The Hindu Business Line : Performance oversight dimension

The current framework of corporate governance emphasises on compliance, leading thus to a checklist mentality. Performance oversight can be added to the compliance dimension of corporate governance.

Mr A. N. Raman, Central Council Member, ICWAI.

The corporate sector in India has held, for too long a time, the role of cost and management accounting (CMA) as supplementary to the financial accounting domain, rues Mr A. N. Raman, Chairman of the Professional Accountants in Business Committee of the South Asian Federation of Accountants (SAFA), and a Central Council Member of the Institute of Cost and Works Accountants of India (ICWAI).

Supporting inventory valuation, spreadsheet-based calculation of costs and budgets for short-term decision making have been the limited focus of utilising the profession, he adds, during a recent email interaction with Business Line.

Though cost accountants have been deployed in high positions in both the public and private sectors in India, the maturity levels of using CMA is not high, Mr Raman observes. “The corporate sector has to consider the importance of cost and management accounting in a strategic context and apply the domain knowledge to seek higher level of enterprise excellence,” he demands.

Talking over the phone, shortly after his return from London, where he participated in a global accounting event, Mr Raman speaks of the structural challenges that bodies like the International Federation of Accountants (IFAC) need to address to enable the CMA perform on a higher plane.

“The IFAC has constituted a taskforce to re-examine its deliverables to the professional accountants in business. The key structural challenge will be to rebalance the DNA of IFAC from being financial auditing centric to also promoting the role of professional accountants in business,” Mr Raman informs.

His fond wish is that the IFAC funds non-audit/financial accounting-related initiatives, and promotes the brand of an ethical professional accountant in business.

Excerpts from the interview:

How can the CMA profession improve the quality of the corporate governance framework in the country?

The current framework of corporate governance lays emphasis on compliance, leading thus to a checklist mentality. This is the conclusion of the survey on the status of corporate governance codes worldwide by the IFAC.

It has, therefore, suggested a rebalancing of the governance framework by adding the dimension of performance oversight to the compliance dimension.

The CMA profession is ideally suited to enable the oversight of the performance dimension as that happens to be the crux of the domain itself.

By emphasising on strategic issues and effectiveness of the resource utilisation, the value-creation processes get assessed effectively in an improved governance framework.

There are basically 12 fundamental principles which the CMA profession can apply as prescribed by the IFAC in testing the quality of the governance framework.

Do cost accounting standards find adoption?

The CMA profession is currently on the task of issuing cost accounting standards. Around 39 topics have been identified for this exercise. Interestingly, some departments of the Government have already felt the advantages of the four standards issued by the ICWAI.

For instance, the cost accounting standards can reduce and eliminate uncertainties in the value of inventories hypothecated to the working capital lenders. In a Basel II environment, this can substantially improve the quality of the assets based on which working capital lending has taken place.

Is name change still on the agenda of the Institute?

Yes, one big reform required is the change in the name of the profession. In the third week of March 2009, the Sri Lanka Parliament passed a legislation forming the Institute of Certified Management Accountants of Sri Lanka, thus even omitting the word ‘cost’.

The strategic significance of the name change is enormous and the Government of India should do something similar soon. Besides this, the recognition of cost and management accountants as a differentiated group of accountants under the economic and taxation laws would be a major boost to the application of the domain knowledge.

Any suggestions from the profession on how to ensure stability of global capital markets?

The CMA profession can advocate the following to ensure future stability to the global capital markets:

Risk-based management accounting assessment of funds deployed, resulting in early warning signals of weakening exposures.

Risk-based reporting in the form of compliance is not adequate. The emphasis should be on embedding risk management as a part of the decision-making process which would have performance orientation in contrast.

Risk assessment based on management accounting principles should be the bedrock of pre-lending phase in critical areas of stimulus outlay such as infrastructure in India. (The Government mulling the introduction of compulsory cost accounting in infrastructure is noteworthy in this context.)

Do we need changes to financial reporting?

On this subject, there are use0ful inputs in the Financial Reporting Supply Chain Survey of the IFAC headed by Charles Tilley, which was a follow-up of a similar report by Norman Lyle of the CIMA in 2005. These surveys have indicated that investors prefer non-financial information relating to business strategy.

Perhaps, it is necessary that the current pure financial reporting based on standards migrates to a broader business reporting that can make better investor sense.

If the CMA profession can provide an assurance-based rating mechanism of the state of maturity of the value-creating processes in business enterprise, it will be a paradigm shift in the valuation of business by capital markets. A qualitative change will occur when there is a transparency on the quality of value creation processes.

On the industry initiatives…

The CII (Confederation of Indian Industry) has taken up the mission of improving cost management in the country through its TCM (total cost management) initiative. The TCM initiative calibrates the maturity levels in cost management from a base to the highest through five layers with differentiating characteristics at each layer.

The top layer should be the destination. The Expert Group’s recommendation — of allowing transformation of cost accounting practices from statutory enforcement at the base level to voluntary at the top level — is in perfect sync with the CII approach.

Besides this, the concern for confidentiality of the information has been taken care of, by providing regulators with access to audited cost data.

D. MURALI

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