Corporate Governance and Systems of Control in a Transitional Economy - Essay Example

?International Developments in Accounting Introduction The system and practice of accounting has earned far-flung development from the traditional period in the international context. Practices in accounting and financial reporting differ from one economy to another depending on the needs of the users of accounting information (Nobes and Parker, 2004). To trace the development of such systems and practice, which helped in the emergence of modern accounting system the case of an emerging economy, India is presented. In order to trace the development of accounting standards and systems firstly the focus is given on the historical and traditional accounting structure of India. The historical development of accounting in India can be mainly traced along three period viz. before the colonial era, during the colonial era and in the postcolonial period. Pre-colonial period in India dates back to the time of Mohenjo-Daro and Harappa civilizations where the functions of commerce and trade started flourishing on a gradual scale. In these periods the accounting practice depended on a system of bookkeeping originally prevalent in Greece. Further documentary evidence of historical accounting systems can be found in the Smritis, which contained rules, and regulations of partnership dealings. With the emergence of the Chandragupta Empire the practice of accounting system earned huge focus with the works of Kautilya or Chanakya. Kautilya developed the treatise of ‘Arthashastra’, which depicted the different rules, regulations, and ethical conducts of accounting practices. However with the emergence of the British colonialists, India started becoming the home ground for rapid industrialization wherein the accounting systems became more scientifically treated to meet the complex industrial and trade demands (Hopwood & Chapman, 2008, pp.1399-1400). Colonial and post-colonial India became filled by many small groups of industries, which generally maintained records based on conservative and traditional practices. These industries generally did not feel the urge to maintain large sets of accounting records for business purposes and thus relied on traditional practices like ‘Single Entry Book Keeping’ (Mukherjee & Hanif, 2003, p.22.1). Traditional Accounting Systems in India The accounting systems in use in India during the traditional period were systematic and laid main focus on the receipt and payment system. Furthermore the practice of accounting was not conducted in an isolated manner but served a continuity of different periods. The period for which the accounts were developed varied along daily, weekly, bi-weekly, monthly or for annual periods. However in such systems the monetary transactions were not carried forward from one period to another. Separate heads were created for different nature of accounts maintained and strict governance was maintained depending on timing deadlines. Further for each of the separate transactions conducted a written record was mandatorily maintained which was produced on request. The person responsible for the keeping and maintenance of such accounting records also conducted separate audits to verify their authenticity (Sarkar, 2003, p.248). The practice of accountancy in Indian context can also be studied along the system of bookkeepings, which were prevalent in the accounting practices. The system of bookkeeping refers to the style of maintaining and recording of financial transactions under the separate books of accounts. Book keeping systems maintained in the Indian context contained of four different types of practices viz. Cash, Single Entry, Indian and Double Entry. The ‘Cash System’ of maintaining records of financial transactions is carried out in those concerns where sales and purchases are conducted only on the basis of cash. Here in case of credit transactions they are accounted at later periods when met in cash. Moreover the ‘Cash System’ of financial book keeping also depended on the maintaining of revenue and expenditure accounts to check the position of revenue incurred and expenditure made. The ‘Single Entry’ system of maintaining financial records does not account separately for personal accounts for debtors or creditors. Rather they are prepared in a consolidated fashion with cash transaction records. Further all other intricate accounting features like maintenance of real and nominal transactions are not catered for which tends to produce inaccurate results relating to business profits and loss measured along specific financial periods. Thirdly the ‘Indian System’ used by the Indian accounting system focuses on a very traditional form of accounting practice as framed in the Arthashastra written by Kautilya. The system takes into account both the cash and credit financial transactions and records them simultaneously in books of accounts. The revenue and expenditures are methodically accounted in this accounting system, which helps, in the proper computation of revenue and loss at the close of financial periods. Moreover the assets and liabilities of the firm are also properly evaluated to produce the Balance Sheets at close of financial year. Finally the ‘Double Entry Book Keeping System’ also used in the Indian book keeping system both in the traditional and modern context mainly divulges into dividing the financial transactions based on dual aspects. Thus each of