Accounting Scams in Indian Context
tempted to be short sighted to present good figures for the current period putting at stake the long term profitability of the company.
· Personal gains for Managers: Most of the managers at top positions have an ESOP component to their salaries which means that they gain directly by an increase in the share price. So they are tempted to present better figures in the markets.
It is fair that any instance of malpractice by a company should be condemned in the harshest of words and penalized by punitive action. But the markets and investors should also look inwards and see their contribution to the present state of affairs. May be there is a case for giving more importance to the long term steps taken by the company to increase profitability even if these steps result in slightly poor results in the short run.
Possible solutions – Belling the cat
There is an urgent need to restore confidence amongst the investor community by taking immediate and strong actions to curb the use of unfair practices used by companies in reporting financial figures. Some of the areas for improvement and the possible solutions are:
· Improving the accountability of audits: This can be improved by implementing a system where the auditors are not paid by the companies but by the stock exchanges as they have larger interest in getting the credible figures from the companies. Another option to look for is to implement a system where no auditor is allowed to audit the same company again in the next 5 years so that the business considerations do not come into the picture for the auditors. Also there is a need to stop the consultancy services offered by the auditors as the companies use it as a carrot to make the auditors close their eyes.
· Reworking the standards: Indian accounting standards are based on the Companies Act 1956. There is a need for a complete overhaul of the accounting standards and making them binding on all audit firms. Best practices from all over the world should be studied and the act should be changed to enforce stricter laws. SEBI should also be a part of this ‘overhaul’ committee to include the interest of the investors.
· New regulator: The Institute of Chartered Accountants of India (ICAI) has failed miserably in its role as the regulator and there is a need to create a separate regulating body which could comprise members from the RBI, SEBI, Comptroller General of India and of course ICAI. This regulating body should be given adequate power and the authority to enforce the rules of the game.