Importance of the Accountancy Profession in Indian Economy

The dance of India’s democracy and the new economy has been played in a perfect step by the chartered accountancy profession since India’s independence. The relationship between the economy and chartered accountancy is symbiotic and in this ecosystem, one influences the other just as in cinema ‘real inspires reel and reel inspires real’.

A balance between costs and benefits of financial reporting

Indian Accounting Standards (Ind AS) are updated in a proactive manner with the change in the dynamics of the economy. With the lines between industries blurring, the need for a new revenue recognition standard was felt and met, serving as a common denominator across the toplines of companies following Ind AS.

The collapse of Enron in 2004 lead to the discovery of the malaise of off-balance-sheet assets and liabilities in listed companies and the biggest driver of the off-balance sheet liabilities and risks was operating leases. A glaring 1.25 trillion dollar operating lease liabilities were lying outside the balance sheets, then. This gave birth to a project for a robust standard on leases to help improve the users’ understanding of lessees’ obligations under lease contracts.

The next big accounting change in the pipeline is the new definition of business, which will help reduce the number of acquisitions that would qualify as business combinations. Control has been given a wide berth under the new age standards and there has been a tectonic shift from risks and rewards based regime as substance should prevail over form.

These are all responses to challenges being faced in the economy and the chartered accountancy profession maintains a fine balance between costs and benefits of accounting and financial reporting.

Multifaceted profession

The Chartered Accountancy profession is one of the most widely sought after professions in the country. It offers one of the robust education and training platforms for a person to qualify to become a chartered accountant. These professionals are well seasoned in all aspects of a business, right from decoding standard operating procedures, accounting and reporting, taxation, mechanics of meetings of the Board and shareholders, listing shares on a stock exchange, valuation, due diligence, insolvency, to acquisition of a business and demergers.

The Chartered Accountants can serve as four lines of defence against the risk of material misstatement due to fraud or error as an internal auditor, key management personnel, director or an auditor. They can work as insolvency and bankruptcy professionals and help work out a solution that is in the best interests of the creditors, debtors, employees, and shareholders. They can also work as valuation professionals or do due diligence to give the worm’s eye view of the peculiarities of the assets, liabilities, location, logistics, employees, etc of business apart from giving the bird’s view of the geopolitical and economic climate of the region in which the business operates.

The directory of independent directors maintained by the Indian Institute of Corporate Affairs (IICA) requires an examination to be cleared by independent directors and Chartered Accountants occupy largest proportion in the databank. The country needs skilled independent directors and chartered accountants in that role can bring ventilation over crucial problems faced by companies.

Helping MSMEs transition from the informal sector to the formal sector

In today’s times, the chartered accountancy profession has an even bigger role to play. Another service that is being rendered by CAs beyond compliance work at the small and medium-sized enterprise (SME) level is assuming the additional role of trusted business advisor. MSMEs and rural entrepreneurs are the heart of the Indian economy and provide the majority of the employment and contribution to India’s GDP.

Most MSMEs work in the informal sector and the level of skill sets is low. Also low is the participation of the female population in the workforce. The participation of the MSMEs in exports is also very low. One can have growth either through an increase in productivity or an increase in labour force. An increase in productivity would require an increase in skills and in particular digital skills. Hence, developing skill sets of the youth and bringing more women into the workforce is necessary to achieve India’s 5 trillion USD goal.

The MSMEs and rural entrepreneurs need to increase productivity, maximize the benefits of technology, become more innovative and have better access to finance. While India has the Right to Information Act the knowledge communication is not very clear to an average entrepreneur. The entrepreneurs lack knowledge of complex regulations and cross border opportunities. They do not know about the free trade agreements that India has with foreign countries and cannot take advantage of it. They do not have access to knowledge on how to offer differentiated products to a wider target audience. The entrepreneurs lack knowledge of the protection of IP rights.

Many of these owner-managed businesses do not maintain proper accounts and lack accounting systems, which is a deterrent for investors to put their money in them. Once the MSME is a part of the formal economy, it will be able to get access to finance and to export. MSMEs need accounting standards for preparation of fully complied accounts and systems to export and receive tax refunds. It would also be able to have better access to technology and subsidies provided by the Government. Chartered accountants are indispensable in the building of the formal economy and can lead to a more efficient working world for businesses and Government.

An auditor is a watchdog or in today’s era it has to be blood hound?

Audit quality is the axis of finance within an entity and by guiding the money into the right businesses it helps build a sustainable and prosperous future for us all. The auditing landscape is changing very fast and digitization is throwing up new questions around the risk assessment of audit data and whether audit data should bear a stamp of authenticity by before it passes from the management to the auditor. Auditors are reinventing themselves while shrugging off the biases that they may be unintentionally carrying. Professional skepticism survives personal and professional barriers and auditors ‘audit what is there’ and also ‘audit what is not there’. This is a very important responsibility which Chartered Accountants perform and it keeps the capital markets well oiled.

Public Sector Accounting

Knowing what assets you have and what they are worth is a prerequisite for professional management, and increases the odds for a return back to society — instead of raising taxes. The relative dearth of public sector accountants is directly reflected in the poor quality of information used by governments in their financial management. Moreover, the management of public finances is limited to simple measures of cash flows and debt.

