Tuesday, August 12, 2008

Inconsistency in Accounting Norms

There have been news reports lately that bring to the fore the inconsistency between the accounting standards issued by the Institute of Chartered Accountants of India (ICAI) and the requirements in Schedule VI of the Companies Act, 1956 in relation to exchange losses incurred by companies on foreign currency-denominated transactions (see here and here).

A Business Standard editorial goes beyond the technicalities of law and accounting and takes matters into the realm of corporate governance:

“The discovery that many large companies are using a contradiction between two sets of rules (one on accounting standards, and another provided under company law) to improve the profits that they report, should come as a wake-up call to all those who believe that India now has good governance standards in companies. The clear intention of the companies which have parked foreign exchange losses on capital assets in the balance sheet, without booking them in the profit and loss account, is to boost the bottom line — in some cases, by substantial margins (as reported in this newspaper yesterday). All the companies involved have quoted legal opinion in their favour, and therefore have provided themselves with some cover for their actions. The question, though, is what is the correct thing to do, not what might pass muster in a legal dispute. And it seems clear enough that these losses should be booked in the profit and loss account. That is what India’s accounting standards ask you to do. That is what the US accounting standards ask you to do. And that is what the international accounting standards ask you to do.”
This episode also touches upon an important aspect of corporate governance. It is not sufficient for good governance to be legislated upon. Corporate governance does not merely revolve around complying with rules and codes, but it ought to be a “way of life” for corporates. Governance principles are to be followed both in form and in substance, and both in letter and in spirit. Unless this is truly practised, no economy can pride itself in having a well developed corporate governance regime.

No comments: