Thursday, May 4, 2017

Legal Claims: The Convergence of Law and Accounting

[Guest post by Pramod Rao, General Counsel at Citibank India]

Many aspects of law and the accounting world coincide and converge especially in commercial enterprises. These are of immense relevance to the enterprise, the general counsel, the chief financial officer, the external/statutory auditors and business units or to control or support functions of the enterprise. 

Among the aspects where the convergence of law and accounting occurs is around legal claims or cases against an enterprise. Such claims and cases against an enterprise arise from time to time - be it claims or cases filed by customers, vendors and suppliers, employees / ex-employees, investors or shareholders, government authorities, etc.

In an article posted on LinkedIn, I examine these issues as well as the accounting implications thereof and matters beyond, all of which represent my personal views on the topic.

- Pramod Rao

1 comment:

vswami said...

OFFHAND In accounting parlance, the concept of 'provision', is commonly understood / taken to mean 'setting aside an amount' for a 'known liability' , the amount of which is not /cannot be ascertained with 'substantial accuracy'. In a given case /situation, the most difficult part of the exercise rests in deciding whether liability is 'known' and also, is 'ascertainable' with 'substantial' accuracy. The 3 marked criterion (in '..'), in a manner of speaking,more often than not, are extremely 'subjective' (or judgmental); that naturally depends upon the extent of expertise / depth of exposure of the individual, being the one whose opinion (external or otherwise) is solicited and followed , and also who has to ultimately take a decision, so as to own the attendant responsibility / answer-ability. On that premise, in general, accounting standards may merely serve as an 'aid' ; not as an effective or fool-/safe-proof tool.

Anyone having practical experience in income-tax law practice is expected to be aware, it is the aforementioned and other intricacies the exercise entails , which mostly account for disputes between the Revenue and taxpayer with regard to the deduct-ability for tax, of any such 'provision' in the accounts; for instance, 'provision for bad debts', which has always been an area of controversies , dispute and court litigation - inconclusive at that . And the case law on such disputes , as experience goes to demonstrate, has proved to be a perennial stream.