The Need to Restore Credibility

In taking this view, I recall what Machiavelli said in the dedication to his famous book “The Prince”. He said:

“Nor do I hold with those who regard it as a presumption, if a man of low and humble condition dare to discuss and settle the concerns of princes; because, just as those who draw landscapes, place themselves below in the plain to contemplate the nature of the mountains and lofty places, and in order to contemplate the plains place themselves upon high mountains, even so to understand the nature of the people it needs to be a prince and to understand that of princes it needs to be of the people”

The Decline in Credibility and Proximate Causes

The last few years have seen a steady decline in the credibility of company managements, the effectiveness of regulatory agencies and role of the professionals. That trust is gradually getting eroded has been often attributed to a number of factors, prominent among these being the failure of some large companies, the exponential growth of NPAs of banks and the alleged complicity of high profile promoters of companies.

While the above may be the proximate causes of the erosion of credibility, I believe there are more fundamental reasons for the erosion of credibility which need to be examined. There are four major concerns which we may consider.

Four Major Underlying Concerns

1. Rapidly Changing Operating Sphere and Rising Stakeholder Expectations

First, the sphere in which the profession is operating is rapidly changing. There has been an exponential technological change in the nature of business, greater penetration of the capital markets and rising expectations from a wider and rapidly expanding population of stakeholders. This growing population is no longer content to accept accountability of management, solely on information contained in the financial statement and backed by auditors’ opinion thereon. It demands a broader and deeper reporting format with greater transparency regarding the wider aspects of the company’s functioning. This could include information as to how the company’s human and intellectual capital is protected, how directors have performed in the discharge of their duties, the key factors which influence the company’s performance and how they have been performed and how they are safeguarded for the future and many other matters.

2. Complex Indian Business Structures and Related Party Transactions

Second, business structures in India are very complex with a majority of companies being family owned and related party transactions being widely prevalent. Despite regulatory safeguards, there has not been sufficient transparency regarding these transactions and often, regulators, independent directors and those charged with fiduciary duty have been unable to confirm the existence and fairness of these arrangements or the ultimate ownership of entities with whom the company has trading relationships or in whom the company has investments.

3. Fundamental Change in Asset Composition: The Knowledge Economy

Third, there is a fundamental change in the composition of the assets of companies. Whereas in the past the physical assets reflected the major value of the company, with the growth of the knowledge economy, the major value of a company is often reflected in its intangible assets such as brand, marketing networks, employee quality, intellectual property, customer base, etc. The financial statements do not adequately capture this value or reflect the increase or decrease which may have taken place in this value.

4. Perceived Conflict of Interest in Multidisciplinary Offerings

Finally, there is a perception that there is a conflict of interest in the different services accounting firms offer. With the growing complexity of businesses and the different skills the firms have acquired, often with the employment of other professionals, they are able to offer these services and business needs these services. While there are adequate regulatory safeguards to ensure that the independence of assurance services is not compromised, this perception persists and needs to be addressed suitably.

Actionable Measures to Restore and Enhance Credibility

Given this environment, it is important that the profession, whose very existence depends on its credibility, take urgent measures to restore and enhance the credibility of the profession. The following may be considered:

First: Appointment of a High-Powered Committee on Corporate Reporting and Audit Relevance

First, the Institute should consider the appointment of a High-Powered Committee to review the utility and relevance of the audit for companies as in the changed business conditions, there is a need to broaden the scope of corporate reporting, to create greater trust in the capital market and provide greater accountability to a wider section of stakeholders. The committee should be chaired by an independent person of eminence, preferably not a member of the profession and should include representatives of the key stakeholders including industry, regulators, analysts, rating agencies, academia and the profession. Its mandate should, inter alia, include the following:

Widening the responsibilities of the profession carries its own risks. However, not to do so may be worse and if this results in establishing adequate “safe harbour” rules for the profession’s conduct, it will limit unwarranted expectations about the profession’s responsibilities.

Second: Closing Ranks and Providing a United Professional Front

Second, the profession needs to close its ranks and provide a united front. While it is true that there are vast differences in the work and opportunities available to the larger firms and to the rest of the profession, this is true of all countries and the inevitable result of globalisation. The solution lies in using the expertise of larger firms, to generally improve the quality of the profession as a whole, the goal being not the brilliance of a few but the competence of the many.

Third: Chartered Accountancy as a Discipline — Widening Technical Committees

Third, it needs to be realised that Chartered Accountancy is not a function but it is a discipline. The members of the Institute are therefore engaged in a multiplicity of functions. In many fields, members have achieved great distinction but their achievements have not got due recognition. The Institute needs to give greater public recognition to this section of the membership and more importantly utilise their expertise to widen the composition of the technical committees of the Institute. It is for consideration whether it would not be desirable that in the technical committees, a majority of the membership should consist of members who are not members of the Council and Council members should largely devote their time to matters of policy, administration and regulation.

Finally: Re-anchoring the Essence of Professionalism and Uncompromising Integrity

Finally, members of the profession have to constantly remember and publicly demonstrate that, irrespective of the function they perform, they are fundamentally professionals and that professionals have certain obligations which they must always fulfill. What this involves is well illustrated in a short piece written in 1957 by Judge Elbert P Tuttle Sr., which the late Mr. Nani Palkhivala had preserved and which he had shared. The following extracts from this piece are relevant: