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        Globalisation and Indian Accounting Standards

                                ndian accounting regula-      are particularly significant in         stitutions that came into
                                tion has evolved in two       the context of reforms in ac-           existence in the 1950s
                                major phases so far. Since    counting standards.                     and 1960s and continued
                           accounting regulation is af-                                               to play a major role until
                           fected by the development of       Financial Reporting in                  the mid-1990s.
                           economic and political insti-      the Context of Economic            § The government con-
                           tutions and policies in a coun-    Reforms and Globalisation               trolled the issuance and
                           try, these phases largely mirror       The system of financial             pricing of shares and de-
                           the economic development           reporting is a function of the          bentures.
                           model that was followed. The       economic, legal and political      § The stock markets them-
                           first phase was from the 1950s     institutions in a country. There        selves were plagued with
                                                                                                      extensive insider trading,
                                 This article explains the frequent issuance of many Ac-              besides other serious de-
                             counting Standards in recent years and recommends com-                   ficiencies in their trading
                             plementary institutional mechanisms needed to strengthen                 and settlement proce-
                             the quality of financial reporting and corporate governance              dures. As a result, there
                             in India.                                                                were inadequate mecha-
                                                                                                      nisms for price discovery.
R. Narayanaswamy           to the early 1990s and the         have been major changes in             As a result, prior to 1991,
      (The author is
Professor, Finance and
                           second phase was from the          financial reporting in India       companies depended on state-
Control Area, Indian In-   mid-1990s onwards. Dur-            since the economic reforms         owned and state-controlled
stitute of Management
Bangalore. He can be       ing the first phase (1950 to       and globalisation began in the     banks and financial institu-
 reached at narayan@       1991), India’s economy re-         early 1990s. Among others,         tions for their capital require-
                           mained isolated from events        the following forces are im-       ments. However, since 1991
                           in the rest of the world. The      portant:                           Indian companies have de-
                           state assumed a major role         § Capital, product and la-         pended to a greater extent on
                           in determining the economic             bour market pressures;        the capital market for raising
                           life of the country and even       § Company law and securi-          resources. Financial reporting
                           involved itself in firm-level           ties law changes in India;    has been influenced by for-
                           decisions on plant location,            and                           eign institutional investment,
                           products, prices, raising capi-    § International accounting         foreign direct investment,
                           tal and pricing capital issues.         and securities regulations.   disinvestment and privatisa-
                               Its serious balance of pay-                                       tion, and listing in overseas
                           ments crisis in 1991 forced        Market Pressures                   stock exchanges, as explained
                           India to radically reform its                                         below.
                           economic policies. Besides         Capital Market Pressures           § Foreign institutional in-
                           structural reforms in foreign          Though stock exchanges              vestors hold a significant
                           trade, taxation and industrial     have existed in India for more          portion of equity in major
                           policy, many of the controls on    than a century, the capital             listed firms. These inves-
                           firm-level economic decision-      market could not play an ef-            tors make international
                           making were dismantled. Free       fective role in channelling             comparisons of financial
                           floatation of the Indian ru-       savings into investments due            reporting standards and
                           pee within limits, permission      to several reasons:                     corporate       governance
                           to Indian companies to raise       § The importance of stock               systems in various coun-
                           capital abroad, liberalisation          exchanges in financing             tries. Foreign institu-
                           of the rules for foreign direct         corporate      investments         tional investors have been
                           investment, and permission              was greatly reduced by the         net buyers over the last
                           for portfolio investment by             expanding operations of            four years. In 2004, out
                           foreign financial institutions          government financial in-           of the total institutional

