Regulatory and Economic Environment - Term Paper Example

Regulatory And Economic Environment India is considered the most populous liberal democracy of the world. It boasts of being an emerging superpower due to its tremendously fast growing economy. The standard of living is expected to rise greatly in recent years. I would be discussing the main influences in the regulatory framework and accounting practices of India in this report. These influences can be categorized in the following ways. The political and economic factor: India has a liberal-democratic political system. The prices, output, demand and supply are all decided in the market place. Though the government does not interfere in each and every aspect, it sets regulatory framework in a few aspects of the market place and corporate behavior. In fact a somewhat 'hand-on' approach is used in order to have a say in the economy by the government. The regulatory framework in India is to provide accounting information so that the government can execute planning and managing of corporate behaviours. All companies are expected to be honest about their accounting practices irrespective of how big or small they are. Types of business organizations: Roberts, Weetman and Gordon stated, "an important economic feature influencing accounting is the type of business organization that dominates the economy. Two features of business organizations are particularly important in helping to explain accounting rules practices: the complexity of business organizations the industrial structure of the country" (12). Keeping this in mind it can be stated that in India the business can be categorized into very large business houses, medium business organizations and very small businesses. There are many family-owned businesses too. Contrary to the popular belief the family-owned businesses in India are not always small. In fact the largest business house in this country is a family business. Hence the regulatory framework is based on the size of the business organization. There are few accounting regulations for smaller businesses and more complex regulatory frameworks for larger businesses as the larger the size; the more complex is the accounting practices. 70% of the Indian population is engaged in agriculture so a wider part of the regulatory framework focuses keep on this sector. In fact the implementation of the International Accounting Standard - IAS 41Agriculture can be attributed to the pressure from agriculturally rich countries like India. India is growing by leaps and bounds in technical sectors and foreign trade and investments. Many multinational companies have opened their doors to India. So accounting regulations are also issued in the interest of foreign currency transactions and translation. Legal factor: India operates largely on the common law legal system but incorporates religious laws too. According to Institutional Shareholder Services, "India's Companies Act has been in place since 1956 and sets out the current three-tier system of administration on the national state and regional level" (para.5). Main purpose of common law in this country is to protect the owners of the companies. "Indian code of governance does not recommend a separation of chairman and CEO positions nor do they mention compensation committees. However, with increasing interest from foreign shareholders, many larger Indian companies are adhering to practices recommended by the SEBI, which more closely resemble Western Standards." (Institutional Shareholder Services, para.16) Taxation factor: Many times tax rules in India are by default used for financial reporting system too. The companies try to resist accounting regulations that puts greater pressure on them in terms of tax liabilities. Therefore in the context of accounting practices; if there is any choice laid by the regulatory framework then the managers prefer to choose methods that guarantee reduction of their tax liabilities. Financial factor: India boasts of a financial sector, which is well developed and well regulated. This helps in achieving the efficient allocation of resources and access to financial products and services. The regulatory framework in this area is directed towards improving market efficiency, preventing unfair practices and enhancing transparency. In terms of modernization and technology, Indian stock market is one of the best in the world. Thanks to the regulatory framework directing cautious pace of capital account liberalisation India did not get much affected by the various internal and external setbacks. The cultural development should be given credit too. Saving habits are intact. The practice of investments and attitudes towards stock market trading has progressed. Accounting profession: The society considers this profession respectable in India. However there are not very good accounting and corporate standards. A more moral and ethical approach is required. Brokers manipulate prices of shares. A strict regulatory framework is required to check this menace. There is excellent cultural development in the country. The government has created a feel good factor towards India. Its importance in the global arena is accelerating. Investors are confidently investing in the Indian markets. The sensex and foreign exchange look positive too. In accounting and regulatory framework the societal culture development of India has influenced the accounting rules and practices as the values, attitudes, beliefs, thoughts and feelings of people of a particular culture affects the behaviour of the society on the whole and one of the outcomes of human behaviour is the accounting regulations and practices. Needless to say that the pace of cultural growth has made the picture brighter and it's the right time to remove the few shortcomings in the regulatory framework of the country. Accounting practices and regulatory framework of UK is no doubt one of the best in the world. Certainly it is a step ahead with that of India if we compare and contrast regulatory frameworks of the two countries. Standard of living is high too. UK has a parliamentary system of governance and is a constitutional monarchy. Unlike India a 'hands-on' approach is not followed. Instead there is free market approach that means the regulatory framework related to government control is applied to fewer aspects of economic activities when compared to India. Privatisation of companies is more acceptable in UK. Whereas in India there are times when, if companies under government control are proposed for privatisation, then they have to go through a lot of national uproar. The policies are more liberal in UK. The regulatory framework regarding the legal system is more consistent in India as there is no separate legal system for different states unlike the legal system of UK. UK on the whole follows one legal system, but due to historical reasons have certain separate regulations for states like Scotland, Northern Ireland and Wales. Certain laws, which are judge-made and passed down as a result of decisions taken in the courts, are considered to be applicable to the similar kinds of cases in the future in both the countries. Both the countries are excellent examples of common law legal system but UK deviates a little towards Roman law too in some minor instances. In the area of corporate governance there is a major difference in the regulatory framework. In UK the chairman and CEO is desired to be separate individuals in public companies. In contrast the case is just the opposite in India. The business organizations are not as much family businesses as that in India so the regulatory framework differs here greatly too. As far as tax laws and financial laws are concerned UK has separate rules concerning both the sectors but this is not always the same in India. In UK corporation tax is paid by companies and income tax is paid by unincorporated business houses. The tax system in UK is excellent. According to Harriss-White, " the absence of enforceable state regulation conforming to the standards of governance of global corporate capital has lured international (finance) capital into the fray as a regulator. It is international capital, rather than the State or labour, that is currently exerting the most active pressure to reform degenerate patriarchal, authoritarian and familial governance structures and non-compliant contractual behaviour at the apex of Indian capitalism" (101). Whereas recent developments have pointed out that there is emergence of a high degree of anti capitalist movement in UK. Needless to point out that there is bound to be contrast in the regulatory frameworks of both the countries in the light of their difference in viewpoints. The London stock exchange and its regulations are very good examples to be followed by the other stock exchanges of the world. The Indian stock exchange and its regulations are based on London stock exchange. So if we make a comparative study we find that regulatory framework in this area is more or less the same. Similarly the accounting practise in India is respected as a result of an approach that has been exported to the entire world from UK. India is one of the many countries, which either adopted or adapted the accounting system of this country. An important regulation in both the countries is that directors of companies, other than SMEs should always prepare accounts in accordance to the applicable accounting standards and be careful enough to explain departures if any. Since membership of the EU is a significant regulatory influence in the UK, India has got indirectly influenced too. Thus the conclusion of the report is that if we compare and contrast both the countries we find that one is the originating country while the other is a country that is carrying forward the tradition successfully in the context of the regulatory framework of accounting practises. Word Count: 1552 Works Cited Harriss-White, Barbara. India Working: Essays On Society And Economy. UK: Cambridge University Press, 2003. Roberts, Clare, Pauline Weetman and Paul Gordon. International Financial Accounting: A Comparative Approach (2nd Ed.). Great Britain: Pearson Education Limited, 2002. Corporate Governance Blog. 21 July.2006. Institutional Shareholder Services. 2 Nov. 2006. < http://blog.ISSproxy.com/2006/07/investors_press_for_reform_in.html.> Read More