Financial Daily from THE HINDU group of publications
Thursday, Aug 29, 2002
Predators on the prowl
THE goings-on in the world, particularly in the US and to a lesser extent in India, revolving round the accountancy profession have rattled the investor-public and the shareholders around the globe. With scams galore, the confidence in the share market is on a steep regression.
There is now, more than ever before, a need for standards, accountability and regulator watchdogs. Should the accountancy profession adopt the best practices approach of imbibing and following appropriate benchmark practices, recognised by experts all round the world? Will globalisation help in this regard? Would unbridled movement of natural persons (read accountant professionals) be a solution or would it have predatory overtones?
Recognising the importance of professional services, particularly the accountancy services, in a globally competitive milieu, the High Level Committee on Competition Policy and Law (of which I was a member), examined certain aspects of the profession, in the context of what ought to be done in respect of professional services, with the competition regime likely to impact them significantly.
During the interaction between the Committee and professional institutes, chambers of commerce and the bar associations, the need for an appropriate strategy for enhancing the competitiveness of the professional services in the global context was emphasised almost unanimously. The sole attributable factor for this emphasis is the coming into being of the WTO Agreement known as General Agreement on Trade in Services (GATS).
Professions in India
The accountancy sector is regulated in India through a combination of both law and professional self-regulation. The Chartered Accountants Act, 1949 governs the profession of chartered accountancy in the country. Likewise, the Cost and Works Accounts Act, 1959 governs the profession of cost accountancy.
The Chartered Accountants Act and the regulations thereunder impose certain restrictions in forming partnership firms. There are restrictions on: the trade name having a nexus with an individual or a group of individuals (abstract names are not allowed), the number of partners; and the number of statutory audits of companies.
For reason of reciprocity, the Institute of Chartered Accountants of India (ICAI) does not recognise many a foreign qualification. This reciprocity factor is grounded on national honour, professional self-respect and the Institute's desire to use it as a bargaining chip. While these considerations have some justification, they affect adversely the employment of Indian professionals abroad.
The regulations under the Chartered Accountants Act prohibit an accountant from advertising, soliciting custom, paying commission, brokerage or share of profits to anybody other than another accountant. An implication of these restrictions has been that there is in existence today of a rather fragmented market for the professional services. Except a few (may be five or six), there are almost no all-India firm of accountants. This structure handicaps the Indian accountant from taking full advantage of the potential global market in accountancy services.
While there can be no two opinions that interests of maintaining quality will have to be paramount, yet it is a fact that there is an inherent and covert desire on the part of established elements in the profession, to limit competition by restricting new entrants.
The restrictions on incorporation and size of partnerships tend to limit the size of growth of the profession and professionals. Similarly, the restriction on statutory audits brings about a limitation on the size of the clientele. These restrictions are hampering the growth of the profession and are also anti-competitive in character, as the consumers are prevented from selecting a professional firm with reasonable freedom of choice.
While one would respect some degree of restraint in marketing professional services, the restriction on professional firms on informing potential users as to the range of their services and potential is a case in point, wherein competition is injured. For instance, a professional firm cannot issue brochures to inform consumers, it cannot even indicate the firm's name in articles contributed to journals nor can it hold seminars to promote and disseminate knowledge among potential clients.
In other words, the professional regulations are perhaps protecting the weak producers of professional services at the cost of information being made available to consumers. It is ironic that Indian firms are not permitted even to mention the existence of their collaboration agreements with foreign accounting firms.
The legislative restrictions in terms of law and self-regulation have the combined effect of denying opportunities and growth to professional firms, restricting their desire and ability to compete globally, preventing the country from obtaining the advantage of India's considerable human expertise and precluding consumers from the opportunity of free and informed choice.
If the Indian accountancy system has to integrate internationally, an appropriate regulatory system must be in place which ensures that: a) there is a general reciprocity of rights and non-discrimination, b) foreign accountants/firms are subject to the same disciplinary jurisdiction as Indian accountants, c) there are greater opportunities for the future development of the accountancy profession in India, and d) Indian accountancy professionals can move abroad for rendering accountancy services.
It is in this context, when existing barriers based on citizenship or nationality are increasingly becoming irrelevant, that it is necessary to promote competitive quality in accountancy services and full accountability therefor on the part of the accountants. It is desirable to promote large partnerships of accountants to enable them to be globally competitive in efficiency and quality of services rendered.
Very few firms in India provide what is called the "single window services", which means providing not only accountancy but also financial, legal and other advice to their clients. Rules should provide for multi-disciplinary partnerships (lawyers, accountants and other professionals), which would permit delivery of composite services as desired by the clients.
If the accountancy profession desires to grow and serve in foreign soil, freedom of movement must be built into the Competition Policy/Law. Unnecessary barriers will have to be removed to facilitate professional development and improvement in the quality of services, besides building an environment for easy movement of professionals outside the country.
It merits mention, even if it ruffles the feathers of some, that if India desires to spread out in the global arena, it should allow foreigners to avail themselves of the GATS mode of movement (of natural persons) into India for practice. Is India game for this? Some view this as possible predation on Indian professional accountants. But if Indian professionals can hold their expertise against foreign competition which I believe they can there is nothing to cavil about predatory onslaught on them.
A significant advantage that may flow out of movement of natural persons (accountants) either way, is the free interplay of knowledge, which should help development of the profession. This will assist implementation of the best practices approach in the accountancy profession.
Having said this, free movement of professionals should not be construed to imply that all regulations must be removed. Regulations are necessary with regard to professional qualifications on the basis of which such services can be rendered.
The professional bodies need to regulate the qualifications and need to discipline the conduct of the members who are rendering professional services. Equally legitimate is the regulation which precludes attempts at blatant advertising.
Likewise, setting accounting standards and performance practices is a legitimate regulation. But those regulations which disallow normal promotional activity, which deny the consumers the benefit of full unrestricted and informed profile about professional firms and deny the consumers of the choice of firms should have no place.
Finally, regulations that limit the size of a professional firm should have no place, if Indian professional firms have to compete globally in the market.
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