By T. N. Manoharan, Chartered Accountant
Article
Introduction :
The Accountancy Profession is one of the oldest and
traditional professions of the modern society since its evolution. The
professions of accountancy, law and medicine are the three learned professions
classically known as the professions of divinity, law and medicine. From the
Indian context, the profession of Chartered Accountancy is in a crucial
transition stage as it has to measure up to the global standards and overcome
challenges that will be encountered over the next decade successfully. The
profession should continue to contribute as a partner in nation-building as
India is one among the fastest growing economies in the world. The Bombay
Chartered Accountants’ Society which has served commendably the profession and
the nation for the last 59 years has entered the Diamond Jubilee Year and to
commemorate the occasion has organised the Diamond Jubilee Conference with
topics that would kindle the thoughts of the intellectuals who will attend as
delegates and stimulate the strategies to be adopted for the sustenance, growth
and glory of the profession in the years to come.
There are a few peculiar constraints in which Indian
accountancy profession has been operating in public practice. The first and
foremost is that the law does not allow more than 20 partners in a firm and
secondly, the status ‘Limited Liability Partnership’ (LLP) is not in vogue as
the concerned Bill is yet to be passed by the Parliament. Besides, most of the
firms in India belong to the SMP category. Even if we construe that firms having
more than 10 partners are big in size, there are hardly 128 firms falling in
this classification. There are also a few firms who are having less than 10
partners, but have employed large number of qualified paid assistants and
trained staff. Even if these firms are kept apart, the rest can certainly be
considered as small and medium in nature.
Impact of information technology :
The impact of information technology in the field of audit
and assurance service is going to be tremendous, as the business community is
already using technology extensively in every facet of its activity. Auditing
will have to be done not just in the computerised environment but by using the
systems and technological tools. Auditing firms will have to adopt automation in
the process to deliver reports timely and qualitatively. On-line and real-time
basis financial information presentation to shareholders will replace the
present general purpose financial statements now prepared annually. Focus of the
assurance service would be on the evaluation of the input data and that of the
results reflected as part of the outputs generated since arithmetical accuracy
shall be taken for granted and therefore will not be required to be verified.
In the USA, xml-based language for financial reporting called
extensible Business Reporting Language (XBRL) has been developed enabling
electronic deciphering of the data in a harmonious manner. There are about 11
countries (Jurisdictions) which have assumed jurisdiction to implement and use
XBRL platform.
Texonomy, the relevant dictionary, has been developed, which
provides a tag with a standardised definition to each data element in the
financials. India is exploring the possibility of assuming jurisdiction to adopt
XBRL to facilitate the listed companies to upload their financial statements
using this language with the stock exchanges to make the global investor to
understand, analyse and compare them in a uniform manner. This would require the
audit function to validate the inputs and certify the outputs. If more and more
nations assume jurisdiction, Indian Professionals may even get outsourcing work
in this field.
Electronic filing of statutory forms and returns is gaining
momentum. Over the next decade the e-filing initiative will be complete in all
the Departments of the Central and State Governments and professional firms
would equip themselves to meet this obligation of their clients.
Corporate governance and role of audit :
In view of the growing importance of corporate governance the
role of audit will undergo a change. Financial debacle of many corporations in
the US like Enron, Worldcom and a few others; the not long ago sub-prime crisis
in the US and the present financial crisis of banks leading to bail-out plan by
the US Government by pumping in 700 billion dollars are all leading to closer
evaluation of the risk assessment and management functions in an entity. Similar
financial crisis is engulfing banks in Europe also and G7 nations are pondering
on methodologies to prevent major banks from failing. Regulations like SOX in
the US will emerge in a stringent way in the rest of the world and the role of
audit will transform to a different level involving objective evaluation and
reporting.
Audit findings and reporting can no longer be elusive on
non-detection of collusive frauds at the management level. The stakeholders
would expect more information and assurance on the risks and uncertainties
arising out of the decisions taken by the management. Independent assurance on
the reliability of systems, procedures and controls that generate the
information and the reliability of such information which forms the basis for
business policies and decision-making, would be expected. Corporate Social
Responsibility (CSR) will assume new dimensions and the audit reporting and
monitoring will encompass the various initiatives taken as part of CSR including
sustainability and growth. All these developments would result in more
opportunities as well as risks for the profession which can be ably met by
enhancing the skill sets and equipping itself with modern audit tools.
