Financial Year 2008-09 has gone by. To most of us the year has been one which will be remembered for a long time to come, particularly on account of events that occurred on the business and economic fronts. The first quarter of the financial year had the hangover of the heady growth that had been witnessed in the earlier years. In the second quarter, the bad news had started arriving. The crisis deepened in the third quarter and by the fourth, all businessmen, economists, professionals were convinced that we were in for difficult times. The debate now centres on how long the turnaround will take.
Apart from the doomsday predictions on the economic front, a mammoth fraud was revealed in the form of Satyam. Much has been written on the subject and I do not intend to add to the same in this communication. Three months have passed and we have very little authentic information as to the extent of the fraud, the manner in which it was committed and at whose door the blame lies.
There have been various reactions to this mega fraud from the industry, the regulators, the profession and the government. Some of the reactions are knee-jerk ones. There is a proposal which has been reported in the press that an entity which is being audited will have to restate/rectify accounts to give effect to the qualifications by the auditor. In my understanding, the roles of the auditor and auditee are today well defined. The respon-sibility of preparing financial statements is of the auditee, and the job of the auditor is to express an opinion on those financial statements. A change in this position will have far-reaching consequences. I appreciate that the opinion of the auditor needs to be respected, and should be disclosed / reported in a manner that it can be easily understood by users of financial statements. For that purpose various ways of reporting and other modalities should be thought of When an auditor blows the whistle, it must be in a manner that users of the financial statements hear it loud and clear. If they pay no heed, it will be their responsibility. Any change in the classical role of the auditor is perhaps uncalled for. The auditor after all expresses an opinion on the accounts. We as auditors must humbly accept that there could be a bona fide difference of opinion and in all humility appreciate that the auditor’s opinion may not be necessarily right. I am sure the Institute will consider all these aspects and deal with the proposal appropriately.
While the news on the economic front is depressing, I do not endorse efforts to change policies, so that unpleasant consequences of economic downturn do not reflect in the financial statements of corporates. While one understands the reluctance on the part of business houses to disclose weak financial position at times the adverse results are on account of ‘errors’ of judgement, to put it mildly. Many corporates had taken positions in currency derivatives. Theses have resulted in their incurring losses. There may also have been other losses due to fluctuations in currency rates. If there has been a financial impact it must be reflected in thefinancial statements. It would not be appropriate to sweep it under the carpet. At a time when we are advocating greater transparency, there seems to be no reason to disturb existing accounting norms which have been formulated after great thought. Admittedly, the losses are due to exceptional circumstances; but if events leading to losses have occurred in the year under review, their impact needs to be accounted for in the same year. It would not be prudent to wish away the reality in the hope that next year the problem will disappear. Consistency is a well-established principle in the accounting world, and we should not sidestep it for short term. It is only because financial statements are prepared on a consistent basis, that they become comparable and this aspect should be borne in mind when accounting standards are amended.
As far as banks are concerned, many of their assets have eroded in value due to the difficult economic situation. Many borrowers are unable to adhere to repayment schedules. Banks have rightly supported the borrowers by rescheduling the loans. However, if assets have really becomesub-standard or bad, the corresponding loss must be provided for. Merely liberalising the provisioning requirements will only postpone the problem and possibly aggravate it. Instead, it may be advisable to revise capital adequacy norms.
By the time I write my next communication, the general elections will be in progress. There is substantial disenchantment with the political class. All are yearning for change and many citizens’ groups are taking various initiatives, some of which I have referred to in earlier communications. It however takes substantial time for a change to occur. To expedite the change, the educated and the elite will have to shoulder far greater responsibility. The least they can do in this election is vote. I, therefore, appeal to all readers, their friends and families to exercise their right offranchise, for I am sure that if they do exercise it, they will make the right choice.
So do enjoy your vacation, but only after you have voted !
With warm regards,
