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Never mind showbusiness, there’s no business like the accountancy business. Accountancy firms have a licence to print money because they enjoy access to a state-guaranteed market for auditing. Companies, hospitals, schools, charities, universities, trade unions and housing associations have to submit to an audit, even though the auditor might issue duff reports. Anyone refusing their services faces a prison sentence.

Major company audits are the most lucrative and that market is dominated by just four global auditing firms. PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young have global revenues of over $80 billion (£41bn) a year, which is exceeded by the gross domestic product of only 54 nation states. These firms dominate the structures that make accounting and auditing rules.

Following the Enron and WorldCom debacles and the demise of Arthur Andersen, the auditing market has become further concentrated in those four firms. Many major companies looking for global coverage find that the auditor choice is very restricted.

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Cheers,

Santosh Puthran

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Corporate governance is the process by which companies are controlled and directed - a company’s board is ultimately responsible for this. The key to good corporate governance is having the right strategy, leadership and control structures in place to produce and sustain the delivery of value to shareholders.

Good corporate governance, and its visibility, gives confidence to all associated with a company that it is being managed well and that value is being created. Our objective in this report is to summarise the key elements of the Company’s governance structure and relate this to the principles in the UK ’s Combined Code on Corporate Governance – a code of good practice for listed companies.

THE BOARD

“Every company should be headed by an effective board, which is collectively responsible for the success of the company.” Combined Code – Main Principle A.1

CHAIRMAN AND CHIEF EXECUTIVE

“There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.” Combined Code – Main Principle A.2

BOARD BALANCE AND INDEPENDENCE

“The Board should include a balance of executive and non-executive directors (and in particular independent non-executive directors) such not no individual or small group of individuals can dominate the board’s decision making.” Combined Code – Main Principle A.3

APPOINTMENTS TO THE BOARD

“There should be a formal rigorous and transparent procedure for the appointment of new directors to the board.” Combined Code - Main Principle A.4

INFORMATION AND PROFESSIONAL DEVELOPMENT

“The Board should be supplied in a timely manner with information in a form and of a quality to enable it to discharge its duties. All Directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.” Combined Code - Main Principle A.5

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PERFORMANCE EVALUATION

“The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.” Combined Code - Main Principle A.6

RE-ELECTION

“All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance. The board should ensure planned and progressive refreshing of the board.” Combined Code - Main Principle A.7

FINANCIAL REPORTING

“The board should present a balanced and understandable assessment of the company’s position and prospects.” Combined Code - Main Principle C.1

INTERNAL CONTROL

” The board should maintain a sound system of internal controls to safeguard shareholders’ investments and the company’s assets.” Combined Code - Main Principle C.2

RELATIONS WITH SHAREHOLDERS

“There should be a dialogue with shareholders based on the mutual understanding of objectives. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. Combined Code” – Main Principle D.1

AUDIT COMMITTEE AND AUDITORS

The board should establish formal and transparent arrangements for considering how they should apply the financial reporting and internal control principles and for maintaining an appropriate relationship with the company’s auditors. Combined Code Main principle C.3

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Sources:

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Keeping pace with international practices, AS-22 was introduced by the Indian Institute of Chartered Accountants (ICAI) and deferred tax accounting was made mandatory for all Indian listed companies.

As per AS-22, a company is liable to provide for deferred tax liability on the first day it accounts for such income. The basic premise being that revenues and expenses of an accounting period should meet matching principle and disparity in computing income for tax and book purposes should be appropriately resolved.

Differences between the two sets of computation of income can be classified into two categories; permanent and timing differences. Permanent differences arise with respect to expenditure legitimately incurred but are wholly or partially disallowed for tax purposes.

Such expenses do not give rise to deferred tax provision. Temporary differences are those that arise due to timing reasons. A typical example is provision for depreciation with varying rates for book purposes and tax purposes. Rates prescribed for company law are minimum rates, taking into consideration useful life of the asset.

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Santosh Puthran
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The Securities and Exchange Board of India (Sebi) has asked the Institute of Chartered Accountants of India (ICAI) to clarify the accounting standards that real estate companies have to follow.

The capital market regulator has noticed that different real estate firms have been using varied methods for accounting revenues.

According to the ICAI, there are two methods of accounting for real estate revenues. The one followed by most companies accounts for revenues according to the stage of completion of construction. If a particular project is half complete, the company will account for half of the project revenues.

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What happens in UK in circumstances where there unsatisfactory interpretation of accounting standards ?

It is referred to Urgent Issue Task Force (UITF) which is a subsidiary of the Accounting Standards Board.

The main role of the UITF is to assist the ASB where unsatisfactory or conflicting interpretations have developed (or seem likely to develop) about a requirement of an accounting standard or the Companies Act. The UITF seeks to arrive at a consensus on the accounting treatment that should be adopted, in such cases, in the context of the ASB’s declared aim of relying on principles rather than detailed prescription.

In India, everything is referred to ICAI. We in India are too under-developed that the government relies heavily on ICAI - body responsible for setting standards and the same set of people who audit them !!!

The GOI should establish a proper Accounting Standards setting Framework where there is a distinction between Standard Setters and Auditors. Any unsatisfactory interpretation should not be referred to Accounting Body.

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Will GOI be so pragmatic.I think this is high time for ICWAI to impress administrative ministries specially MCA and MOF of the importance of equal recognition of ICWAI members in the regulatory field and equal recognition for all attest functions. Read More

I also need to emphasis that the Auditing Profession Act does not preclude any one from conducting an audit. It simply specifies that in order for audit services to be provided by any firm or individual, such a firm or individual ought to be registered with the Independent Regulatory Board for Auditors. The legislation seeks to level the playing field in this regard, but we are mindful of the needs for the highest professional standards that need to be maintained. I have also requested a comprehensive review of the entrance requirements in an endeavour to facilitate entry for persons who may have undertaken a route of study other than an accounting degree.

I therefore would urge SAIPA to ensure that it influences the processes with the Regulatory Board that are intended to allow for more professional bodies to be recognised. The recently promulgated Audit Professions Act is an example of our ongoing efforts to ensure better mechanisms to strengthen our corporate governance, responsibility and accountability. Not only does this Act protect and define the role and functions of registered auditors, but it also seeks to ensure the integrity, reliability and validity of the attest function they perform.

We appreciated that in today’s more empowered world, we need to act decisively, as, in the words of Arthur Levitt, former Chairman of the US Securities and Exchange Commission Minister Trevor A Manuel, MP, Minister of Finance

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Abundance of skills available in the sector of accounting and auditing and with impending Companies act direct tax code bill India should re-orient its recognition procedure lest it ideology of inclusive growth is in shambles.WRT Auditing and public accounting profession.

Most of the countries in the world whether UK/EU/ZA/Au have made it a point to demutualise education and auditing profession and regulate the profession by bringing in a certain degree of competition and enabling the profession to be institute(institution) neutral.In UK six bodies are recognised as RQB and one of them is not a member body of IFAC.In Australia Three bodies are recognised by ASIC.In ZA(south africa)the newly constituted IRBA has come up with an accredition model in May 2007. Read More

In the USA it is a common format of exams under AICPA but NASBA recognises the qualification for License to practice.In Canada though there is no super regulatory body the Government of canada recognises three institutes for Auditing(CGA/CICA/CMA).Most of the south east asian countries recognise more than one qualification for credence to auditing with malasia having two internal bodies-MIA/MICPA.

The relevance of having such a demutualisation is to recognise the skill-set delivered by various institutes and also promote healthy competition.This also ensures quality and destroys Monopoly which is a must for any civilised society.

Unfortunately the development in India is not encouraging on this front where we are trying to put all eggs in one basket and grant undue weightage that may harm the stakeholders interest in the longrun.

ICAI is a statutory accounting body and so is ICWAI and both are the members of IFAC and the latter is a founder member of the international organisation.In a huge country like India with variety of stakeholder it is in the interest of the society to have a superior regulator with the participation of the accredited institutes(ICAI/ICWAI).This may be under the administrative supervision of the MCA.With the digitisation of MCA operations it would be easier to track the performance of the auditors.

Members of ICWAI/ICAI should be entitled to register as auditors initially and be allowed to audit businesses on equal footing(financial/cost/special/internal/tax audits).Any new bodies by virtue of WTO on services fulfills the criteria should also be allowed to have accredition.
ICAI and ICWAI should be restricting their function to delivery of education and required skill set and the member disciplinary mechanism and quality assurance and review board.Their representatives will occupy the newly constituted supervisory body for regulating the auditing profession.The regulatory body will focus its arms on all types of audit with sectoral neutrality.
A member of the two institutes should satisfy additional requirements as designed by the regulator to get registered as Auditor.

I think India should enter into such model coterminus with the enactment of the New companies act and direct tax code bill.

The benefit will be that the society shall have choice of the professionals a change of mind set and more focussed audits.

More Info :

ASIC, Australia
OPSI, UK

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