- Compiled by Nupur Goel
The RBI governor’s speech at Regional
Conference of WIRC, provides an insight into what is expected from the CA
profession, how the world is looking at the profession and also as a guide to
what the approach of CA professionals be in this era. I personally recommend it
as a “MUST READ” for all those who are related to the profession. Some of the
excerpts of the speech are:
On
the Challenges for the Accounting Profession,
he says
“As several
stakeholders depend upon the accounting profession, the profession too has to
recognize that it has to continue to inspire the trust and confidence of the
stakeholders if it has to remain relevant and value adding. In recent years,
several challenges have emerged, both at domestic and global levels which, if
not effectively addressed, could erode that confidence. Let me address
what, in my view, are some of the key challenges.”
His views on Competence
“First, the
challenge of competence. With the growing complexity of
the financial sector and the emergence of new and sophisticated financial
instruments, the knowledge base of the profession needs to keep pace with these
emerging practices and innovations. This requires, not just a continual review
of its curriculum, but more importantly, an active, well diversified and
constantly updated programme of continuing professional education for its
members. Continuing professional education cannot be a mere ‘tick in the box’
or determined by participation in number of hours of education or training, but
should be evaluated by way of outcomes - upgradation of relevant knowledge and
skill sets.
Towards improving the skill set of the
accounting profession, with particular reference to auditing banks, the Reserve
Bank has taken some initiatives. We have established a practice of an annual
Statutory Auditors’ Conference to apprise the statutory auditors of banks on
the critical issues in the area of banking regulation and supervision. The conference
also provides a forum for auditors to give us their feedback on current
concerns and to suggest any changes to our supervisory and regulatory policies.
We have found this to be an effective forum for mutual exchange of views, and I
hope you likewise have found it to be value adding. I am open to
suggestions on improving this engagement.
I am also happy to note in this context that
as a result of your Institute's initiative, India is embarking on convergence
with International Financial Reporting Standards (IFRS), which would then
result in our financial accounting and reporting getting to be world class. As
you are no doubt aware, IFRSs are largely broad principles rather than detailed
rules. Their application requires judgment and possibly even lateral thinking,
especially in the area of determining the fair value of financial assets and
liabilities. The auditing profession needs to improve its skill endowment to
facilitate a smooth and efficient convergence with IFRS.”
On Globalization and adaptability:
“The second
challenge the profession needs to reckon with is globalization. Globalization
implies that countries can no longer afford to remain isolated in so far as
their operating and legal systems are concerned. For the profession, this gets
reflected not merely in international accounting and auditing standards but
also in a number of other areas like education, ethics, etc. I gather the
ICAI, with its 180,000 members, is the second largest accounting institution in
the world. It is not sufficient that the Institute merely responds to and
adopts global standards. It should, in fact, go further and actively
participate in the formulation of these standards.
I am happy to learn that the President of ICAI
has recently been elected as a member of the board of the International
Federation of Accountants (IFAC) and that there is an Indian member on the
IASB. I also want to commend the Institute for its active participation and
involvement in several international committees and projects aimed at improving
accounting systems and processes. I would only urge that going forward, ICAI
should proactively take the lead in the formulation of accounting standards in
areas where we have specific concerns as an Emerging Market Economy (EME).
Another task the profession needs to address
in regard to managing globalization is how it will select, from within its
membership, persons of the requisite competence to participate in the global
forums, and how it will provide them both financial and professional support to
make this participation rewarding to them individually and to the profession
more broadly. Needless to say, the process of selection of persons for
representing the Institute in international forums should be strictly
meritocratic and transparent.”
On the expansion of opportunities for CAs:
“ I am told one
of the issues agitating all of you is expansion of opportunities for the
accounting profession especially in view of the growing membership of the
Institute. So far, you have enjoyed a monopoly position in respect of certain
areas of work, for example, the audit of financial statements. The easy way out
to seek and expand opportunities would be to agitate for continuation of this
monopoly position. I believe this will be a mistake. Rather, the profession needs
to identify emerging opportunities in the market place and develop the skill
needed to exploit them.
Let me cite an example. With concepts
like core banking and centralized record keeping, the relevance of the audit of
branches of Public Sector Banks (PSBs) has significantly declined. These banks
have represented to RBI that the audit of bank’s branches should be
reduced. There is merit in this suggestion, since currently the cost of
audit of PSBs is significantly higher than the cost of audit of comparable
private sector banks. However, the Institute has been resisting this because it
would mean a reduction in work for its members.
I believe the Institute's efforts in this
regard are ill advised. In fact, it makes much more sense for the
profession to sharpen its skills in the area of concurrent audit for which a
need exists than to agitate for retention of work which does not add value.
Similarly, the profession has shied away from the responsibility for prevention
and early detection of fraud. The need for such a service exists and if the
profession does not fulfill that need, other agencies which can provide this
service will displace auditors and deprive them of a potentially expanding
opportunity.”
