The bottleneck is at the top of the bottle

The satirical yet succinct quote which forms the caption of this article is that of the celebrated management guru of all times, Peter Drucker, when he was driving home the point that the source of all ills of any entity is its leadership.

With the backdrop of the above, I am proceeding to analyse some of the issues pertaining to our profession ‘led’ by the Institute and in the process, if some of my observations do sound abrasive, so be it. Nothing less is meant.

To begin with, some fairly less significant issues:  Firstly, let us look at this limit on tax audit assignments. ICAI has, pro-actively, prescribed that no single CA in practice can sign more than 45 (only 30 till last year) tax audit reports.  Economic Times, more than a year back, carried a news item that India has 31.5 million tax payers.  Assuming (conservatively though) that just 10% of that figure only come under the tax audit parameters, we should be having 31,50,000 tax audit assignments in this nation. The ICAI’s annual report says that we have 68,808 members holding COP as on 31^st March, 2008. Again assuming (foolishly though), that all of them are in India and in active practice, they together can sign only 30,96,360 tax audit reports, leaving a yawning gap of more than half a lakh assessees  who are statutorily required to get themselves tax audited but  cannot find a CA to do that.  Though there is a pending litigation on this issue, it appears that the last word has not yet been said on this. However, when the FM hinted the likelihood of including even the cost accountants as possible tax auditors, the profession got concerned and agitated. Though the basic idea of the ceiling seems to ensure better spread of professional opportunities, that still does not give any reason to retain such impractical limits, and more so, without ever bothering to ensure compliance by members. With the advent of e-filing (as the IT returns capture the names and membership numbers of CAs in tax audit cases), it is definitely possible to source the data. However, we do not have any information that the ICAI is even planning to get such data to either remove such impractical limits or to revise the same.

The second such insignificant issue is the practice adopted for restoration of membership of those who have failed to pay the membership fee for several years, after collecting additional fees for the same. That the Institute can condone such lapses for a ‘fee’ is something that is not easily digestible. This simply means that in our Institute, where ostensibly ethics and discipline rule the roost, money can efface indiscipline. This is even extended to students, as when they pursue other courses without the prior permission of the Institute, such ‘defiances’ (intentional or unintentional) can be ‘corrected’ by paying a condonation fee. What kind of a system is this?  If money can be a leveler for any act of indiscretion, why we boast of ethics? (In case of students, I am opposed to the very idea of Institute requiring them to take prior permission for pursuing other courses. It is a matter of agreement between the member imparting training and the student to ensure that the training hours do not get infringed. Why should Institute bother about this and make getting prior permission as a rule and then also collect fee for granting condonation from those who did not or could not comply?)

Let me turn to some important issues:  Firstly, about a nasty Accounting Standard, which our Institute has proudly made mandatory for almost all the business entities from the financial year ended 31^st March, 2008. I am referring to AS-15, which even at an academic level, is a horrendous one, for various reasons.  This standard, which is (as usual!) a cut-copy-paste job from IAS-19, has the blessings of NACAS (which has done its bit by combining Level II enterprises and level III enterprises as a single group and hence made this standard applicable to virtually all business entities) too and requires complicated measurement and recognition procedures of employee benefits such as gratuity and leave encashment.  Not just that. It also requires actuarial certification to go with.  Now, to have made this standard as compulsory for all the business organizations itself is reflective of total non-application of mind. To make the actuarial certification compulsory is even nonsensical.  I will tell you why I use such strong terminology. The total number of actuarial professionals in this country of one billion plus is a mere 367. Out of this meager number, 112 are working abroad and about 50 are above 70 years old. Many young and middle aged actuarial professionals are employed full time in organizations such as LIC, other private insurance companies (numbering about 40 today) and in pension and provident fund institutions. So, we may have just about 100 actuarial professionals who will have to certify about the compliance of AS-15 of lakhs of business entities in our country. As per the MCA website, the number of incorporated companies as on 31.3.2005 (upto which date only statistics are available) was about 6.8 lakhs.  Today, the figure must have crossed 8 lakhs. Apart from limited companies, we have other entities as well. How on earth this country is going to see compliance of AS-15 is anybody’s guess. One thing is for sure. More than 90% of companies can only have qualified reports, this year, thanks to AS-15. And for all this, such expense provisions are not even tax deductible thanks to Sec. 40A(7) and 43B of the Income Tax Act.  

Talking of standards, I have been crying for a long time now, that ICAI is unnecessarily hurrying on the adoption or convergence (or whatever they choose to call it as) of the IFRS and has drawn a definite timeline of 2011. (I was happy to find a Council member reflecting the same thought as mine on IFRS convergence, openly in a meeting recently. I am sure that he spoke in the Council also with the same verve and vigour).

Obviously, the well meant cautions against such mindless adoption of IFRSs and the attempts to import the accounting principles of West have all been thrown to winds and the votaries of IFRS in our country are almost succeeding in their intentions to please some foreign masters in this matter. One of the usual arguments used was that the Western financial reporting and disclosure standards are simply out of the world and deserve to be aped without questions. With such so called stringent standards only, Barings happened, Enron happened and Xerox happened not in the distant past and recently the march again began with  Lehmann Brothers, AIG, Freddie Mac etc leading. The IFRS and its underlying concept of fair value accounting are even accused to be the reasons for such mega failures and the concepts are taking a beating even in the western world lately. Lot of crying is now heard demanding the suspension of fair value accounting in the western banking circles  but in India we are dying to switch from our conservative accounting concepts to such fair value accounting or the mark-to market concepts.  Another argument is that only IFRS convergence would bring more Foreign capital flows. With the global financial crumbling that is happening, we are only seeing the withdrawals of foreign capital in thousands of crores.  IFRS or no IFRS, foreign investors will come where they can make money and run away when they cannot. Our nation’s unique business cultures and practices cannot be compromised for such happenings. We should be rule makers for ourselves instead of being rule takers from others.

 ICAI in its Annual Report proudly recalls the motto “Ya Esa Suptesu Jagriti”, to mean that we are the ones who keep awake among those who sleep.  Is ICAI awake to the above issues? It better be lest it cannot be reflective of true leadership qualities and will only live up to the wry comment of Peter  Drucker by being a  bottleneck in our profession.