Yet another development for which the profession should be
prepared is the possibility of more disciplinary proceedings and adverse
developments in the context of professional indemnity. In the US, PCAOB does the
oversight function. In India, till now, we are used to peer-review mechanism to
ensure quality in attestation services. Peer review does not lead to
disciplinary proceedings and even an adverse finding results in refusal of
issuance of peer review certificate. Henceforth the scenario will change.
Quality Review Board (QRB) will replace peer review board and any adverse
finding will lead to disciplinary proceedings. The change in the disciplinary
mechanism will also expedite the disposal time of a case. More claims may lead
to popularisation of insurance policies with reference to professional
indemnity.
Convergence of standards:
The phenomenon of globalisation has resulted in free flow of funds with no hindrance on account of geographical borders and regulations have also been giving way facilitating cross-border investments. Not only the multinational companies positioned outside India are establishing in India, Indian companies are also growing stronger to position themselves in the international business arena. More and more acquisitions of foreign businesses by Indian enterprises and establishment of subsidiaries abroad would take place in the next decade. Shareholders and other investors would be spread across the globe which has initiated the debate on converging or adopting a common set of International Accounting Standards and Auditing and Assurance Standards.
About 102 countries including members of European Union, Australia and New Zealand, China and Pakistan have adopted IFRS. IASB and FASB have entered into a memorandum of understanding to work for convergence of US GAAP and IFRS. India and Canada have prepared a roadmap to converge with IFRS by the year 2011.
These developments would call for expertise inIFR S; International AAS. Fortunately, the Indian Standards are formulated keeping the International Standards as the basis and therefore the differences to be synchronised are limited. Indian professionals, if they have command over IFRS, can look forward to global opportunities seeking their services.
International taxation:
Yet another potential area for professional development on account of the globalisation; ecommerce; cross-border investments and the consequent convergence will be the evolution of international taxation as a wider area of practice. Hitherto, the scope in this discipline is restricted to a section of professionals who are specialising in this field. Soon the scope will expand at par with domestic taxation practice. Expertise in DTAAs of specific countries could be an area of exclusive specialisation for a professional.
Transfer pricing area of practice is now confined to income-tax law. With the proposed replacement of service tax and VAT legislations by Goods and Services Tax (GST) legislation by 2010, the scope of transfer pricing may extend to the service sector area too. In India, where the contribution to the GDP by the service sector is more than 51%, the scope would be greater and at the same time calls for establishing supportive knowledge bank and data base to meet the expectations.
Management consultancy services:
In the olden days, the practice area of a Chartered Accountant was confined to core areas, such as auditing and accounting and later encompassed taxation field. It is difficult now to introspect whether the statutory work conferred exclusively on Chartered Accountants was a boon that provided recognition and a steady source of revenue or was a bane that prevented them to expand their horizon of operation as a business advisor. Nevertheless, the present scenario demands focussed attention of the practitioners in the field of ‘Management Consultancy Services’ that promises to keep them busy at least for the next few decades.
The wide range of services that flows in the consultancy field include services relating to project appraisal and funding by way of private equity or debt syndication or other ineans; Funding through IPO; International Finance and Currency Management; Valuation; Due Diligence; Merger and Acquisitions; Risk Assessment; Restructuring of Business; ERP Implementation; Internal Audit; System Audit; Knowledge Process Outsourcing (KPO); Investment Banking and Wealth Management. Knowledge in these areas would bring immense opportunities and there will be no dearth of work for those who possess the skill set in these areas.
The basic difference between statutory work and consultancy work is that in the case of the former, a client is compelled to engage a Chartered Accountant to prevent penal consequences for non-compliance, whereas in the case of the latter, the client approaches on his own volition for value addition. In the case of statutory work, the client perceives it to result in an expenditure, whereas in consultancy, the benefit accrues either in the form of increase in revenue or reduction in expenditure, thereby enhancing his willingness to pay adequate compensation for the services. Therefore, the ability of the professional to do proper billing of services commensurate with ‘the time and expertise utilised is far greater with reference to consultancy services than for statutory work.
