The Hindu Business Line : Shadow fight

THE INSTITUTE OF Chartered Accountants of India (ICAI), which already has its hands full with cases of professional negligence, has a new, sensitive and challenging assignment ahead: . It has to go deep into the findings of a recent "study" by the rating agency, Crisil, about corporate accounting, in deference to the wishes of the Department of Company Affairs. It was about a month back that, in the course of the launch of its new product in the field of financial analysis of audited accounts of companies, Crisil had emphasised the recasting of accounts to reflect a `truer picture' of the financial health of companies. Of the 600 odd companies that it scanned, almost one in five `overstated' the profits while every seventh company `understated' them. Crisil had conceded that much of the deviation was technically legal as per accounting standards, but claimed to be coming out with the `golden standard of accounts for the entire analytical community'.

About a week back, the department asked ICAI to examine the veracity of these findings since "it is important that the hype or the undesirable accounting methodologies stated in the report need to be clarified" and "unusual accounting practices" have a bearing on the confidence of investors in the financial statements of companies.

It seems that to keep the bean counters occupied with something, the DCA has instructed the ICAI to get to the bottom of the findings of Crisil study and then submit its views to the department, though there are no charges yet that the auditors concerned had erred. Evidently, a case of micromanagement. And since regulators have also to be seen as doing something, the Institute wants to unleash its disciplinary mechanism on the deviant companies to take things to a "logical conclusion".

But there is no study, as such. What Crisil is talking about is only a priced product. The agency had put together analysts to work on the public domain information and drawn conclusions that are being made available for sale. But nothing prevented the ICAI from accessing the data that were already available to any shareholder and also with the Registrar of Companies. That is why, it is strange that the President of the Institute doubts whether it would be possible to source the balance sheets and audit reports.

There could be more than one opinion on the financial statements that Crisil frowns upon. The ultimate shelter that would protect the accountants who worked towards the preparation of those statements would be the letter of the law and a permissible interpretation thereof. While it would be futile to claim that Indian accounting is a paragon of truth, any effort to paint what is legal as mala fideis but a farce of regulation. If the leeway provided in the accounting standards is too wide, or if disclosure requirements are to be improved upon, legislation has to undergo a change. It would be pointless for regulatory institutions to run after red herrings. That would be like posting jawans with carbines at every road corner to nab traffic defaulters.

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