The Hindu Business Line : Financial statements have become unintelligible to lay readers

Three out of four CFOs (chief financial officers) say that companies should send to shareholders soft copies of financial statements, rather than the printed booklets. Almost one in two CFOs `strongly recommend' industry specific accounting standards. Over 90 per cent applaud the sarkar's e-initiatives such as MCA-21 as revolutionary. About 95 per cent of the CFOs are interested in convergence with global accounting standards, mainly IFRS (International Financial Reporting Standards). And on whether the ICAI (Institute of Chartered Accountants of India) should be the sole standard-setter, there seems to be a consensus.

These are among the findings of a recent survey conducted by Ernst & Young India, based on the views of 125 CFOs, of whom 78 per cent were from listed companies. "The most important point in the entire survey is the fact that though 62 per cent of CFOs feel that CEO/CFO certification is a high-risk area, actually 81 per cent of them still feel that this should be mandated," says Mr Rahul Roy, Director, Ernst & Young India Pvt Ltd, speaking to Business Line.

Rahul has to his credit to being the youngest person to have headed the ICAI as its President, since its inception. He has served on a number of international bodies including the International Federation of Accountants (IFAC) Ethics committee; an Advisory committee of the International Accounting Standards Board (IASB); committees constituted by the Government of India, SEBI, RBI, etc. Rahul specialises in International and Indian Financial Reporting and Assurance.

Excerpts from the interview:

What are global accounting standards, and why do we need them? Would it mean dismantling of national AS (accounting standard) structures such as the ASB (Accounting Standards Board) of the ICAI? Are there certain international standards that do not apply to India?

Different jurisdictions have their own accounting standards. Till date there is no one true Global Standard, as there is no standard which is uniformly accepted in all jurisdictions.

However, US GAAP (generally accepted accounting principles), and increasingly IFRS, have already attained international acceptability, and normally, these standards are referred to when one talks of Global Standards.

Regulators around the world are trying to converge towards a common body of standards and increasingly many countries are converging towards IFRS. In fact, convergence is now desired by CFOs as well, as we discovered in our survey. The key reason citied was requirement for a global standard owing to the ongoing globalisation drive.

Ultimate acceptability of a Global Standard would mean dismantling national AS structures. But this may not realistically be achieved within the next decade or so. A lot would depend on the scalability of the Global Standards and the cost of adoption of such standards by small and medium enterprises in emerging economies.

Measurement and presentation/disclosure of financial instruments is one area where India has not mandated its own Accounting Standards as yet. Existing approach in various other ASs/pronouncements including business combinations, industry-specific pronouncements, and the degree to which fair valuation concepts are embedded in GAAP are critical differences between Indian Standards and US GAAP or IFRS.

Where are the gaps in Indian GAAP? How can we resolve the same?

In our survey, largely all CFOs agreed that the Indian GAAP is sufficient, relevant and clear even in comparison to Global Standards.

Seventy-nine per cent respondents believed that Indian GAAP met the needs of the management to provide robust financial reports and 76 per cent CFOs believed that it meets the needs of stakeholders to obtain financial information as well.

That said, CFOs realise the need for convergence. Indian GAAP should immediately have its own project for convergence with IFRS and critically examine the need, if any, for country-specific `carve-outs'.

There should be a mechanism for immediate replication of changes in IFRS.

On the Indian system of AS generation — with the ICAI, NACAS (National Advisory Committee on Accounting Standards) and CBDT (Central Board of Direct Taxes) included. Plus the expert advisory and AS interpretation from the Institute.

It is essential to remove multiplicity of standard-setters. In addition to the bodies mentioned, the RBI issues its own standards (Income recognition, NPA norms, etc.). Some standards are in the legislation itself (such as presentation and disclosure standards specified in the Companies Act, the Banking Regulation Act, etc.). SEBI (Securities and Exchange Board of India) issues its own requirements (example, Interim Reporting Format and Disclosures), which are very different from that mandated by AS-25. ICAI's Expert Advisory Committee (EAC) interprets these various pronouncements; the IRDA (Insurance Regulatory and Development Authority) has its own requirements. The list is endless.

As per the E&Y CFO Survey, CFOs are of the consensus that the ICAI should be the sole standard-setter and multiple standard-setters or regulators are undesirable. This will benefit significantly as it will harmonise the diverse accounting policies, regulations and practices currently in use. Regulators should work with the ICAI in developing the standards. Multiple regulators and hence regulations are a big bane which lead to inconsistencies and have an adverse impact on the business environment.

Do we have effective monitoring that reporting entities follow the mandatory AS? Are there best practices we can adopt from around the world, in this task?

The MCA (Ministry of Company Affairs), the FRRB (Financial Report Review Board) of the ICAI and SEBI do attempt to monitor adherence to standards. However, given the huge quantum of data, the samples picked up would appear inadequate. Monitoring compliances is an evolving regulatory issue around the world and different models such as that of the PCAOB (the Public Company Accounting Oversight Board) and the PIOB (Public Interest Oversight Board) have been tried in different jurisdictions. While we may debate on the model that we will use, what is essential is that people in charge of manning these models should be qualified and eminent professionals, well remunerated for the job that they will undertake and people who can understand and appreciate the spirit of these standards and laws; people who are clued on to international evolution in accounting and, above all, persons with a sense of materiality, proportionality and maturity, rather than compliance specialists with a checklist approach and clerical aptitude.

To most readers of annual reports, AS references may be obscure. Your comments on whether ASs have to be decoded for the lay business people.

With the constant evolution of accounting practices worldwide and resultant complexity of ASs, financial statements have largely become unintelligible to the lay reader. It is, therefore, essential that the profession of financial analysts develops, specialising in analysing financial statements in a sector-specific manner.

On innovative methods in AS teaching.

A sterile closed room environment is no longer ideal for teaching ASs. Teachers will have to actually introduce case studies from published balance-sheets and heavily draw upon EAC opinion, comparative accounting standards across jurisdictions, and interpretation and practical experience of the teacher. It would, therefore, be essential for a successful teacher to also have experience as a practising professional.

Do accounting software products factor in AS? And thus reduce the compliance worry for accountants?

This is a nascent area. ASs themselves are evolving fast and until a stable platform is reached any software product itself will be outdated since it is off the shelf. Further, as long as there is significant divergence in taxation law and accounting standards, the resultant software would be quite complex.

What changes in law do you think can give AS a boost?

The law should mandate that accounting standards be followed for all entities (at present, the mandate is only for corporate entities through the Companies Act, 1956). The law should also encourage that all audit qualifications be rectified in the accounts itself.

http://AccountSpeak.blogspot.com

D. Murali

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