Re-orientation:
The profession of Chartered Accountancy is facing many challenges in India in view of globalisation and unprecedented growth in the economy. These challenges demand re orientation in the approach and attitude of the profession. The emerging areas of opportunities and risks indicated above call for different skill sets, knowledge and delivery mechanism. Even with reference to statutory work such as statutory audit or tax audit, one is expected to be proficient in Accounting Standards, Auditing and Assurance Standards and in the relevant laws. But, there is one significant difference between the consultancy field and the traditional practice encompassing statutory audit and that is the competitive environment. A Chartered Accountant has to compete with multinational entities, corporate bodies and other professionals in the Management Consultancy field, whereas it is a monopoly situation so far as statutory work is concerned. Nevertheless, the profession needs to acquit creditably in both the fields in order to maintain its credibility in the eyes of the public in general and that of the Government and Regulators in particular. Thus, in order to effectively compete and to deliver qualitatively, the profession needs to address many challenges during the next decade from now and some of these challenges are highlighted hereinafter.
Acquisition of skill sets:
Knowledge in the new areas of consultancy work may be acquired by studying the relevant literature and accessing information through web. Attending workshops and training programmes focusing on specific topics would be useful. Participating in the execution of work by other professionals or mentor firms will help to provide the confidence required to handle assignments independently. Templates of reporting would serve as a model in the initial implementation of work. Mid-size firms can even afford to organise periodical in-house training programmes for partners and the senior staff. Individual empowerment by undergoing specialised post-qualification courses seems to be inevitable. Every professional who has the competence in the consultancy field should groom and train others to create teams within the organisation. Forums like ICAI and BCAS should empower the profession by organising appropriate training programmes, workshops and symposiums.
Positioning of divisions:
Indian firms should grow stronger to a level where they are in a position to create divisions demarcating audit and assurance division; tax and allied services division; and consultancy division. Even if there are three partners, each one should attempt to specialise, so as to head and lead one of these divisions and build working teams. In the emerging scenario, specialisation is the order of the day. A specialist in audit, another one in tax and yet another professional having proficiency in consultancy can come under one roof to constitute a strong firm and render multifarious services to the client. There were two proposals relevant to the growth of the firms that were pending viz., Limited Liability Partnership Bill and approval of regulations to allow multi-disciplinary partnership firms. While the first is still pending, the latter has come through recently.
Human resource development:
Attracting new talent in the profession to practice appears to be a Himalayan task. About 90% of the newly qualified Chartered Accountants prefer to go for employment and only the remaining few have the passion to join a practising firm and a very few among them end up setting up their own office. If we trace back the history, there has been a cyclic pattern among the newly qualified in switching over in their option between practice and employment. The span of each such cycle was a period of 5 to 7 years. However, the recent financial crisis in the US and Europe is expected to marginally spill over in Asia and may enhance the number of entrants into the profession.
Expansion by mergers and consolidation will be the order of the profession in the decade to follow. Although size per se is not quality, it helps to comprehend wider horizon of services to be rendered to the client and enables undertaking work of greater magnitude. Prior to mergers, networking arrangements may surface to provide the required under-standing and compatibility over a period of time.
Geographical spread:
Another challenge faced by Indian firms is that most of them are operating in one centre. Getting assignment of certain works would depend on the extent of geographical presence in more cities. Therefore, one would do well to identify professionals/firms in different geographical locations and develop an understanding for mutual reference and execution of works. Once the reliability and compatibility is established, then merger can be contemplated by converting the firm in the other location as a branch. By this approach, a small firm also can evolve itself into a bigger firm by developing branches in many centres. No doubt, this is easy to say but challenging to accomplish. But, if there is a sustained approach and zeal, nothing is impossible. Firms can also look for international affiliation. There are many associations at the global level which identify member firms in different countries so as to strengthen the ability to serve clientele across the globe by cross reference. The initial cost of becoming a member of any such association and annual membership fee may appear burdensome, but it should be viewed as an investment and not as expenditure. The return on investment is bound to take some time, but it should be worth the wait in the globalised scenario. Further, such an affiliation can be used for securing templates or database as may be helpful in handling new avenues of assignments.
