate proceedings ,the
clients , even the assesses whose accounts are clean and who has been compliant
with the laws of the land , there is this expectation of favors from the
authorities and the professional CA is guided by the client or sometimes the CA guides the client to extend the “favor “ and incur
the “lesser cost” to avoid a larger future cost .The larger cost could be just
the nuisance value of assessments not being completed or it could be threat of
some tax claims on the client . The equation at most times is a no brainer.
Also take the case of a professional who refuses to go by this. He stands a
definite chance of losing the client for which there always hawks waiting in
the wings to pick up. Not for a moment one can deny the difficulty of surviving
in a world where the unstated and tacitly accepted norm is exchange of
favours.But when we talk so proudly of a great profession, don’t we have the
responsibility of being different. It is sad that there is a tacit acceptance
that passing on favors is okay. Even now the aspect of “Financial frauds” and favors
to ensure lower taxes and similar white collar crimes are considered okay. They
are not viewed with the same degree of distaste that a physical crime is. In the author’s view ( I
am sure that would be the case with most ) the social cost of white collar
crime is significantly larger than the cost of physical harm to anyone. An
“Enron” caused a lot more damage to its own employees and investors than any
type of physical violence. It deprived several employees and other investors
their lifetime savings and the means to live a dignified retirement life.
Consequences
and the fallout
First and foremost is the belief amongst the public that the accountants
are there to manipulate and support the owners of business and that they do not perceive that they have a
responsibility to the society. There is a certain degree of negative perception about the profession.
Second is the belief that Professional accountants need to be employed
so that the negotiation base for “favors” is on a strong footing. Extent of favor
is a function of knowledge and non-compliance. A professional with a better
knowledge base of the subject as well as the likely consequences, can weigh the
cost of favor Vis a Vis the likely consequential cost .This is nothing but a
glorified intermediation for an anti-social activity. The profession’s standing
in the eyes of the public goes down.
The good work of Chartered accountants’ professional work in general is
not something which shows up as a socially benefitting area of work in terms of
its proximate and direct benefit. The benefits are multifold and huge but quite
a derived one. One should be able to easily gauge the impact it has on the society
by looking at the damage to society in the absence of the accounting professionals
or failure by the accounting professionals in discharging their duties. The
case of “Enron” mentioned above stands ample testimony to that.
Widespread “financials” manipulation gives rise to lack of credibility
in shares and even inclination to avoid Companies which have a good business
model and with transparent financials.
Possible
remedial steps.
There are several steps that can be suggested to bring down the incidence
of financial manipulation but the greatest single step would be for the CA s to
take a resolution of not being a party to manipulations. That may happen in an
utopian world. For the record, however, one can bring down the incidence with
the following broad steps.
1. High focus of
automation of all Governmental processes and building a system driven work flow.
I recall Mr. Narayanmurthy, Founder Infosys talking about this in an interview
connected to "Lok pal movement "and one definitely agrees with the fact
that this can bring down corruption and need for Professional like CA to curry
favours.The CA s should spearhead these and come out with suggestions on this
front, in fact the CA Institute should have a focussed committee to suggest
areas where automation can be targeted to bring down malpractices.
2. Need for the CA
institute and the professional accounting bodies not to be studiously avoiding
embarrassing topics like lack of ethics. They need to boldly talk about it in
various forums and emphasise the need for CA s to refrain from non-ethical
practices. There is a need to get over the hesitation in talking about wrongs. The
more we talk the better is it for the profession to correct itself.
3. Unethical and
misreporting and manipulation of accounts should have a high penal cost. The
cost should include a ban from practice plus punishment under the criminal provisions.
One is sure that there are possibly laws to that effect in our Country. As is
the normal problem, such laws are rarely enforced. Need is to make a few
examples.
4. Make the CA's
allegiance to the Institute larger than their allegiance to the employers. Have
a cell where CA and others can report existence of non-ethical practises in the
Companies. Initially have a practice of protecting the identity of the
informer. Gradually we can look at greater disclosures.
5. System of
compulsory rotation of Statutory auditors atleast once in 3-4 years.
Some of the above are just suggestions. I am sure several of my fellow
CA professional would come out with far better ideas to remedy the situation
buy we have to make a start somewhere.
S.Srikanthan
+91 97415 97791
Membership No 024079