On the Independence of Auditors:
“Let me now turn
to the challenge of 'independence'. The growth of large international
firms of accountants has created an opportunity for the provision of a
multiplicity of services. Clients benefit from such umbrella services and
attach value to it. However, this also raises the vexed question of the
extent to which provision of these multiple services erodes the concept of
independence.
The case of Enron, which took down along with
it the audit firm Arthur Andersen, comes to mind in this context. The
sudden collapse of Enron, an energy trading and distributing company, ranked
seventh in the Fortune 500, raised a number of questions about the accounting
and auditing practices followed by the company. The company used creative
accounting to shift losses and debts off the company’s balance sheet into
special purpose entities (SPEs) thereby concealing the extent of its
indebtedness. The company was also reported to have withheld information about
SPEs which could have led auditors to insist on their consolidation in the
balance sheet. Enron’s accounting transgressions misled investors to
believe that the company was more profitable and less leveraged than it really
was.
Andersen audited
Enron for all sixteen years since the company’s formation. On top of pure
audit, it also sold internal-audit and consulting services. Despite this
privileged insight, Andersen did not discover that Enron was publishing
incorrect financial statements leading to the term “Enronisation of financial
statements”. This raises an important question of conflict of
interest. Is it the case that the extensive consultancy work done by
Arthur Andersen for Enron compromised its independence leading to its failure
to detect erosion of accounting standards? It also subsequently came to
light that some members of the Audit Committee faced financial conflicts of
interest, generated in part by the company’s donations to charities to which
they were connected. Could this conflict have been prevented?
Accounting and
auditing practices were also called into question in the collapse of Parmalat,
the largest dairy company in Europe, in one of the biggest accounting frauds in
corporate history. Like Enron, Parmalat too undertook elaborate derivative
deals, often using complex offshore structures that involved some of its many
subsidiaries. Investors and bankers struggled to understand the balance sheet
or gauge the true extent of its liabilities. By the time it collapsed, Parmalat
had established dozens of arrangements involving offshore companies, which did
not form part of the company’s consolidated financial statements.
Instances such as
these reaffirm the need for systemic reforms in two areas. The first is the
regulation of auditors. The profession has argued for years that
self-regulation and peer review are the right way to maintain standards.
But the conduct of Enron, Parmalat etc. under the very nose of auditors
has raised question about the effectiveness of soft regulation. The profession
has to find a way of remedying this if it wants to prevent the imposition of an
external regulator.
The second reform
is the need to eliminate conflict of interest in accounting firms.
Should there be a ban on auditors selling consulting services to those
they audit? One view is that there is no real conflict of interest and that
better audits would be the best way to assure regulators that such a ban is
unnecessary. Yet if confidence in auditing is to be regained, perception is
equally important. Regulators are likely to demand some meaningful change on
the issue of such conflict of interest. Overall, this is a complex issue which
needs to be addressed dispassionately.”
On Inter-disciplinary
Approach
“Inter-disciplinary
approach is the next challenge on my list. In a complex world, no single
profession can meet all the requirements of market participants. Neither
is it possible for individual professions to operate in silos catering to
specialized needs. Inter-disciplinary interaction is therefore not only
unavoidable, but in fact desirable. But this creates its own problems,
particularly in the area of disciplinary jurisdiction as professional standards
in different governing bodies - if such a body exists - may be different and
members of such bodies may be differently regulated.
The recent global
financial crisis illustrates the problems that can arise from divergence of
views across disciplines - in this case between the accounting profession and
prudential banking regulators. There is widespread criticism that the
accounting standards, more so fair value accounting insisted on by accountants,
failed to reckon with illiquid markets and distressed sales, and thereby
contributed to the crisis, or at the very least exacerbated the severity of the
crisis.
Post-crisis,
there is convergence in the views of prudential regulators and accounting
standard setters on the desirability of forward looking expected loss approach
to loan loss provisioning. The IASB, FASB as well as the Basel Committee on
Banking Supervision (BCBS) are actively engaged in finding a commonly agreed
solution to this complex problem.
While discussing
the issue of loan loss provisioning, I would like to highlight the Reserve
Bank’s concern on the issue of divergence in identification of Non Performing
Assets (NPAs) and provisioning as certified by statutory auditors vis-a-vis the
findings of the supervisory inspection conducted by RBI. In the Reserve
Bank's view, in certain cases, the statutory auditors have underestimated the
extent of NPAs and the required provisioning. Since RBI, as the supervisor of
the banking system, relies and leverages on the work done by auditors, the
profession should effectively address this issue. Ultimately, it is the
statutory auditors’ certification that is taken as the ‘true and fair’
statement of the accounts of a bank and is disclosed to all stakeholders.
It is therefore of prime importance that there is no underestimation of
provisioning requirements while finalising financial statements of banks.”
To view complete text of speech
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