By T. N. Manoharan | Chartered Accountant | Padmashri Awardee
ARTICLE
Introduction:
The decade ahead from now would be a promising period for
India as a nation and the role of the profession would assume an altogether
different magnitude and significance from what it was in the past. India would
be doing everything to transform itself into a developed nation by 2020. There
would be resurgence in the overall economic activity and buoyancy in many
sectors. As accounting and finance professionals, Chartered Accountants both in
Industry and practice, would have a pivotal role to play in multiple capacities
to promote the prosperity of the business houses and thereby facilitate the
economic growth of the nation. Sea change in the taxation and corporate laws
demands unlearning and relearning which would be a challenging task for us.
Technology would have a predominant role in many things the profession does and
technological tools would evolve to improve the operational efficiency of the
professionals.
Business advisory — New facet of the profession:
Management consultancy practice and corporate advisory
services would assume greater proposition in the wide range of services to be
rendered by members of the profession. Mergers and acquisitions leading to
growth and expansion of businesses would be the order of the day. As part of the
expansion plan, many companies would go in for IPO to raise capital in the
domestic markets. Besides, Indian companies are going global by establishing
subsidiaries and acquiring businesses abroad. Indian accounting profession
should also think and act global. More and more corporate entities would be
raising funds in the versatile global markets and the authenticity of the
financial information as certified by the profession would therefore assume
paramount importance. Further, restructuring as part of business reengineering
could be of immense value addition to the business enterprises. Corporate
funding for new ventures as well as for diversification projects need to be
handled by the profession by providing back-to-back services. Therefore, the
profession need to empower itself in all these areas to cater to the
expectations and do effective hand-holding in execution of these various
strategic plans. An audit firm can render these services at a smaller scale
comfortably. When the size and magnitude are large, it would be better to create
a corporate entity so that with funding from various resources massive human
resource recruitment with wider horizons of expertise and capabilities becomes
feasible.
By virtue of S. 25 of the Chartered Accountants Act, 1949,
Chartered Accountancy practice cannot be in corporate form. But there is no such
restriction for consultancy practice. There are two ways of rendering the
above-mentioned non-exclusive services by the profession under the status of a
company. First methodology is to incorporate a corporate entity by obtaining
name approval and recognition from the Institute of Chartered Accountants of
India (ICAI). The second method is to establish a company without recourse to
ICAI. The difference between the first and the second approach is that in the
first option, a member of the profession holding Certificate of Practice (COP)
can become a managing director or executive director or be actively involved in
any other position in the company. Such a member can continue to carry on attest
function in the audit firm in which he is a partner and be eligible to train
articled assistants under him. In the second option, these advantages would not
be there and a member could at best be a director simplicitor or a
retainer/consultant of the company. Then the management of such a company would
be by others who could even be non-members of
the profession. If, in the second option, any member desires to actively get
associated in the day-to-day management of the company, then he has to surrender
the COP and cease to render assurance services or train articled assistants.
While a few members of the profession may opt to be with the audit firm, a few
others may take up positions in the company. The co-existence of an audit firm
and a corporate entity as indicated above, without breaching any of the norms of
the ICAI, would augur well to compete in the market with even business entities,
banks and other corporate bodies rendering such non-exclusive services.
IFRS convergence — The next big change in
reporting:
In-principle decision taken by the Ministry of Corporate
Affairs (MCA) is to the effect that India would not adopt IFRS as it is, but
would formulate Indian Standards corresponding to each IFRS in vogue. This
implies that ICAI has to re-issue Indian Standards corresponding to each IFRS.
The differences between IGAAP and IFRS need to be ironed out and those standards
shall thereafter be considered by the National Advisory Committee on Accounting
Standards (NACAS). The Standards would then be recommended by the NACAS to the
Government to be notified under the Companies Act as Indian IFRS. The advantages
in adapting Indian Standards to IFRS instead of adopting IFRS are as follows:
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Wherever options
are provided in IFRS either for recognition or measurement or presentation,
Indian Standard can eliminate one or more of the options and retain what suits
Indian entities.
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Indian Standards
can prescribe disclosures which are not contained in IFRS.
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Indian Standards
can use terminologies different from those used in IFRS, so long as the change
does not result in deviation of the accounting principle prescribed in IFRS.
The above-mentioned differences would not be construed as
resulting in non-compliance with IFRS and India would still be perceived as an
IFRS-compliant country.
The next five years will be critical for the profession in
this area of practice as the phased implementation of convergence has been
announced by the Ministry of Corporate Affairs. The decision is to phase out the
converge during the period between 2011 and 2014 as given in table below:
Urban co-operative banks having networth not over Rs.200
crores; Regional rural banks; unlisted companies having networth below Rs.500
crores and SMPs are all outside the purview of convergence plan as of now.
The subject of IFRS being new and the expertise being limited, there are plenty of opportunities emerging for the profession in the nature of conducting training programmes; developing the processes and systems related to technology initiatives; transforming the accounting and financial reporting from I GAAP to IFRS and above all, in rendering advisory services. Even small firms and individuals can adopt IFRS as an area of specialisation. Knowledge of IFRS would be inevitable to discharge the attest function in a proper manner with reference to an entity that has followed IFRS-based Standards. Indian accounting profession, if equipped well, will have opportunity to render services not only on the domestic turf, but also across the globe as this is a potential KPO segment.
XBRL initiative — Technology in reporting: eXtensible Business Reporting Language (XBRL) is a new reporting methodology involving technology for better, faster and smarter presentation of financial information of an entity. XBRL enables preparers of the business reports to meet business reporting demands effectively and cost efficiently. XBRL facilitates the investors to decipher the figures in the balance sheet and other financial statements in a uniform and harmonious manner across the globe. As on date, about 11 countries have implemented XBRL. India is in the process of assuming jurisdiction and implementing this initiative by the end of this year for companies listed in stock exchanges. Many other countries are making significant progress in the adoption of XBRL. For this purpose, taxanomy, which is a kind of dictionary containing organised group of definitions that represent information found in a variety of business reports and the relationships of the items found in those business reports, is required to be prepared and adopted. Our profession can play a vital role in this whole exercise by associating with the Government, stock exchanges and the listed companies in the evolution of this facility in India and later in its effective implementation. Thereafter, financial statements uploaded by the listing companies with the stock exchanges using the XBRL platform would be more meaningful in meeting the expectations and information needs of the international stakeholders.
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Phase I
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From 1-4-2011
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1.
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Listed and unlisted companies with net worth
of over Rs.1,000 crores
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2.
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Companies in the sensex and nifty club and
companies listed in overseas
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stock exchanges
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Phase II
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From 1-4-2012
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Insurance companies
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Phase III
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From 1-4-2013
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1.
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Listed and unlisted companies with a net
worth of over Rs.500 crores but
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less than Rs.1,000
crores
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2.
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Banking companies
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3.
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Urban co-operative banks having networth of
over Rs.300 crores
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Phase IV
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From 1-4-2014
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1.
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All listed companies with a net worth of
Rs.500 crores and less;
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2.
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Urban co-operative banks having networth
above Rs.200 cr but less than
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Rs.300 crores
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Goods and Services Tax — All in one basket:
The Empowered Committee of State Finance Ministers is still grappling with the formulation of Goods and Services Tax (GST) model to be implemented in India. Just as the resentment and opposition that came from certain States for replacement of Sales Tax by VAT, GST is also receiving divergent reactions from various State Governments. In the year 2009, when the present government got re-elected, the tone and tenor of the announcement was such that GST would be implemented with effect from April 1, 2011 and there would be an attempt to introduce Direct Taxes code sometime thereafter. After comprehending the difficulty in generating a wide consensus among the State Governments on GST, the Finance Minister’s speech delivered while commending the Union budget 2010-2011 on 26th February, 2010 made the certainty and confidence in implementing Direct Taxes code, which is the sole prerogative of the Union Government, with effect from April 1, 2011 quite obvious but on introduction on the same date of the legislation governing GST only an earnest attempt has been assured. (paras 25 & 26 of the FM’s speech).
plunge into this field of services in a comprehensive manner. GST is proposed to encompass all the levies that are now imposed in the nature of Excise duty, Additional Customs duty (CVD), VAT, Service tax, Entertainment taxes, Octroi, Entry taxes, Luxury tax, Cess, Stamp duty, etc. Consequently, GST would be a significant contributor to the Government exchequer and the role of the profession in this branch of law, would accordingly become more important.