the financial transactions conducted reflect in the books of accounts either in debit or credit forms. The system of debiting and crediting books of accounts depending on nature of transactions helps the accountant to easily compute the profit and loss incurred at various levels. This information is then used to prepare and maintain specific accounts like ‘Profit and Loss Accounts’. Further this system also maintains balance sheets of the company at the end of financial periods (Mittal & Jain, n.d., p.4.2; Kulkarni & Mahajan, 2008, p.1.12). Development of Accounting Systems in India Vishnugupta Chanakya Kautilya was credited with the systematization of the accounting systems in India. The Arthashastra written by Kautilya covered three areas mainly – “national security and foreign policy, administration of justice, rules governing economic development, taxation and accounting” (Hopwood & Chapman, 2008, p.1400). It made four key contributions. It developed the modern accounting doctrine. It underlined the scope and approach to accounting along with the processes of dealing with “false accounting”. The work comprised of codes, which indicated financial rules and develop a framework to help in the decline in conflicts of interest, which forms the basis of the practice of auditing. Finally, the book mentions the ethics of accounting practices and the significance of the same in the field of accounting. The author showed here that accounting was related to the macroeconomic practices and an accounting system was developed for revenues, expenditures and cash flows. Kautilya advised a two-winged system of governance. The treasurer was supposed to mange the assets and the records were to be maintained by the comptroller (Hopwood & Chapman, 2008, p.1400). Thus a difference between duties and responsibilities was outlined. A characteristic unique to Indian way of accounting amongst the mercantile group was the application of accrual method of accounting where income is acknowledged by the use of cash flow system and expenditures through an accumulation method for expenditure accounting. The accounting systems of India subsequent to the formation of Accounting Standards in the International level underwent some key changes. The committee for the accounting standards practiced in the international plane also helped in the creation of bodies for the maintenance of accounting standards in India. During 1977, the body of Charted Accountants in India formed the board for maintenance of accounting standards. The creation of the board helped in the harmonization of the different accounting policies and practices used in regional level in India. This board helps in the regulation of accounting practices through the issue of regulations depending on key changes in the legal, economic and social system of the country (Tulsian, 2006, p.2.8). Besides the development of the body of accounting standards the opening up of the economic systems of the country helped many companies and economies to start trading with the Indian companies. This also catered to the development of accounting practices in the country, which were gradually being based on international standards. Even before the 80s, many firms in India published reports within some financial statements but managed to hide the real facts from the world. Thus they even dishonored the lawful requirements. There were only some companies like ITC Limited, and the Tata Group, which revealed the true figures. The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India issued compulsory account statements in 1991 owing to the altering economic policies. India has always aimed at making its system of accounting acceptable at the international level (Tsamenyi, 2009, p.293). The international body of accounting standards developed observed that the countries of the world have different sets of methodologies pertaining to the maintenance, regulation and interpretation of accounts. Thus the body of international accounting standards devised accounting regulations to harmonize the accounting rules, which also catered to the development of accounting practices (Roberts, Weetman & Gordon, 2008, pp.6-7). In India another significant factor, which led to the development of accounting practices, was the growth of industries. The advancement of the industrial environment in the country triggered the need for change in the auditing and accounting practices in the country. Practice of auditing countered heavy changes owing to the complexity of the industrial climate, which required the development of systematic and scientific approaches in dealing of such. Moreover the development of separate ownership patterns of the Indian industries also brought about changes in the accounting practices. The ownership patterns of the Indian industries emerged as three different forms viz. government or state controlled, private and joint. The development of these ownership patterns also happened to create new forms of accounting practices. Further the development of Information Technology and the extensive use of such in the business processes of the companies also amount to the change brought about in the accounting practices. The accounting systems are now prepared in a totally computerized environment which require the creation of new audit and accounting methods for the proper evaluation of such (Gupta, 2004, pp.5-6). Moreover in addition to financial accounting the development of