Don’t reduce Coalgate to an accountant’s quibble

Sharing the dais with the Prime Minister, Chief Justice S. H. Kapadia said, in the course of his address on Saturday, that profit was opinion. Implicit in this assertion was a hint of disapproval, if not censure, of every detractor of the Government’s coal allocation policy.

A couple of years ago, the IT icon, N. R. Narayana Murthy left accountants and auditors red-faced when he aired similar views, but in a different context.

The context indeed is important. Murthy’s cynical lament was in the context of company accounts. Despite accounting standards, accounting is not an exact science, amenable to straitjacketing --- though the endeavour of international accounting standards is to foster uniformity across companies, sectors and countries, so that readers of accounts are not or led up the garden path.

The cynicism is not misplaced, given the considerable latitude companies enjoy in making their accounts — be it treatment of research expenditure (whether it should be written off or accumulated and amortised), what the components of cost while valuing stock are, or when exactly should revenue be recognised, to mention only a few examples. These could well make all the difference between loss and profit.

Ideal accounting standard

It is not only scriptures and statistics that can be quoted to suit individual ends; accounting standards too fall in the same category. Admittedly, the ICAI, taking a cue from its international counterpart, has been striving to remove the scope for convenient and self-serving alternative accounting policies, thus forcing companies to zero in on the ideal standard, whether they like it or not, on a given accounting issue.

Murthy, however, went a step further and observed that while profit is opinion, cash is real. This betrayed a huge accounting naiveté, though. A cash-rich company need not necessarily be profitable and vice-versa. NTPC and Coal India are profitable, but always cash-strapped. His implicit exhortation to readers of accounts to set store by its cash flow statement rather than by its profit statement was, thus, not entirely correct.

Discounting time value

Chief Justice Kapadia’s warning was in a different context — valuations. Profits can be swayed by valuations and, to this extent, he is right. Chronic tinkering with stock valuation year after year is the oldest trick in an accountant’s armoury. A house property can be valued on the basis of its present market value, but the wealth tax law in our country goes by the multiplier of the net rental value method.

The philosophical refrain that an auditor is not a valuer, though he is intimately connected with values, has not helped matters in this regard. But in Coalgate, the issue is not valuation, though obfuscators, including apologists of the ruling combine, have been making valuation the key issue to rubbish the CAG. Pedants too have joined the fray with one of them writing that the CAG has forgotten one of the most cardinal principles of financial valuations — the time value of money concept.

The loss from coal allotments gratis , he thundered, could simply not be Rs 1.86 lakh crore, but much less because the CAG had forgotten to discount the losses spanning several decades to their present value.

The present value theory takes after the “Bird in hand is worth two in the bush’’ cliché. Applying a deep-discount rate of 10 per cent, the putative losses could arguably be not more than Rs 50,000 crore, but does that absolve the government of the guilt of giving away precious natural resources on a platter?

Can a swindler take comfort from the fact that the trial judge scaled down the quantum of loot from Rs 1,000 crore mentioned in the charge-sheet to Rs 500 crore?

If anything, the CAG could well be guilty, in hindsight, of, in fact, underestimating the losses, given that one does not know how much bounty Mother Earth harbours in its womb and what the value of coal 20 years down would be.

While profit-is-opinion is indeed a warning to readers of financial accounts, the same logic can, by no means, be extended to exculpate the government and the beneficiaries of distributing and benefiting, respectively, from largesse in Coalgate.

Act of negligence

For, financial statements per se are not prospectuses to entice investors. But slackness in valuations, while giving precious natural resources to private parties, is an unpardonable act of negligence. What is involved is public property and public money.

The auditor of a government company may not be hauled over the coals for being less than exacting in giving his audit report, but he would definitely be in the dog-house should his valuation of the undertaking, in the run-up to its strategic sale to a private party, turn out to be superficial.

This is precisely what happened with the NDA Government’s first major strategic sale. Fifty one per cent stake in BALCO was sold to Sterilite Industries Ltd for Rs 550 crore.

To be sure, it was to the highest bidder which ironically turned out to be the sole bidder. The Government could not have been faulted therefore, but those in the know averred that the Government ought to have fixed a floor price of at least Rs 2,000 crore for its sale of 51 per cent equity stake.

(The author is a New Delhi-based chartered accountant.)

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