The Hindu Business Line : Tighter regulation

The startling disclosure by the founder chairman of the information technology major, Satyam Computer Services, that the balance-sheet of the company comprised “faked and inflated figures of revenue, profit, interest and debt” has sadly brought to light the inadequacy of the accounting system and the failure of the auditing agency to detect and expose frauds of such magnitude. As has been pointed out by Mr Narayanamurthy of Infosys, the auditors failed to real ise what was happening for such a long time. They should be made accountable. This leads us to the question as to whether there exists proper regulation for large corporates.

Not stumbling blocks

The global financial meltdown has thankfully highlighted the need for suitable regulation. Experts have acknowledged that control is no longer a repugnant word; it does not stifle growth and efficiency. Bureaucracy is often looked at with contempt for being rule-bound. It has to bear the additional burden of having inherited a colonial mindset of distrust and bias. Finance officers are trained to scrutinise a transaction from the point of view of its impact on the recurring revenue expenditure and sustainability. Though many executives feel constrained and view such procedures as stumbling blocks to dynamic decision-making, the fact remains that the interests of the tax-payer and the general public are protected.

Different perceptions

There is a fundamental difference in the perception of a government finance officer or auditor vis-À-vis a practising chartered accountants. While government accounts may be difficult to understand, they do not suffer from the vice of dressing-up, which is permitted in the garb of accrual accounting and disclosure norms. Yet another significant difference is the manner in which a transaction is audited in the Government. The intrinsic merit, not the cosmetic format of a transaction, is dissected. The finance officers subject each proposal to rigorous scrutiny from the propriety angle and, unlike their private counterparts, are not satisfied with apparent compliance in form and law — what is popularly known as ‘voucher audit’.

Setting stringent standards

Large corporations with thousands of shareholders and institutional investors are akin to government departments in size, complexity, customer base and trustee-nature of fund holding. Despite this, the corporates are managed by a small board, which has considerable freedom to take decisions on investment, compensation packages, and so on. They are subject to minimal regulation.

The recent events in the global financial sector have highlighted the inadequacy — rather reluctance — of the industry associations, rating agencies and auditing firms to set stringent standards for adoption, much less the willingness to enforce them ruthlessly. Otherwise, how can one explain the failure of large institutions one after another! The solution lies in tightening the regulatory mechanism, as public interest is involved.

(The author is a former Financial Commissioner, Railways. blfeedback@thehindu.co.in)

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