962 The Chartered Accountant January 2006
      turnover of Rs 5,475 bil-                        and rewarding manage-                            standards adopted and/
      lion, foreign institutional                      rial performance.                                or trusted in the country
      investors accounted for                   §      Investor confidence in                           of listing reduces inves-
      about 92 per cent.                               companies is bound to in-                        tors’ costs of monitoring
§     Foreign direct investment                        crease if they comply with                       the listing company, and
      has also been increasing                         internationally accepted                         should, therefore, reduce
      over the years. Much of                          standards. This view is                          the companies’ cost of
      the foreign direct invest-                       the same argument that                           capital.1
      ment is in the form of                           has been applied around
      setting up wholly-owned                          the world, particularly in                Product Market Pressures
      subsidiaries or joint ven-                       countries whose account-                     Since the commencement
      tures with Indian com-                           ing standards might be                    of the economic reforms, In-
      panies. Presenting the                           considered less developed,                dian firms have enjoyed great-
      financial statements of                          or less likely to ensure the              er interactions with overseas
      Indian operations in ac-                         provision of high quality                 markets in the form of exports
      cordance with the ac-                            financial information to                  and imports of goods and ser-
      counting system that the                         investors.                                vices. These interactions have
      overseas parent company                   §      Consistent with the trend                 impacted financial reporting.
      uses is important for per-                       towards privatisation and                 § Overseas customers, deal-
      formance evaluation and                          internationalisation, sev-                     ing with Indian firms are
      preparation of consolidat-                       eral Indian firms have                         concerned with the firms’
      ed financial statements.                         listed on overseas stock                       financial performance, es-
§     Partial privatisation (or                        exchanges. They are sub-                       pecially when long-term
      disinvestment) and pri-                          ject to detailed disclosure                    relationships are involved.
      vatisation of state-owned                        requirements, as specified                     Increasingly, they demand
      enterprises create demand                        by the relevant exchang-                       high quality financial
      for high quality financial                       es. Annual reporting                           reports to monitor the
      reporting from these firms                       of financial statements                        firms’ performance. To a
      as a means of monitoring                         based on accounting                            slightly lesser extent, the

                                                                                                                                                                Lamiya Lokhandwala

 The then Governer of the Reserve Bank of India, Bimal Jalan stated that adoption of global accounting practices would help Indian companies gain by about 20-30 basis

points in cost of funds when they borrow from abroad.

964 The Chartered Accountant January 2006
                  same comment applies to            customers. We would ex-            contracts make demands
                  suppliers.                         pect TCS to seek overseas          on US accounting sys-
              §   High quality financial             listing in course of time,         tems that are largely ab-
                  reporting contributes to           given its significant expo-        sent in seniority-based
                  the reputation of a firm           sure to the U.S software           systems elsewhere. In
                  in its product market as a         market. Again, financial           India, prior to the 1990s
                  dependable organization            reporting under account-           the government regulated
                  to transact business with.         ing standards recognised           and approved remunera-
                  Using the case of Infosys          internationally will assist        tion of top management.
                  Technologies, Narayanas-           that transition.                   However, since the 1990s
                  wamy (1996) illustrates           The rapid globalisation             Indian companies have
                  how a company modifies        of the services sector of India         been moving in the direc-
                  its financial reporting in    explains why technology and             tion of relating manage-
The rapid         response to the needs of      software services firms are at          ment compensation to
globalisa-        its product market. In        the forefront of adopting in-           financial performance.
tion of the       1994-1995, the company        ternational financial reporting    § Since professional em-
services          voluntarily provided un-      standards. The evidence from            ployees have worldwide
sector of         audited US GAAP finan-        Infosys and other IT firms              mobility, they are likely
India ex-         cial statements. At the       persuades us to conclude that           to benefit from making
plains why        time, 73 per cent of the      potential benefits in product           investments that have
technology        company’s revenue came        markets provide significant             cross-border mobility that
and soft-         from the United States.       incentives to Indian firms to           results from international
ware ser-         As of 31 March 2005, the      accept high quality account-            listing of their companies’
vices firms       company provides consol-      ing and disclosure systems.             stocks.
are at the        idated income statement                                          § Firms with large overseas
forefront         and consolidated balance      Labour Market Pressures                 operations employ for-
of adopt-         sheet prepared in accor-          Indian firms need talent to         eigners who are generally
ing inter-        dance with the national       stay ahead of the competition           more comfortable with
national          accounting requirements       in their product and capital            financial reporting and
financial         in Australia, Canada,         markets. The labour market              disclosure standards that
reporting         France, Germany, Japan        influences financial reporting          are followed around the
standards.        and the United Kingdom.       standards and quality in sev-           world.
                  The company has opera-        eral ways.                             These arguments build on
                  tions in all of these coun-   § Superior financial report-       the point in Desai (2004) that
                  tries. A major objective           ing could be useful in        firms with employees abroad
                  for overseas listing is to         convincing a firm’s pres-     might be interested in listing
                  create brand equity in the         ent and potential employ-     their stock in these foreign
                  company’s international            ees of its financial sound-   markets as an employee in-
                  product markets.                   ness, so that as key users    centive program.
              §   Similar      considerations        of a firm’s accounting in-
                  apply to domestic list-            formation they can trust      National Regulations
                  ing. For example, India’s          the firm as a dependable         In the last decade there
                  largest software services          employer offering good        have been significant changes
                  firm, TCS has long been            long-term prospects of        to Indian laws and regula-
                  privately held by the Tata         growth.                       tory requirements relating to
                  group but in 2004, the        § Some firms (mainly, but          accounting and governance.
                  company’s shares were of-          not only, in the technol-     The major developments are
                  fered for sale to the pub-         ogy sector) have employ-      briefly as follows:
                  lic. Clearly, the motiva-          ee stock ownership plans.        §	 National	 Advisory	
                  tion for going public was          Employees in these firms      Committee	 on	 Accounting	
                  not any immediate need             demand financial infor-       Standards: In 1999, the Com-
                  for additional capital, as         mation in order to have       panies Act, 1956 was amend-
                  the company is cash rich.          a liquid market for their     ed to provide for setting up a
                  Being a listed company             claims.                       National Advisory Commit-
                  carries greater prestige      § Sunder (2002) states that        tee on Accounting Standards
                  when it comes to dealing           strong pay-performance        (NACAS) to advise the Gov-
                  with present and potential         links in US managerial        ernment on the formulation