For managing the financial affairs of a modern, highly complex government, the right tool is accrual accounting. A modern government needs a mindset that will recognize that managing public assets can generate revenues to pay for public services, fund infrastructure investments and boost the economy—without raising taxes.

Global standards promote transparency and enable the easy comparison of transactions across borders and jurisdictions. This means that State Owned Enterprises should also produce financial statements according to high-quality accounting standards, and increase the effectiveness of nonfinancial reporting. Furthermore, they should disclose publicly both financial and nonfinancial information.

Effective financial reporting is critical to governments’ understanding of their fiscal position and prospects. It is also crucial for providing legislators, markets, and citizens with the information they need to make efficient policy decisions, and to hold governments accountable for their performance.

Managing your working capital and taxes

The COVID 19 pandemic era shutdown seemed like a long cut off period with no change in the results of operations of the entity - with even the impairment quantification not being easily measured reliably. Businesses may take longer to sell their inventories and that period could be even fifteen months instead of the one year or less assumed until now. Chartered Accountants can help businesses reassess their normal operating cycle and reassess their current and non-current assets and liabilities. This would be helpful in the preparation of financial statements and the new working capital would help in the better presentation of the state of affairs of the business to the bankers, suppliers, and shareholders. Through better, more reliable and transparent financial information, accountants and auditors contribute to the efficient allocation and management of resources, help companies attract investment and access credit.

In the present circumstances, having cash is very important and it can be said that ‘cash is king’. Businesses need to conserve cash and reduce Capex and wastage over wanted or excessive costs. It is time to separate the wheat from the chaff and go lean. A Chartered Accountant can advise and help save excessive expenditure, taxes, and cash. They are well versed with new tax regulations and can help save a lot of money. In these fast-changing times, it is a good idea to not be ‘penny-wise and pound-foolish’.

Data is the new oil

For many businesses, the lockdown was pivotal in their digitisation drive. Many businesses were worried about internal controls in the circumstances and many more planned to take insurance and improve the security of their data. It is a good time to go shopping for the services of a Chartered Accountant as they can help identify the ‘what could go wrongs’ and help build a robust firewall against the online tailgaters.

Technology is increasingly at the heart of everything CAs do and offers enormous potential through the use of intelligent accounting systems, especially for micro and smaller businesses. The accountancy profession is gradually adapting modern tools and information technology.

Reinvent your business to adapt to changing customer habits

The pandemic has accelerated certain trends in consumer behavior like a spike in online purchases, the use of chatbots, etc. E-commerce is the cheapest way for a business to showcase its products and maybe it’s time to take the business online and improve the social presence of the business. It is also a good time for businesses to think of improving their productivity and accessing new markets to sell the increase in production. Chartered Accountants can do the data analysis and help tear apart the sales variance numbers to tell you which products and mode of selling are more preferred by the customers.

Moving towards sustainability

The chartered accountancy profession is moving towards sustainability accounting and ICAI is the second professional accounting organization in the world to set up a Sustainability Reporting Standards Board to help set up standards to help build a sustainable future for us as all. The future of investment banking is also pointing towards sustainability and those are the businesses that will survive past 10 years.

The public and private sectors should publicly report the impact their activities have on the environments and societies in which they operate, along with reporting on their policies and how these have been translated into practice. It is being pursued.

The profession is contributing to the achievement of the Sustainable Development Goals (SDGs) that aim to end poverty, protect the planet and ensure prosperity for all.

Integrated reporting

Integrated reporting has emerged as an important development in corporate reporting. The essential drive behind integrated reporting is that there are currently myriad corporate reports (the annual review, the management commentary, the chairman’s review, CSR reports, etc) that all contain valuable information but are aimed at different audiences and are usually unconnected. They fail to spell out clearly how the company’s performance relates to the business model. So, there appears to be a need for the corporate strategy and business model to become integrated and inclusive of all material issues, and the aim is that an integrated report will bring all this information together in a coherent way. It is being pursued.

Using integrated reporting, which incorporates non-financial as well as financial data, one can evaluate how they create value over the short, medium and long term. This can, in turn, ensure that capital—environmental, financial, human, intellectual, and social—is allocated more efficiently and productively used.

Capacity Building

Accounting plays an essential role in economic development. High-quality corporate reporting is key to improving transparency, facilitating the mobilization of domestic and international investment, creating a sound investment environment and fostering investor confidence, thus promoting financial stability. A strong and internationally comparable reporting system facilitates international flows of financial resources. The profession has been very adaptable and capacity building is going on regular basis.

Conclusion

A Chartered Accountant is an important pillar in the economic growth of the Nation. They help in implementing the law by capacity building, advocacy and supporting in other ways. A Chartered Accountant is a mathematician who can read the story behind numbers, a lawyer who can advise on complex civil laws and regulations, a whistleblower who can warn of a material misstatement, and a businessman who can take calls on acquiring or selling off an entire business. Chartered Accountants are advisors to the Government and are a partner in nation building. It is no surprise to see Chartered Accountants as Members of Parliament, top-notch investment bankers, auditors and at top positions of multinational companies. Who needs an army of advisors when a few guerillas will do? ■■■