There can be no substitute for watertight systems and procedures to enhance corporate governance : Business Line
December 14, 2012:
Our mythological scriptures tell us that dharma runs on four legs. This was the concept of welfare state. Let us look into the accounting world: the four legs of accounting dharma are: Authentication, Authorisation, Accounting and Accuracy.
PROXY FOR PRECISION
Let us take ‘accuracy’ first. Though initially accuracy was synonymous with arithmetic competence, this can now be achieved through a plethora of computing devices, ranging from one’s palm tops (making people eat out of the palm) to the desk tops (again archaic, these days).
This accuracy principle produced many an accountant who was typecast (for cartoonists) as bespectacled and commanding numbers at his/her fingertips. The premise of the conventional literature is that if both sides of the trial balance tally, the accountants can heave a sigh of relief, no doubt sending the sheaf of papers before them into disarray.
Accuracy does not, of course, imply precision. Accuracy sometimes is viewed as a matter of one’s imagination, since unlike the Science disciplines, accuracy eludes definition in Accounting. This challenge of accuracy and its nuances makes valuation in accounting (as also in Finance) more an element of fantasy. In an oxymoron of sorts we tend to use this “accurate estimate” to substitute English for numbers!
The second pillar is that of Authorisation. This pillar, the accounting aficionado asserts, is the root of a transaction. Be it the internal transaction or the arms length one, the authorisation is the basic structure on which the edifice of an accounting system stands. Authorisation goes to the genesis and tries to question the “Who” was/is the author of the transaction.
The Accountant ticks off the transaction if it is properly authorised. It also ensures that there is a proper hierarchy of sanctioning, with approvals having been complied with. In other words, respect is accorded to organisation manuals, which spell out the pecking order.
Take, for instance, the power to sanction Revenue Expenditure up to a certain amount, beyond which it would require the boss’ approval in the hierarchy. When these levels are well defined, they make the task of an accountant (who may be below his/her manager or peer boss in the hierarchy) that much easier, and the transaction processing time will be reduced.
This is also one of the litmus tests that the accountant subjects the transaction to. The rigmarole of explanation — usually provided by the officer/party spending the amount, and the circumstances that lead to such a spending — can be done away if the accountant finds the authorisation is not violated.
The downside is that in the event of the transaction not going through due to lack of proper authorisation, the accountant becomes the butt of criticism. The parties concerned might unleash a litany of expletives on the prevailing system.
This is more on account of ignorance and callousness on the part of the parties about the system in general and accounting systems in particular. There is no point cribbing that the Pillar is insensitive. Pillars are pillars and knowing and respecting the procedures will ensure that one does not have to run from pillar to post. Of course, authorisation, per se, does not question the “Why” of cash outgoing.
A correctly prepared, signed, authenticated Voucher, vouches for this. Moreover, in a few organisations, when the bosses show contempt for established processes in accounting, they pay no heed to these procedures and claim that they are born to break the rules. Under such situations, the accountant who processes the payment will be in a dilemma, since authorisation has been given a go-by. He may have to face a tirade from auditors after the boss concerned has left the organisation.
At the end of the day, the accountant may not get an accolade but can go home and squeeze a good night’s sleep, if he insists on authorisation.
Pillar no 3, Authentication, concerns the genuineness of the document/certificate or any other proof. When shell companies are being created, the numbers that crisscross in the final statements might have been created out of documents of doubtful authenticity.
The Satyam fraud shook the very foundations of evidence. The trail of the fraud is such that fake FD documents, receipts, were created, and everyone was made to believe that a cash mountain existed.
After the misdemeanours of scam-tainted Satyam came to light, other companies decided to flaunt their assets in the public domain.
soteric subjects such as ‘valuation’ seem particularly important now. Authenticity is a valid precondition for any right, whether it is mining or other asset.
The Authenticity concept has even pervaded our daily lives. Be it coffee/tea, gold, or a movie flick, everyone tom-toms the authenticity of the document, product and service.
Now comes Accounting for the event. This is the Fourth dharma. This is a field where there is a lot of scope for assumptions (critics say, assumption is the mother of all goof-ups).The time-tested double entry system ensures and establishes the parity between benefits received and given.
A lot of grey areas exist in the Accounting Pillar. We have a slew of standards, both home-grown and away, which try to bring in some sense to the assumptions. They also try to rein the accountant’s imagination, so that it does not run riot.
Because of the scope of arbitrariness involved, the Accounting Standards globally are on the path of convergence. India will shortly be enveloped in the International Financial Reporting Standards canopy, with domestic standards getting enmeshed into it. Despite the many limitations of the accounting system and its end product, it still continues to charm the stakeholders.
A plethora of legislation endeavours to bring in a lot of rigour into an otherwise judgmental and subjective realm to prevent unbridled misuse of the system.
This Quartet is going from strength to strength to make the accounting discipline and profession — from the Board rooms to the backyards of accounts department — transparent.
(The author is Director (Advanced Studies), Hyderabad Centre of Excellence, ICAI. Views are personal)
Source: Business Line