                                                                        January 2006 The Chartered Accountant   965
of accounting standards. This       -	   The	 Narayana	 Murthy	             Audit	and	Governance: It
amendment was largely in                 Committee	 on	 Corpo-              was appointed in 2002 in
response to an international             rate	 Governance: The              the wake of the series of
groundswell of interest in               major recommendation               corporate scandals that
the globalisation of account-            concerning financial re-           shook the U.S. in 2001
ing standards, and as part of            porting is that in case a          and 2002 and the enact-
India’s economic reforms to              company has followed               ment of the Sarbanes-
facilitate international trade           an accounting treatment            Oxley Act (SOX) in July
and capital movements. Sig-              different from that pre-           2002. The Committee
nificantly, the press release is-        scribed in an accounting           made several recommen-
sued by the Government stat-             standard, management               dations on strengthening
ed that “the Committee shall             should justify why they            the mechanism of corpo-
advise the Central Govern-               believe such alternative           rate audit as an effective
ment on the accounting stan-             treatment is more repre-           tool for monitoring the
dards to be followed, evolved            sentative of the underly-          quality of financial state-
and practised in the country             ing business transaction.          ments.
… to meet the challenges of              Management should also        -	   The	 Kumar	 Mangalam	
emerging globalisation of In-            clearly explain the alter-         Birla	 Committee	 on	 Cor-
dian economy.”                           native accounting treat-           porate	Governance: This
    §	 Securities	Legislation	           ment in the footnotes to           was the first official com-
and	 the	 Stock	 Exchange	 List-         the financial statements.          mittee to examine corpo-
ing	Agreement: The Securities            These changes have been            rate governance in India.
and Exchange Board of India              incorporated in the new            It was motivated, among
(SEBI) has over the years, and           clause 49 in the Listing           others, by “the financial
more so since the late 1990s,            Agreement. SEBI also               crisis in emerging mar-
played an active role in requir-         requires a certificate from        kets”, a reference to the
ing compliance with account-             the company’s external             1997 East Asian Crisis.
ing standards and provision of           auditor on compliance              The Committee empha-
additional disclosures. It man-          with this clause.                  sised the effect of globali-
dated half-yearly reporting         -	   The	 Naresh	 Chandra	              sation of accounting stan-
of financial results and later           Committee	 on	 Corporate	          dards by saying that India
required quarterly reporting.
In 1995, SEBI amended the
listing agreement to require
annual report publication of
the statement of cash flows
by listed companies, although
the Companies Act did not
(and even now does not) re-
quire the statement. In 2001,
SEBI amended the listing
agreement to require seg-
ment performance reporting
in listed companies’ quarterly
    §	 Corporate	        Gover-
nance	 Reforms: Over the
years, a number of initiatives
have been taken by the gov-
ernment, regulators and the
private sector on reforming
corporate governance in In-
dia. The recommendations
made by the various commit-
tees have had an impact on
financial reporting in India.
These include the following:

966 The Chartered Accountant January 2006
     has “to move speedily          1999 as a Standing Committee                       1990s and later when major
     towards the adoption of        with the following objectives:                     events such as the bursting of
     international standards.       l     To review the continuous                     the dotcom bubble, corporate
     This is particularly im-             disclosure requirements                      accounting scandals, corpo-
     portant from the angle               under listing agreements;                    rate governance reforms in the
     of corporate governance”       l     To provide input to the                      U.S. and elsewhere, and SOX,
     (para. 12.1). The Com-               ICAI for introducing                         were followed up more quickly
     mittee recommended pre-              new accounting standards                     in India. This, more than any
     sentation of consolidated            in India; and                                other measure, captures the
     financial statements, seg-     l     To review existing ac-                       effect of globalisation of the
                                                                         A recent
     ment reporting and dis-              counting standards, where                    Indian economy on standards
                                                                         study on
     closure of related party             required and to harmo-                       of accounting and corporate
     transactions. In 2000, the           nise these accounting                        governance.
     recommendations of the               standards and financial
                                                                         nance in 10
     Committee resulted in a              disclosures on par with                      Impact of Economic
     major change in the List-            international practices.                     Reforms and Globalisation
                                                                         in Asia
     ing Agreement.                     In 2001, the DCA entered                       on Accounting and
                                    the scene with the idea of the                     Governance
                                                                         that in
International Accounting            National Advisory Committee                            A recent study on corporate
and Securities Regulations          on Accounting Standards.                           governance in ten countries in
                                                                         mity to
    The restructuring of the            Despite the DCA’s activ-                       Asia indicates that in confor-
                                                                         the IASB’s
International        Accounting     ism, necessary amendments                          mity to the IASB’s standards,
Standards Board (IASB) and          to the Companies Act have                          India is ranked fourth in the
                                                                         India is
the International Organiza-         not been made on many of                           region; Singapore, Hong
tion of Securities Commis-          the matters on which recom-                        Kong and Malaysia are ahead
                                                                         fourth in
sions (IOSCO) acceptance            mendations were made by the                        of India; South Korea, Tai-
                                                                         the region.
of the IASB’s “core set of          Naresh Chandra Committee.                          wan, Thailand, Philippines,
standards” for the purpose of       SEBI’s competitive advantage                       China and Indonesia are be-
cross-border listing have im-       is that it is less politicised, it                 hind. In enforcement, only
proved the acceptability of         deals with listed companies via                    Hong King and Singapore are
IAS/IFRS within India. SEBI         stock exchanges and it has to                      ahead of India. Indian inves-
is a member of IOSCO and is         worry less about implementa-                       tors are willing to pay a gover-
on several of its key commit-       tion problems. On the other                        nance premium of 23 per cent,
tees. As such, it would be diffi-   hand, the DCA has to work                          conceivably for lower agency
cult for SEBI to defend Indian      with several ministries and                        costs. (Barton et al. 2003).
accounting practices that are       departments in the Govern-
not in accordance with inter-       ment of India and any changes                      NEw INdIAN
national standards and prac-        it wants to bring about require                    ACCouNtING
tices. The changes in Indian        the approval of Parliament.                        StANdARdS
accounting described in this        Therefore, the process is slow
paper are, to a great extent, the   and sometimes politicised.                         Issuance of Accounting
result of pressure felt by SEBI         It is significant that inter-                  Standards Gathering Pace
because of being a part of a        national developments pro-                             Accounting standards is-
body of international securi-       duce ripples quicker in In-                        sued since 2000 are frequently
ties regulators. In turn, SEBI      dia than was the case earlier.                     referred to as the “new account-
required major changes in In-       For example, the 1987 stock                        ing standards.” The ICAI is-
dian accounting.                    market crash in the rest of                        sued 13 accounting standards
    Even though SEBI and the        the world left India relatively                    between 2000 and 2004, as
Department of Company Af-           unaffected. Even more to the                       compared to 16 standards is-
fairs could be said to be broad-    point was the securities scam                      sued from 1977 (when it was
ly interested in disclosure and     in 1992 in India that wiped                        established) to 1999. The new
accounting respectively, the        out a large part of investors’                     accounting standards cover
lines of distinction have been      wealth in many companies.                          several complex recognition as
blurred, at least by SEBI. For      The response to the scandal                        well as disclosure issues, such
example, it was SEBI that first     was considered slow and half-                      as segment reporting, leases,
set up an Accounting Stan-          hearted. Contrast this with                        deferred taxes, consolidated fi-
dards Committee in 1998-            the developments in the late                       nancial statements, intangible

