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ICAI in dire need of complete overhaul

M R Venkatesh | January 21, 2009

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"The Indian stock market today has the potential to lift all boats across the entire social spectrum of the country and this potential needs to be exploited to the fullest if the government wants to realise the dream of reducing the poverty rate to single digit."

This is not from a research paper of an amateur Indian economist. Neither is it Captain Haddock speaking in his usual inebriated stage. Nor is this another typical gaffe of President Bush. In fact, this is the editorial comment - yes editorial - comment in the official journal of the Institute of Chartered Accountants of India in its December 2007 issue.

If you thought that this was an unintended slip, please have a rethink. The editorial further adds "With the Sensex having crossed the so far unheard (sic) of 20,000 mark recently, the burgeoning Indian capital market is making waves across the globe, indicating the boom time and bright future prospects of the country's economy."

ICAI's attempt to provide comic relief to its readers through its editorial does not stop there. The same editorial only in the previous paragraph states "The Indian stock market is no real guide to economy and that is why serious economists do not take it seriously." Pray then why such reference bordering on obsession to stock markets in the following paragraph?

Since that fateful comment by ICAI in December 2007, the Sensex along with its global peers has tumbled down dramatically beginning January 2008. So much for the ability of ICAI - the premier accounting body of the country - to understand, foresee and articulate global or for that matter national economics.

Stunning lack of vision

This lack of vision is stunning to say the least. Even seventeen years after the government adopted the new economic policy the ICAI is yet to come to terms with the changing times and changed circumstances. It continues its romance with direct taxation, a habit that it picked in the pre-liberalisation era where direct tax rates were excessively high.

This is well reflected in the pre-budget memorandum submitted by the ICAI to the central government where the ICAI assumes that the budget is virtually the finance bill and vice versa - losing sight of the fact that finance bill is all but one dimension of the budgetary process. So is its syllabus which is usually twenty years behind market developments.

But this lack of vision in the preparation of the pre budget memorandum or the changes in the syllabus is just a symptom of the larger malaise gripping the ICAI. Reacting without any great purpose after the Enron accounting scandal the ICAI responded with vengeance by introducing more than a dozen standards in torrents.

The simplistic assumption was that this was the cure to the accounting malaise within the Indian corporate sector! Many of these standards, euphemistically called as the "second generation standards," have actually resulted in varied interpretations and treatments by CAs making financial statements bulkier but not purposeful by any means.

But the post Enron phase reactions of the ICAI did not stop with the mere introduction of accounting standards. It went the whole hog in bringing in systems that were prevalent and failed in the West. Peer audit, was one of them.

But what was missed in the entire melee is the fact that Enron's auditor - the now defunct Arthur Anderson -  were too subjected to peer audit. In fact, this reflects the penchant of the ICAI to bring in a system which has been a relative failure elsewhere. Simply put, its understanding of globalisation is simply to adopt whatever is available on the Internet.

To be fair to the ICAI, it acknowledges the fact that peer audit is not a foolproof exercise for the quality of an audit. Commenting on the same ICAI makes a candid confession on Peer Audit by stating "As there are inherent limitations in the effectiveness of any system of quality control which happens to be subject-matter of review, departure from the system may occur and may not be detected." Why then tom-tom the same?

The lack of understanding of a global economy and the imperial demands of an emerging India is the fundamental reason as to why ICAI is consistently caught with its pants down. Yet ICAI as a matter of routine welcomes every single move of the government without any application of mind. Naturally, it is not seen as an intellectual body but as a cheerleader in the traditional nine-yard sari.

Why?

The answer to this question is not far to seek. The very structure the ICAI's apex administrative body of the socialist vintage - the council is rather huge - 40 to be precise. As Murphy would tell you that the output of a committee is inversely related to its size. The size itself is a huge deterrent for any purposeful contribution by the council.

And by drawing its members who are elected from across the country with varied perception of the industry, state of the economy and the profession, it is surely conceded that the leadership indulges in extensive and intensive debate on many issues. But these are mostly trivial and hence blanketed under the cloak of confidentiality. (Again Murphy's Law: Trivial subjects attract maximum confidentiality).

Apart from the size of the council, the performance of every individual member in the council is intricately linked to the election to the office of the vice-president of the Institute (The vice president automatically gets automatically elected to the office of President). This creates a tenuous relationship between members of the council with every decision linked to their respective future electoral prospects.

In fact, the election to this post has been so central to the three-year term of a council member that it virtually dominates their individual and collective agenda. Take for instance the disciplinary mechanism of the ICAI - the bulwark of a self-regulating profession.

This mechanism has served the profession well, by and large with the sole exception when it allegedly concerns the disciplinary cases pertaining to the council members. With whispers becoming shriller by the day within the profession, accusing fingers on these council members go berserk in alleging foul play and in leveraging their position in the disciplinary proceeding against them or their firms or their partners.

To expect any member to precipitate action against his council colleague facing disciplinary proceedings would mean to jeopardise his chances on getting elected as the vice president.

Corporate governance - What's that?

It is in this background in 2003 the Southern India Regional Council of the ICAI had passed a unanimous resolution in an EGM requesting inter alia that the members proposing to contest elections to the ICAI should declare along with their bio data the list of pending prima facie tenable disciplinary cases against them.

Despite more than 5 years elapsing since the resolutions were passed one understands that the council which has to debate and effectuate the necessary changes to the election code is yet to effectuate the necessary changes. Obviously, vested interests are in full work.

It is reliably learnt that couple of years back one of the partners of Price Waterhouse, the auditors of Satyam [Get Quote] and a member of the council contested though unsuccessfully for the post of vice president of the ICAI. Mercifully, I should say, for had he been successful, today the Satyam imbroglio would have involved the office of the president of the ICAI.

Remember, it is the very firm that has been alleged by Reserve Bank of India [Get Quote], no less, to be negligent in the audit of Global Trust Bank. What has been consistently worrying some well-meaning members is that even the fact that some candidates are facing disciplinary charges is not revealed to the members at large.

The elections to the council of the ICAI are due this December. Experience tells me that it would turn out to more pompous than the elections in UP, more vitriolic than it is in Tamil Nadu and of course more virulent than it is in Bihar. With the sole exception of booth capturing, all the ills plaguing the general elections in India are witnessed in our elections. Naturally, people who get elected have an enormous personal (disciplinary) agenda.

All these have resulted in a huge dent in the credibility of ICAI. As the securities scam broke out in the early 90's the then President did a Tarzan and thumped his chest on the ability of the Institute to bring erring members to book as is present one doing on the Satyam imbroglio.

In between, several presidents have acted on predictable lines on many scams that have broken out in the interregnum. And each time ICAI has done precious little and the image of ICAI has gone down on each occasion. The least ICAI can do is to ask two members of PW in the council to resign forthwith to ensure a free and fair probe into l'affair Satyam.

But even that elementary demand to uphold the basic level of ethics and morality seems too onerous for ICAI. It is indeed strange that this demand has not come from members at large either. In contrast, our silence is causing irreparable damage to our collective image. What a fall for the premier accounting body of the country. It is time that we comprehensively overhaul the functioning of the ICAI from its journal to its elections.

The Author is a Chennai based Chartered Accountant. Comments can be sent at mrv@mrv.net.in


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