Infrastructure:
Generally, infrastructure takes a back seat and it is a non-priority item for many firms. This mindset should drastically undergo a change. Every firm should aspire to have stability in the place of operation and allocate a percentage of earnings every year for acquiring modem gadgets and tools. Further, every firm should spend in installing and documenting systems, procedures and controls to secure and enhance operational efficiency. Knowledge database should be developed leading to industry-wise specialisation and also in select areas like transfer pricing. Every firm should also periodically address and review the investment planning for every partner in the firm. Such planning should include securing of housing and conveyance facility for the partner’s family.
Billing standards:
It can be said without fear of contradiction that many firms are unable to recruit youngsters for two reasons. One is inability to pay near to market salary and secondly, not being able to guarantee partnership and provide lucrative practice with variety of work exposure in view of the limited areas of operation. While the second one can be addressed by tackling the challenges identified above, the first one can be handled only by proper billing ofthe services rendered. Underbilling of services cripples the growth potential of a firm.
Service rendered, in many cases, is not properly identified and added on to the billing. Invariably, it is the practice of annual billing or common fee package for multifarious services that paves the way for underselling of the services. Many do not even consider the manhours spent as one of the imp or- desert peace. Prosperity is welcome, but not at the ‘tant ingredients for billing. Of course, in deserving cost of peace of mind. Contentment is a great virand exceptional cases, rendering services for a low ‘ tue to be given up. No one is poor if he is contented cost or free of charge may be justified, but that policy and the one who lacks it can never be considered or approach should not be extended to all clients. rich, irrespective of the wealth that he may possess. A professional who renders services backed by knowledge, values and competence always does the billing with absolute confidence unmindful of losing the client. He not only demands greater value for services, but also commands respect and credibility. In the long run, such a professional experiences that quality begets qualitative client, irrespective of the cost of services.
In order to facilitate proper billing, ICAI has prescribed norms for charging fees for various services rendered. These norms can be relied upon to convince and persuade the client to compensate for the services rendered. A firm should develop the practice of billing as per these norms and make the client to fall in line to recognise the value of services. While exploitation by excessive billing is to be condemned, underbilling is undesirable and to be desisted.
Quality and values:
Most important challenge for a professional firm is to ensure quality in anything it does and to adhere to the ethical norms laid down for the profession. The first one can be ensured by building quality team in the organisation and the latter by imbibing values and appreciating that growth should not be at the cost of ethics. Adherence to values is a challenging task these days as many players around us in the system do not attach any significance to this aspect. The dividing line between profession and business is getting blurred, of late. Hope it does not vanish in the days to come. If it happens, it would be quite unfortunate and the onus is on us not to allow it to happen.
Aspiration to become rich in the shortest possible time can be the root cause for deviation from established principles and best practices. We read in history that Gautam Buddha deserted all the prosperity and left the palace in search of peace. On the contrary, many in today’s world seem to be joining the race in search of prosperity and in the process desert peace. Prosperity is welcome, but not at the cost of peace of mind. Contentment is a great virtue to be given up. No one is poor if he is contented and the one who lacks it can never be considered rich, irrespective of the wealth that he may possess.
Therefore, whatever is stated above urging against underbilling should not be misconstrued as an advice to exploit the client or to do excessive billing either. Fee-based approach in everything we do would be fatal in the long run, whereas value-based approach would bring reputation. Mahatma Gandhi said that there is enough for everyone’s need but not for the greed. The Father of the Nation also indicated that ‘ends’ do not justify the ‘means’. It might pay to be unethical in the short run, but in return one loses self-esteem and peace of mind, which is too precious a price one should dread to pay. When we charge the fee, let it be a consideration only for our services and not a price for compromising on values and principles. Quality in service without compromising on ethical values leads not only to prosperity in the long run, but undoubtedly helps us to command respect.
Conclusion:
There is tremendous scope for the profession to grow and expand. There is acute shortage of finance professionals which factor influences in the flow of more and more work to existing firms. Business entrepreneurs, these days, require professional firms to do the hand-holding in the establishment of their business as well as in the expansion and restructuring plans. They expect a professional to be part of the decision-making process, instead of merely providing inputs for decision making. If only the SMPs can address the above-discussed challenges with enthusiasm and right attitude, they can perform with competence and efficiency and make a mark in the profession. Not only they shall prosper, but they would also contribute to the economic growth of the nation. In matters of innovation and empowerment, let us swim with the current, but in matters of values and principles, let us stand like a rock. I wish BCAS to grow from strength to strength and continue to excel in serving the profession in the centuries to follow.