968 The Chartered Accountant January 2006
assets, and impairment of as-      ment required companies to
sets. These standards cover        present consolidated financial
matters for which there were       statements even though such a
mostly no prior pronounce-         requirement did not exist then
ments. As a result, they have      in Indian law, and does not ex-
tended to follow the IASB          ist even now. Also, companies
promulgations more closely         were required to publish quar-
than the previous generation       terly segment financial results
of standards. Nevertheless,        although the Companies Act
there are substantial differenc-   has no requirement for seg-
es between the new accounting      ment reporting.
standards and the correspond-
ing IASB standards.                Greater Convergence
    Some of the new account-       with International                  fact
ing standards came to be is-       Accounting Standards                that      share-
sued in view of the need felt         Increasingly, Indian             holder reporting and tax
by SEBI. The ICAI did the          accounting     standards            reporting are different in In-
rest. In fact, SEBI was under      are getting closer to               dia, as in other British Com-
pressure from IOSCO to im-         IAS/IFRS than was                   monwealth jurisdictions. In
prove Indian accounting stan-      the case until the                  recent times, there is a recog-
dards and bring them in               1990s.    To                     nition that financial reporting
line with the IASB.                     begin                          should not be coloured by tax
SEBI also tight-                         with,                         considerations. An enabling
ened the stock                                                         factor for this development is
exchange List-                                                         the steady drop in income tax
ing Agreement.                                                         rates resulting in taxation be-
Some of the                                                            ing less important now than it
matters that                                                 the Ac-   was.
SEBI required                                              count-          Another trend in India’s
were not then re-                                        ing Stan-     movement towards accepting
porting require-                                       dards Board     the globalisation of accounting
ments under                                          (ASB) sticks      standards is the adoption in
the Com-                                           faithfully     to   some cases of the benchmark
panies Act                                        the language of      treatment rather than the al-
1956.                                            standards with        lowed alternative treatment in
                                                few exceptions.        the relevant IFRS. For exam-
                                                This       contrasts   ple, when AS 11 dealing with
                                                sharply with the       the effects of foreign exchange
                                               earlier ASB prac-       rates was revised in 2003, the
                                               tice of making          ASB decided to adopt the in-
                                               sometimes mere          ternational benchmark treat-
                                               verbal       changes.   ment that requires recognition
                     A s                       Also, in the past       in the current period of all
                  such,                        Indian accounting       exchange differences arising
                 the ac-                       standards        were   from transactions. The alter-
                counting                       tacitly influenced      native treatment that allows
          standards glo-                        by tax consider-       carrying the additional liabil-
balisation movement                             ations. The ASB        ity arising from a severe de-
in which IOSCO was                               was      implicitly   valuation as part of the cost of
a key player led to SE-                          concerned with        the related fixed asset was not
BI’s influence to hasten                          the effect of        accepted. This was despite the
India’s involvement in                              standards on       fact that the Companies Act
the globalisation pro-                                reporting for    requires adjusting the cost of
cess. For example, an                                    income        fixed assets for exchange dif-
amendment to the                                           tax, de-    ferences arising from foreign
Listing Agree-                                             spite the   exchange liabilities related to
                                                                       acquisition of fixed assets.

