Financial Daily from THE HINDU group of publications
Thursday, Nov 03, 2005
Financial Daily from THE HINDU group of publications Thursday, Nov 03, 2005 |
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Opinion
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Accountancy Columns - Books of Account Corruption isn't a natural disaster
"The top 10 most-corrupt countries with their scores are Chad (1.7), Bangladesh (1.7), Turkmenistan (1.8), Myanmar (1.8), Haiti (1.8), Nigeria (1.9), Equatorial Guinea (1.9), Ivory Coast (1.9), Angola (2.0) and Uzbekistan (2.2)." Thankfully, India is nowhere in that story; but before you heave a sigh of relief please visit http://ww1.transparency.org to read more about the latest index. A quote of TI's CEO David Nussbaum greets you on the organisation's homepage: "Corruption isn't a natural disaster. It is the cold, calculated theft of opportunity from the men, women and children who are least able to protect themselves." More than two-thirds of the 159 nations scored less than five out of a clean score of 10, indicating serious levels of corruption in a majority of the countries surveyed, informs a press release dated October 18. India's score is 2.9, and rank, 88th, shared along with Armenia, Benin, Bosnia, Gabon, Iran, Mali, Moldova and Tanzania. It may be a relief that Pakistan is ranked 144, and that the US isn't in the top 10 best, not counting the Refco effect yet! `Asia and the Pacific' regional average is 4.28, compared to the global average of 4.11, perhaps because New Zealand, Singapore and Australia of the `top 10' league belong to the region. The phenomenon of corruption has existed for ages, writes Ajit Mishra in a book that he has edited: The Economics of Corruption, from Oxford University Press (www.oup.com). "References to bribery and punishments for bribery can be found in many ancient sources like the Code of Hammurabi, King of Babylon (22 BC), the Edict of Harmhab, King of Egypt (14 BC) and Kautilya's Arthasastra (14 BC). Corruption is as old as the notion of kingdom," he writes. The CPI suffers from "perception biases, endogeneity and aggregation problems," says Mishra. He mentions the World Bank's BEEPS — short for `Business Environment and Enterprise Performance Survey' — conducted in 1999, wherein it tried to measure corruption by questioning selected firms in a set of 26 transition countries. "Firms are seldom asked about their own payments — rather they are encouraged to talk about average payment made by a similar firm in the industry," explains the book about the common survey methodology. Mishra draws attention to how such a study can get corrupted by `victimisation bias', that is, "only firms that have been victims of corruption rather than beneficiaries are likely to report". People who can benefit personally from corrupt practices are a tiny minority, writes Gunnar Myrdal in a chapter titled Corruption: Its Causes and Effects. Public outcry against corruption must be regarded as a constructive force, he instructs. "Examples of ingenious distortions of records abound, from the creation of fictitious personnel on payroll to changes of job titles, reports of nonexistent pieces and so forth," writes Jean Tirole in another chapter, titled Hierarchies and Bureaucracies: On the Role of Collusion in Organisations. Dangerously, safety rules may not be applied and accidents may be kept off the record, with a firm collusion between hierarchies in place. Theory of Misgovernance, by Abhijit V. Banerjee, tries to explain why government bureaucracies are often associated with red tape, corruption, and lack of incentives. Two `eminently reasonable premises' of the author are that a substantial part of what governments do is to respond to market failures; and that, like all other organisations, the government has "agents who are more interested in their own welfare than in any collective goals". Arresting read!
Knowledge injection
Take, for instance, Empathy Ltd, which is developing a new drug for HIV that has successfully completed Phases 1 and 2 of clinical testing, and for which FDA approval is pending. Should the company start capitalising the development costs? "Getting FDA approval for the drug is the clearest point at which the technical feasibility of completing the development is proven. However, that need not be the earliest point for capitalisation," advises E&Y. Discovery Ltd has a different problem. It has borrowed money in dollars to fund its R&D, which is incurred in rupees; the company wants to know if it can capitalise the exchange loss. "AS-26, AS-16 and AS-11 are relevant in this context," notes the guide.Pharma companies have come under increased scrutiny from the SEC in respect of `channel stuffing', alerts the guide. "An associated issue is in respect of accounting of rebates." The question has been `whether rebate should be deducted from turnover or whether turnover should be shown at gross amounts and rebate shown as a selling expenditure?' Before answering the poser, the guide cites policies from published accounts such as of Dr. Reddy's, Ranbaxy, Shire, Sanofi and Glaxo. On `in-licensing, milestone and other up-front receipts and payments', there is an excerpt from Roche's policy — that receipts are "initially reported as deferred income and recognised in income as earned over the period of the development collaboration or the manufacturing obligation". Most payments, however, are expensed as incurred, as in most cases the products "have not yet gained regulatory approval". Injection Ltd has made a non-refundable gift of Rs 35 million to a university, towards research into new diseases. The company has no right to access the research findings. How should the donation be recognised? As a charitable donation, answers the guide, injecting some knowledge into otherwise morbid accounting. Let me wrap up with a sample of `samples' query. "Drug Ltd gives samples to physicians to acquaint them with the product. Samples produced during the year could still be in inventory at year-end. "However, they can be distinguished from other inventory as they are marked `sample not for sale'. Though these samples have a cost of production, their sale value is nil, since they are distributed free to the physicians. How is sample stock to be valued?" Prescribed reading!
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