other accounting streams in India like Cost and Management Accounting also depend on certain factors. The Cost Accounting systems gained popularity in India after the event of the Second World War. Development of newer and synchronized manufacturing and industrial systems required the introduction of cost accounting practices in India. Modern sophisticated industries required bringing about economies of cost in their production practices. This was mainly to maintain the competitive position in regards to the global economy. Thus the Cost Accounting practices introduced helped the large companies to compute the cost in the different stages of the production system, which was taken as an innovative approach (Banerjee, 2006, pp.17-18). India is gradually moving towards an adoption of modern accounting techniques like the balanced scorecard and ABC (see appendix). This change in the field has come across due to more than one reason. As outsourcing activities are popularized, India is emerging as a potential economic partner and the firms are compelled to improve upon their productivities and performance assessment systems. The joint ventures undertaken at the global level have led to the circulation of the modern and refined techniques in accounting. The curriculums of management colleges have exposed the students to these superior techniques in order to equip them better in terms of seeking a job. Indian Institutes of Management and Indian School of Business are examples of some institutions, which have employed a set of both visiting and permanent faculty trained or educated from the developed nations of the west and therefore increasing the process of imparting the knowledge of modern accounting techniques to the students. (Hopwood & Chapman, 2008, p.1409) Concluding remarks and Recommendations The advent of outsourcing gives birth to an array of problems related to control and incentives. The way of managing outsourcing functions in India and different measures of performance and control frameworks might help reduce the opportunity costs and make sure that the benchmark of performance are met. This area is interesting to the researchers of management accounting to unravel. An area of future research entails finding the different performance measures used by a firm which outsourcing abroad instead of doing the same within the same nation. It might also be important to trace the influence of ownership types on corporate governance and systems of control in a transitional economy like India (Hopwood & Chapman, 2008, p.1409). The Indian Accounting Standards Board (IASB) has been contemplating the merging of company law in India with International Financial Reporting Standards (IFRS) from 2011. Also, in this era of information technology attention needs to be paid to govern the online companies and regulate them to produce finance statements. Any delay in this convergence might make its position weak on the global front (CNBC-TV, 2010). Though most of these companies operate at small scale, the government needs to gradually work in this area and make them bound to produce their statements on annual basis. References 1. Hopwood, A. & C. Chapman (2008), Handbook of Management Accounting Research, Elsevier. 2. Mukherjee & Hanif (2003), Financial Accounting, Tata McGraw-Hill. 3. Sarkar, K. (2003), Public Finance in Ancient India, Abhinav Publications. 4. Mittal, R. & A. Jain (n.d.), Accountancy, FK Publications. 5. Kulkarni, M. & S. Mahajan (2008), Management Accounting, Nirali Prakashan 6. Tulsian (2006), Financial Accounting, Tata McGraw-Hill. 7. Roberts, C., Weetman, P., & P. Gordon (2008), International Corporate Reporting: A Comparative Approach, FT Prentice Hall. 8. Gupta (2004), Contemporary Auditing, Tata McGraw-Hill. 9. Banerjee, B. (2006), Cost Accounting Theory And Practice, PHI Learning Pvt. Ltd. 10. CNBC-TV, (2010), “What if India delays IFRS convergence?”, Money Control, Available at: http://www.moneycontrol.com/news/management/what-if-india-delays-ifrs-convergence-_502377.html (accessed on March 5, 2011) 11. Tsamenyi, M. (2009), Accounting in emerging economies, Emerald Group. 12. Nobes, C. & R.B. Parker, (2004), Comparative International Accounting, Prentice Hall. 13. Geense, I.M. (2005) Balanced Scorecard, available at: http://www.google.co.in/imgres?imgurl=http://www.managerialaccounting.org/Balanced%2520Scorecard%25202.jpg&imgrefurl=http://www.managerialaccounting.org/Balanced%2520Scorecard.htm&usg=__4Ljms3NjEFg0GdDZgKj8kb4J044=&h=552&w=472&sz=85&hl=en&start=5&zoom=1&tbnid=0ERsOTzOorQjBM:&tbnh=133&tbnw=114&ei=GJZyTZ30BovRrQfV4oXTCg&prev=/images%3Fq%3Dbalanced%2Bscorecard%2Baccounting%26um%3D1%26hl%3Den%26sa%3DN%26tbs%3Disch:1&um=1&itbs=1 (accessed on March 5, 2011) 14. Chapter 20:Process Costing and Activity-Based Costing, (n.d.)Principles of Accounting, available at: http://www.google.co.in/imgres?imgurl=http://www.principlesofaccounting.com/ART/c20art/aabcsummary.jpg&imgrefurl=http://www.principlesofaccounting.com/chapter%252020.htm&usg=__gcC4XjsKWqEHNXvzCrRF3nA-Vwg=&h=475&w=741&sz=134&hl=en&start=1&zoom=1&tbnid=dyB5QoZ1BgKPFM:&tbnh=90&tbnw=141&ei=3ZZyTcjJFcftrAfZ5vzSCg&prev=/images%3Fq%3Dabc%2Baccounting%2Bsystem%26um%3D1%26hl%3Den%26sa%3DN%26tbs%3Disch:1&um=1&itbs=1 (accessed on March 5, 2011) Appendices. Balanced Scorecard (Geense, 2005) How to develop an ABC (Activity Based Cost) Technique of accounting (Chapter 20:Process Costing and Activity-Based Costing, n.d.) Read More