970 The Chartered Accountant January 2006
Moving towards                      ent) company’s financial state-                   Indian accounting standards
International Accounting            ments. With the advent of                         are gradually moving towards
Standards                           consolidation, companies have                     IAS/IFRS under the forces of
    The differences between         incentives to divest unprofit-                    globalisation of Indian busi-
Indian accounting standards         able subsidiaries and associ-                     ness. Some commentators
and IAS/IFRS have been nar-         ates. Changes in the structure                    have stated that India should
rowing, especially in the case      of corporate holdings since                       adopt IAS/IFRS completely
of standards issued since the       the initiation of consolidated                    in order to convey to the out-
late 1990s. Some of the dif-        financial statements in 2001-                     side world that the country’s
ferences are attributable to the    2002 can be studied. Another                      accounting standards are in
need for conformity with the        issue is whether consolidation      The effect    line with the best international
Companies Act. Some others          has led to companies changing       of deferred   practices. Will the adoption of
exist because there is no corre-    their criteria for performance      tax ac-       IAS/IFRS be effective in im-
sponding Indian standard on         evaluation. Given the major         counting is   proving the quality of Indian
the subject (e.g., financial in-    role of family-controlled cor-      to capture    financial reporting and disclo-
struments and business com-         porate groups in India, the         the tax       sure?
binations). A general percep-       requirement for consolidated        effect of         Let us remember that IAS/
tion is that financial reporting    financial statements may lead       differences   IFRS are drawn from common-
practices have improved over        to significant improvement in       between       law countries, such as the UK
the past 5 years; however, sig-     transparency and considerable       account-      and Australia and to a certain
nificantly strengthened en-         restructuring activity.             ing profit    extent the US, all of which are
forcement mechanisms are                Deferred	 Tax	 Accounting:      and taxable   economically developed. The
needed to further improve the       The effect of deferred tax ac-      income.       economic, legal and political
quality of corporate financial      counting is to capture the tax                    institutions in these countries
reporting (World Bank 2004).        effect of differences between ac-                 provide the framework for
    Some of the new account-        counting profit and taxable in-                   the effective working of high
ing standards are far reach-        come. The creation of deferred                    quality accounting standards.
ing in their impact on firms’       tax liabilities for temporary                     Ray Ball (2002), a well-known
balance sheets and income           differences will result in lower                  professor of accounting at the
statements and are therefore        net profit. This could impact                     University of Chicago, identi-
expected to have significant        firms’ tax planning strategies.                   fies a number of institutional
economic consequences. These        According to some commenta-                       features in these countries that
provide opportunities for re-       tors, deferred tax accounting is                  are important in determining
search. Mizuno (2004) pro-          a major change with far-reach-                    the quality of accounting:
vides evidence that Japanese        ing consequences.                                 § These countries have a
companies’ adoption of new              Foreign	Exchange	Transac-                          long history of free mar-
accounting standards produced       tions: In the past, companies                          kets that are regulated
significant economic impacts        were allowed to adjust their                           to varying degrees, but
on decision-making by corpo-        foreign exchange gains and                             the capital market rather
rate management. It is possible     losses arising from change in                          than the state decides on
that India, too, will experience    foreign exchange liabilities                           resource allocation in the
some effects. The following are     related to acquisition of fixed                        economy.
illustrations of possible eco-      assets to the cost of the fixed                   § The capital market is ef-
nomic consequences that may         assets concerned. AS 11 (re-                           ficient and is able to price
arise from implementing the         vised) provides for recognition                        securities efficiently.
accounting standards.               in the profit and loss account of                 § The primary focus of the
    Consolidated	      Financial	   such differences in the period                         corporate governance sys-
Statements: In the past, when       in which they arise. Manage-                           tems is on shareholders,
companies were required to          ment would likely reduce the                           rather than other stake-
attach the financial state-         resulting volatility in reported                       holders such as lenders
ments of subsidiaries to the        profit by entering into suitable                       and employees. Public
parent’s financial statements,      hedging arrangements.                                  markets for equity and
they could keep a loss-mak-                                                                debt funds, rather than
ing business as a subsidiary        Institutional Mechanisms                               banks, are the major
rather than as a division of the    for Global Accounting                                  sources of finance.
parent and not recognise the        Standards                                         § There is a clear separa-
subsidiary’s losses in the (par-       As argued in this paper,                            tion of ownership and

972 The Chartered Accountant January 2006
                                                                                    they have access to private in-
                                                                                    formation for monitoring the
                                                                                    performance of the enterpris-
                                                                                    es. To that extent, there will be
                                                                                    less demand for public finan-
                                                                                    cial reporting. Furthermore,
                                                                                    even now, the stock market
                                                                                    in India does not account for
                                                                                    a large portion of the invest-
                                                                                    ment. The legal provisions for
                                                                                    private securities litigation are
                                                                                    cumbersome and are not help-
                                                                                    ful to individual shareholders
                                                                                    or groups of shareholders for
                                                                                    filing class action suits. Also,
                                                                                    agreements for payment of
                                                                                    contingent fees are not le-
                                                                                    gally enforceable in India. In
                                                                                    sum, merely transplanting ac-
                                                                                    counting standards from an
    management of the firm.             of contingent fees preva-                   advanced jurisdiction to India
    Shareholders        engage          lent in the United States                   without the complementary
    managers to run the firm’s          for a long time, and the                    institutional framework will
    operations.                         system of conditional fees   Indian ac-     be ineffective.
§   These features give rise            allowed in the United        counting
    to demand for public fi-            Kingdom in recent years.     standards      Conclusion
    nancial reporting and         § Independent auditors un-         and corpo-          Indian accounting stan-
    disclosure and indepen-             dergo high quality train-    rate gov-      dards and corporate gover-
    dent auditing of financial          ing and testing of knowl-    ernance        nance requirements are now
    statement information.              edge and skills.             require-       more in line with international
§   Since the incentives          § Financial reporting and          ments are      practices. The recent develop-
    of managers and audi-               tax reporting are separate   now more       ments can be attributed to the
    tors are not the same as            and covered by different     in line with   operation of economic forces
    those of the shareholders,          sets of rules.               interna-       arising from capital, product
    agency problems arise.            Ball notes that these fea-     tional         market and labour market
    Shareholders have ac-         tures do not exist to the same     practices.     pressures and to regulatory
    cess to private litigation    extent in developing coun-                        initiatives in response to over-
    to get compensation for       tries. He provides evidence                       seas developments, such as the
    loss caused by the actions    from the East Asian group of                      East Asian Crisis and SOX.
    of managers and auditors.     countries (Hong Kong, Ma-                         Foreign financial institutions
    Individual shareholders       laysia, Singapore, and Thai-                      and listing in international
    can sue managers and          land) and China to show that                      stock exchanges are playing a
    auditors, and groups of       although these countries fol-                     major role in speeding the pace
    shareholders can initiate     low IFRS/IAS, the account-                        of raising Indian standards to
    class action suits.           ing quality in these countries                    international levels. India is
§   The private litigation        is greatly inferior to the com-                   still in the early stages of its
    process is facilitated by     mon-law group (Australia,                         involvement in the globalisa-
    efficient court systems       Canada, United Kingdom,                           tion of accounting standards.
    and speedy action on ju-      United States). Ball’s com-                       Mere adoption of superior ac-
    dicial decisions and or-      ments are also valid in the                       counting and disclosure stan-
    ders. This explains why       case of India. There is no clear                  dards will not raise the quality
    potential litigation in the   separation of ownership and                       of Indian financial reporting.
    US is a powerful deter-       management in family-owned                        Creating a complementary
    rent against manager and      and government-owned Indi-                        institutional framework that,
    auditor failures. The liti-   an enterprises. Since the own-                    among others, facilitates cost-
    gation process is further     ers of these enterprises are on                   effective private litigation by
    facilitated by the system     the boards of the companies,                      shareholders is critical. r

974 The Chartered Accountant January 2006

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