Accounting profession: Fallen from grace?

In any conference on corporate governance or training programme for senior company executives, you listen the murmur that the auditing profession has fallen from grace. If not many, at least a few believe that there is some truth in that perception. The perception is built around major audit failures in recent times (e.g., Satyam, WorldCom and Enron). The perception strengthens by the belief that the companies are managed unscrupulously with the aid of the auditor or because the auditor compromises its independence. The perception gets further strengthened when regulators bring new regulations to protect the audit independence, such as, provisions in the Companies Bill 2012 relating to rotation of auditors and constitution of the National Financial Reporting Authority with power to oversee the profession and to investigate professional misconduct.

A major audit failure does not necessarily reflect the failure of the auditing profession. The failure of Arthur Anderson (one of the Big Five audit firms at that time) reflects the failure of the internal governance system of that firm. It does not symbolise the failure of the auditing profession. Similarly, the failure of the auditor (PWC) in Satyam case is partly the failure of internal governance and partly the failure of individuals. It is true that the confidence of the auditing profession gets shaken when major corporate failures are reported. We see wide media coverage and public outrage on such failures. The reaction of investors, regulators and other stakeholders reflect that they place very high value on the audit opinion. Focus on audit independence by regulators and researchers too reflect that audit is playing an important role in protecting shareholders' interest. The perception that the auditing profession is failing in its responsibilities is not based on facts.

We some time mistakenly identify the accounting profession's loss of exclusiveness as a fall from grace. Over last four decades the number of the members of the Institute of Chartered Accountants of India has increased by more than twelve times to more than two lakhs and the number of members of the Institute of Cost Accountants has also increased significantly. Around the time of independence only youth from affluent backgrounds attempted to enter this profession since only they were aware of the advantages of this profession and could take the risk of failure brought about by the very low percentage of success in certification examinations. But today, particularly in urban areas, your next-door neighbor is likely to be an accounting professional. Many young members of the middle class families now consider the accounting profession as a career option. This attraction towards the accounting profession is a positive development. It shows that the members of the profession still enjoy respect in society and earn a good livelihood. This can hardly be called a fall from grace.

Auditing is only one of the services that accounting professionals provide to the corporate and other sectors of the economy. Top management needs information from management accounting system for formulating and implementing strategies. Cost and revenue information is required in making a choice from alternative activities. Companies prefer accounting professionals to lead critical functions like risk management, internal audit, business valuation, tax management, and accounting and control. Effectiveness of all these functions depends on appropriate information architecture, and analyses and presentation of information. Companies expect accounting professionals to develop capabilities in managing information, with technological support, in a complex and dynamic business environment (e.g. economic, social, political and technical).

Most of the young members of the Institute of Chartered Accountants of India are joining the corporate sector. Similarly, most members of the Institute of Cost Accountants are in employment with companies. Auditing is no more the core service that accountants provide. Other services have become equally important. Therefore, both the accounting bodies need to focus on building new capabilities needed to match the expectations from the companies. They have taken vital initiatives in this direction. There is a need to accelerate the process.

In future the space (in terms of the proportion of total services being provided by the accounting profession) of regulated services (primarily, audit and certification) will shrink. I expect that with the change in the scenario the so-called turf war between the two institutes, which has taken off a bit of sheen of the accounting profession, will end. Both the institutes will maintain their separate identity and we shall see healthy competition between them in competence building and improving service quality. They will work together to take the accounting profession forward. I may sound over-optimistic. But if this does not happen, the accounting profession will fail to take advantage of new opportunities and will fail to attract talent.

Email: asish.bhattacharyya@gmail.com

Affiliation: Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), The Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited