The Hindu Business Line : Accounting is like scorekeeping

Failures mainly result from greed, from the quest for higher profits, and higher bonus and ESOPs for the top people. In fact, the current failures call for better accounting, better scorekeeping..

DR KAMAL GUPTA, FORMER TECHNICAL DIRECTOR, ICAI.

All of a sudden, conferences and seminars on IFRS (International Financial Reporting Standards) are the in-thing, where you can find accounting professionals busy taking notes and asking questions, so that they are ready for the 2011 deadline when India will be converging with IFRS.

But why should we be focussing on the IFRS now? When posed that query, Dr Kamal Gupta, former Technical Director of the Institute of Chartered Accountants of India (ICAI), asks in response, "Can India be isolated, if more than 100 countries already adopt IFRS, and more than 150 will adopt it by 2011?"

Even in the US, with a prime GAAP, something epoch-making has happened - subject to certain conditions, the domestic US companies will be moving towards IFRS, he adds. "If the US does it, the UK does it, Brazil, China, Russia. how can India be left."

Most of our companies have global kind of links, be it for exports, imports, shareholding, and so on, reminds Dr Gupta during an interaction with Business Line recently. "Therefore, we must do our accounting in a manner that the world understands. So I think more than ever, there is a need for it. The Institute, the Government, the industry recognise it."

While convergence is good, on a theoretical and conceptual framework, there are tremendous practical difficulties, Dr Gupta cautions. "However, we must first accept the concept, so that we can deal with the difficulties as we go along."

Excerpts from the interview:

On the one side, the West has some of the best accounting systems, which we are planning to adopt in toto. On the other, the West has been witness to some of the worst financial collapses. How do we reconcile the two?

Accounting and financial reporting are like scorekeeping. How well you keep the score is the issue. You ask me, why in the Western and other countries - where there is better accounting and more sophisticated accounting, or accounting to which we aspire India to reach in the next 4-5 years - there are failures such as Lehman, AIG and such. Accounting is scorekeeping. It is measurement of wealth, performance and liquidity.

Our argument is, let us do scorekeeping on a parameter that is internationally recognised. Now, because you have a good scorer does not mean your batsman should always score centuries. If Tendulkar or if our `Big Four' did not succeed in Sri Lanka that doesn't mean you should not have a good scorekeeper in the system.

Well, there are other business reasons for failure. Greed is one cause. Sub-prime lending, for instance, is lending against inadequate security, at a higher interest rate, in the quest for higher profits and better EPS. If they had followed the IFRS, then those risks would have been evident. Because this new scorekeeping says, bring all financial instruments into the balance sheet, don't have off-balance-sheet items, bring them at their market values, and then in disclosures give `value at risk', the sensitivity with forex rate, interest rate, and let the readers of financial statements and the regulators make a judgment.

As an accountant I am a scorekeeper. I'll give you the score, and also give you the quality of that score. First, what are the numbers, and then, what is the quality of those numbers. That is what a good international reporting system provides.

We cannot say that because of a good scorer a batsman has failed and so the scorer is to blame.

Failures mainly result from greed, from the quest for higher profits, and higher bonus and ESOPs for top people. In fact, the current failures call for better accounting, better scorekeeping.

Do you foresee IFRS convergence bringing in change to accounting education?

Sure, the way we teach and test accounting knowledge will change. At the moment, there is so much emphasis on the old-styled entry-making. And accounting books are thick with different types of entries. The emphasis on logic and principle is not there.

If we see the syllabi of, say, the UK Institute, they don't have this entry business - as in bills receivable, consignment, and so on. They emphasise on conceptual basis. Of course, entries are to be made and their effect shown.

Therefore, we need to have an accountancy paper concentrating on the application of standards. Teaching has to focus on the concepts, the theoretical framework, why that standard is there, how it is applied, what is the impact of that standard on wealth (that is the balance sheet), performance (that is the profit and loss account), and liquidity (the cash flow statement).

You can't now ask students to mug up entries. We will need a paradigm shift in teaching also, as in accounting standards.

Is there an IT (information technology) dimension in the IFRS convergence?

The SEC filings in the US use XBRL (Extensible Business Reporting Language) taxonomy.

The US GAAP has terms that are parallel to the taxonomy. One of the conditions that the US has put for adopting IFRS is that you should have XBRL for IFRS. The next step, therefore, is IFRS XBRL taxonomy to enable companies submit XBRL-formatted information. And this is coming. The IASB has to do it.

One benefit is that we do not have to develop this. The IASB will develop this taxonomy, at the behest of the US.

Obviously, this will have to be wedded to the internal systems, the organisation's ERP and so on. Accounting, after all, is an information system. It is data collection, data editing. Somebody has said that accounting is the most interesting statistical system where billions of transactions can be converted into a few lines, in a statement.

Will we have to cope with a whole new terminology?

No. Let me give you a few examples. We used to say `closing stock' and they used to say `inventory'; similarly, `sundry debtors,' and `accounts receivable'. That stage is gone. As it is, our Indian standards are very largely based on the IFRS.

The language is now understood. We'll face the finer aspects and nuances when we start adopting the IFRS. Again, once you have the IFRS' XBRL taxonomy, the minor differences will also go.

Do you think our universities will keep pace with accounting developments?

Universities are now teaching Indian accounting standards. Once the profession changes its ways by which it teaches accounting and tests accounting, with reference to reporting standards, it will automatically be adopted by the universities. I have full faith in our teachers and professionals in their adoption of new material. Over time, considering the huge student population, good textbooks will be written.

For example, when we were students, only microeconomics used to be taught. In our last year of B.A., macroeconomics came in. The teachers had not grasped it and we got it all wrong, which we realised later. But now, macroeconomics is part of the curriculum.

Thus, any new development, our education system will adopt. Text books will change. There will be motivation to do it because of the numbers.

D. MURALI

(Illustration by R. Rajesh) InterviewsInsights.blogspot.com

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Accounting is like scorekeeping