PROTECTIONISM & PROFESSIONALISM IN THE SERVICE SECTOR

'Globalization' has become a convenient catch phrase for some; to be used selectively when it suits their interests – only to hasten and take cover at other times under the protectionist garb i.e. when it doesn't cater to self-interests.

An interesting case in point is the accounting and audit profession in India. The Indian Institute of Chartered Accountants  is a distinguished body with some fine minds. They have embraced the underlying spirit and substance of International Accounting Standards (IAS) and the U.S. GAAP and have blended and customized them to evolve best practices, good codes of conduct and ethos of professionalism and ethical conduct among its members. In recent years, the Institute has also ventured abroad, not merely to conduct examinations or for oversight of alumni but also to promote their credentials and image and to make a contribution to global debates, be they about corporate governance, financial disclosure / transparency etc.

It is therefore, all the more surprising that the Institute has chosen to wear the garb of protectionism at home. Obviously, there are pros and cons in allowing international audit firms (such as the Big Four) unfettered / free and full access to the Indian market. Many will loathe to give up on carefully nurtured corporate businesses and hand them over on a platter, to the overseas-based new entrants to the market place; merely because the businesses have gone global and need international accounting firms.  Besides, this may not be in the interests of its members and therefore, opposition, understandably, is developing fast and furious, about the onslaught of the global accounting firms (KPMG, Ernst & Young, Pricewaterhouse Coopers and Deloitte & Touche). The debate has developed an emotional rancour and thus less reasonable! Clearly, as India becomes a major financial and business hub and part of the BRIC [i.e. one of the top four economies of the world, in the next fifty years, if  Goldman Sachs' predictions and forecast for Brazil, Russia, India and China (BRIC)  are to be realized],  the country cannot afford to think  and act strictly "local", and yet want a share of the international pie in other matters where the Indian MNCs are making a foray.

The residual protectionist attitude is natural and sensitive,  given that India has had over fifty years of overbearing socialism, which converted the economy into an obstacle race in terms of market access and barriers. Some international accounting firms such as KPMG that went into India, do employ a few thousand professionals directly or indirectly, and who are recruited from the Institute's membership. Therefore, job opportunities are clearly immense and growing.   The Institute should therefore, help grow the cake than be obsessed with cutting the existing loaf / pastry. Sadly, it cannot have the cake and eat it too!

There is certainly a case to be made out that the Indian accounting profession can and should emulate the example of the Indian software professionals and actually export their skills, in an organized, institutional / corporate basis as opposed to merely seeking  employment; in the main.  They can for instance, scope out good quality in financial advice, accounting, audit and assurance practices and these can be honed to be on par with the best in the world.

It is unfair to accuse, as some have done, the Big Four of involvement in corporate scandal such as Enron, Tycos etc. The Big Four are a little bit like the oil majors and other MNCs that do overlook  sharp practices in some parts of the world.  True, they are also quick to disown upon discovery and move on.  For instance, KPMG in the U.S. recently, was forced to drop some of its tax planning / avoidance products.  Similarly, audit and advisory activities do cause conflicts of interest and the Management and shareholders of client companies are ill-served by co-mingling them instead of having them fully and fairly addressed, segregated and resolved. In all these cases, perception is as much of a problem as reality and materiality. It is true, that in the U.S. and in the West, the heat has been turned, in full measure, on the audit firms. To an extent, the surveillance and segregation of audit and consulting tasks is less rigorous in emerging markets and there is dilution in the quality of assurance work per se.  Potentially, a major share of the business is now accruing in the emerging countries, be it India, China, Brazil, Russia, Indonesia and the like.

Given the rise of protectionism globally, possibly as a backlash to free markets foray, the accounting and audit firms need to tread very carefully. They need to be supportive of businesses in the countries they operate in, bringing global best practices into play in each of the assignments that they undertake and ensure that they contribute consistently to the nurturing of the markets.

For instance, the Big Four accounting firms can set up special training institutions and run free seminars for the young accountants that graduate through the portals of the Institute(s). These are the areas where a perceived discharge of corporate / social responsibility will minimize this mixed bag of accusations and mud-slinging, even if they stem from envy and greed.

In India, the Institute cannot embrace the 'Swadeshi' (a 'Nationalist' movement, not very different from the Bhumiputra, localization and other forms of protectionism) and yet when their overseas members are made to feel less welcome or recognized in overseas markets, they bristle with seething anger.  All  growing economies, in their embryonic stages,  do require some forms of protectionism. But in India, this sine qua non is hardly justifiable after fifty years of independence. Some of these crutches will have to be gradually and gently removed. Software firms do not have any such protectionism nor do the banks or industrial firms, excepting through entry barriers. Even these will disappear gradually under the WTO's action plan. Therefore, service sectors can and should aspire to become as good as their global counterparts; and their predicament is similar to that of manufacturers who are coping with competition cropping up as tariffs, that are gradually dismantled.

Some protectionism may also be in the interests of smaller firms, the minorities and all those that do not have the muscle, expenditure, the scale of operations or current profitability, to take on the big ones in competition. Mahathir once described this syndrome and said that "Malaysia is good at badminton or athletics, but opening up financial markets is akin to asking the Malaysians to play American baseball and beat the U.S. They have never played the game, nor do we have the strength, height or reach advantages that are necessary to excel in such games as baseball, football, basketball and volleyball" Therefore, laissez faire prematurely may not translate into level playing fields. 

No one grudges some form of protectionism, unless it is a vice-like grip or blanket bans. The Institute for instance, cannot indefinitely expect foreign accounting firms like KPMG not to use their brand names when they solicit business in India. It is true that when  they were initially established, they set up local accounting firms such as Raut & Co. But retaining such hurdles prove counter-protective and counter-productive in the long run, and may only encourage evasion and chicanery. 

Another recommendation of the Institute is that every three to five years, there should be a rotation of auditors by public companies. This is arguably destablising and such things are best left to the corporate  sector, not regulated but enforced through a voluntary code of conduct. There is certainly a plausible case that long tenure audit arrangements lead to cosier relationships. Besides, there is always a need for a fresh breath of air and new perspectives. Reviews by new auditors can discover flaws and some credence. It would be best however,  that these are  not legislated or mandated but achieved through an internal "challenge" process in each case. Besides, shareholder education (which the big firms can contribute and arrange) will eventually ensure that turf protection practices are discouraged or  frowned upon by stakeholders.

Ultimately, accounting and audit firms are also in business, not in philanthropy and are naturally profit-orientated. It is when corporate greed factors take hold, that they need to be curbed and opportunities / temptation diminished.  One would have thought that in the professional segment, this can be achieved by 'naming and shaming'. Regrettably, professionals and entities do rise as Phoenix from the ashes of their former self, in some cases by shedding names that developed dubious connotations or poor past track record. They then vigorously 'network' to regain market share.  While professionalism and protectionism are not incompatible per se, they ought not to assume dimensions that  impede progress or orderly growth in any  economy.

The author is General Manager of Emirates Bank.  However, the views expressed in this article are not necessarily shared by the Bank.

Back

Top