Direct Taxes Code — Redefining Income-tax Law: On 12th August, 2009, the draft Direct Taxes Code (DTC) Bill was released along with the discussion paper for public debate and comments. Many of the forums and the public, expressed anguish on select areas such as levy of MAT on gross value of assets of the companies, DTAA override, residential status of foreign companies, taxation of capital gains, Exempt-Exempt Tax (EET) provisions, General Anti-Avoidance Rules (GAAR), taxation of not-for-profit organisations and proposal to adopt 6% of the ratable value of a house property as the rental income, etc. The Honorable Finance Minister, assured to revisit these and other areas and that the DTC would be redrafted accordingly. On 15th June, 2010, the revised discussion paper on DTC has been released covering the changes made in eleven items, including the above-mentioned areas and response has been called for from public by 30th June, 2010. Most of the changes are welcome in nature. There could still be scope for representation in matters relating to certain aspects of capital gains, the concept of ‘controlled financial corporation (CFC)’ sought to be introduced for the first time and the increased scope of wealth tax imposing levy on all persons. It has also been indicated in the revised discussion paper that the threshold limits and slab rates originally proposed in the DTC may be calibrated in the Bill that would be introduced in the Parliament. The same would happen to the threshold limit in wealth tax is the indication.
Majority of our members in practice, especially in smaller places, specialise in taxation. There needs to be a paradigm shift in this segment of practice as the implementation of DTC would usher in a new era of taxation regime. Irrespective of the fact that DTC has few demerits, in comparison with the present legislation DTC certainly has many advantages to its credit in terms of simplicity and methodology of computation and procedures. Looking at positively, a substantial segment of the present judicial precedents would become irrelevant in the implementation of DTC. The only hope is that the room for fresh litigation under DTC may not be as fertile as it is under the existing legislation. It is good to note that in spite of the recession, the revenue collection on the direct tax front has seen a phenomenal increase. Lower tax levels and better compliance, it is expected, would propel the economy into a double-digit growth trajectory. The profession can gear up to translate this expectation into reality by enabling better compliance across wider section of the population.
LLPs and multi-disciplinary partnerships — Globalisation and Diversification:
Limited Liability Partnership (LLP) as an entity has become a reality with the passage of the Limited Liability Partnership Act, 2008. The provisions of the Income -tax Act have also been amended to include LLP at par with a partnership firm under the Partnership Act, 1932 for taxation purposes. LLP has the distinct advantage of a company as it restricts the liability of the partners and at the same time preserves the operational flexibility of a partnership firm. Yet another advantage of a LLP is that there is no ceiling in the number of partners.
The concept of multi-disciplinary partnership (MDP) firm has also been recognised when the Chartered Accountants Act, 1949 was amended by the Chartered Accountants Amendment Act, 2006. The First Schedule of the Act [Clause (4) of Part I] was amended to permit members of the profession to enter into partnership with members of other profession as may be notified. The Council deliberated in the context of such amendment and recommended to the Government, way back in 2006-07, that the following professionals may be notified as eligible to be admitted as partners in a CA firm:
Cost Accountant;
Company Secretary;
Advocate;
Engineer;
Architect; and
Actuary
Once the relevant Notification is issued, MDP would become a reality and CA firms can admit the above class of professionals. Further, as and when ICAI enters into Mutual Recognition Agreement (MRA) with any professional body or institution situated outside India, members of ICAI will be in a position to enter into partnership even with members of such bodies/institutions.
At present the fragmentation of the profession is so obvious that there are 32,496 proprietary firms, 10,500 firms with 2 to 3 partners, 2,886 firms with 4 to 10 partners and hardly 186 firms with more than 10 partners. If the regulations are suitably modified and notified to permit CA practice to be carried on in the form of MDP which is a LLP, then the profession would witness rapid expansion and growth. There would be consolidation of small and medium firms to upgrade into large firms so that all such firms can become a one-stop solution provider. By the end of the next decade even if there are 10 Indian firms that have grown considerably big and expanded globally, either directly or through affiliation, it would augur well for the Indian accounting profession.
The profession should also address the risk of facing claims and litigations in the emerging scenario. As practiced globally, CA firms should evaluate the risk factors associated with their areas of practice and accordingly protect their interest by subscribing to professional indemnity policy.
Composition of membership — Equality in profession:
Basically, there are three categories of members from ICAI point of view. One, who hold membership but do not obtain COP since they are in full-time employment. Second, those who go in for employment, but take up practice on part-time basis by obtaining COP. Such category of members is eligible to render consultancy services but not assurance services. Third category are those who take up practice on full-time basis with COP. Considering the fact that those in part-time practice are primarily in employment and that they cannot carry on attest function, they are grouped, for our analysis, as being in employment. In any case, their strength constitutes less than 10% of the total strength of membership at any given point of time. In the eighties, most of the membership was in practice and only a small percentage of the members were in employment. With globalisation, liberalisation and privatisation from 1991 onwards, phenomenal increase in opportunities was witnessed in the manufacturing and service sectors for CAs resulting in more and more inflow into employment than in practice.
There are two revelations based on data as on 1-4-2009 that needs to be comprehended. First, the size of the members in employment is phenomenally increasing over the last decade leading to a situation where they constitute 54% and those in practice account for only 46%. Secondly, if the membership increase of 22,654 between 1-4- 2006 and 31-3-2009 is analysed, it is astonishing to note that 95.67% have taken up employment and the rest have entered full-time practice. Of course, those who are recruited by audit firms as employees are also treated as being in employment since they don’t obtain COP. A few decades down the line, the situation may be such that a significant portion of the members (say, about 80%) would be in employment and those in public practice may dwindle similar to what is prevalent in developed economies. Of course migration of Indian CAs to foreign countries may decline with India rapidly growing and the developed economies experiencing recession coupled with the fact that opportunities are reaching a point of saturation. Still the outflow to upcoming economies cannot be ruled out. On the growth front, if CA firms can increase their ability to pay at par with business enterprises, more talent could be drawn into the profession from the market. A day should emerge when CA firms compete equally with corporate entities at the campus placements organised by ICAI for recruiting CAs.
Another trend that is quite interesting is the steep increase in the composition of female members and also of girls pursuing CA curriculum. In 2000, the female members of ICAI accounted for about 8% which increased to about 12% in 2005 and in 2010 it is at 16% of the overall membership of about 165,000. Between 2000 and 2010, the growth of total membership is 71,142 out of which the female membership accounts for 18,397 (26%). In respect of student population, since inception of the profession in 1949 up to 1999, the inflow of girls used to be insignificant and that is why we had only 8% female members in 2000. But thereafter the scenario changed and the new curriculum introduced in 2006-07 accelerated the inflow phenomenally such that the female students now account for sizable number as seen below:
CPT: Female 129,432; Male 250,657 — Total 380,089 with the ratio 34:66;
PCC/IPCC: Female 71,157; Male 138,716 — Total 209,873 with the ratio 34:66; and
FINAL: Female 25,884; Male 97,427 — Total 97,427 with the ratio 27:73
As indicated above, at the entry level, the girls have registered a little over 1/3rd share in the total strength. This trend is bound to continue and with the passage of time the composition of the profession would include significant proportion of the female membership. This is another phenomenon the profession should encourage and factor in its growth profile.
Conclusion:
Besides providing assurance services and facilitating compliance of various laws, our profession can architect every business growth and expansion; advocate for business reengineering; doctor the revival of sick units; engineer viable business solutions; navigate the implementation of systems and procedures; pilot strategic plans and thereby author business success stories in the country. Profession should aim at achieving excellence in all its endeavours. Excellence is like the summit of a pyramid — the larger the base, the higher could be the summit. There are limitations to the excellence we can achieve on a narrow base. Therefore, the profession should broad base the range of services as indicated above with wider skill sets, standards and values. The quality and credibility of the profession should be such that we are in a position to build a pyramid of excellence, the summit of which is unmatched by that of any other profession. In matters of innovation and knowledge empowerment, let us swim with the flow of the current but in matters of values and principles let us stand like a rock as ultimately, it is the image and the reputation of the profession that would enable us to sustain, grow and excel.
