Accountants & Accountabilities

13 April 2002

The Enron episode and 'event risk' did cast aspersions on Arthur Anderson on the one hand and, in an even more invidious manner, on the entire accounting and audit community, on the other - if media reports are to be believed. This is unfortunate and is part of the 'instant coffee' generalisation sweep / syndrome that now exposes the affected financial community to huge reputational risks; even if only a few rogue traders or accountants or one location-specific arm of a major global group had engaged in disreputable acts and activities. Anderson tried the Paul Volker (former Fed Chairman) approach to 'damage-limitation' but to little avail. Its consulting arm may yet succeed in disengaging itself from the ensuing demise, by ring-fencing its 'practice' and restoring its reputation gradually, but may well find itself on a long winding road!

In a more specific sense, what has been at issue is the comprehensiveness of the U.S. Generally Accepted Accounting Principles (Gaap) and its viability as a global benchmark for accounting standards. Another important consideration (or casualty) sacrificed at the altar of Arthur Anderson's possible demise, is the ability of accountants and auditors to self-regulate. This is perceived to be woefully inadequate at the crunch-time and the whole gamut of such self-regulation is best 'stress-tested' during situations such as now. In the eerie lull after Enron, the International Accounting Standards (IAS) have clearly stolen a march over U.S. Gaap for being more robust and reliable; although the latter two appellations are arguable.

Interestingly Patrick Smith in a comment in the Singapore Strait Times has said that the U.S.-listed corporate sector trails behind Asia; if measured in terms of compliance with reporting and accounting best practices. The Asian companies have had better habits than those at the top end of Nasdaq and S&P 500. So his rhetorical question is, "who ought to be learning from whom"?

He quotes from a research report published by CLSA Emerging Markets, that compares the relative merits of Asian and U.S. accounting standards and in particular, the comparison between the 'proforma' reporting of earnings with the U.S. Gaap and that under IAS. It was evident that the price earnings (P/E) ratios of leading Nasdaq companies were about 159 times the actual earnings!; whereas in the case of Asia, it was only 8.4 times the earnings. The inescapable conclusion from this being that the Asian companies had, in fact, understated their earnings by about 3.2%; whereas the Nasdaq companies had overstated it by some 206%. Not surprisingly, many Asian corporations choose not to adopt the U.S. Gaap but instead opt for the IAS.

It is in this context that the UAE has the advantage of starting out now, and anew; avoiding the mistakes made by others and introducing a workable self-regulation matrix. Mr. Mahendra Asher (who personifies the quintessential features of a reliable, well versed accountant) forwarded to me, a copy of Federal Law No. 22 of 1995 and the results of the recent members' survey by the Accountants & Auditors Association (AAA). Many polled recommendations are clearly unimpeachable; including (i) the adoption of the International Auditing Standards, (ii) asking all companies registered with the Ministry of Economy and Commerce, to submit audited financial statements, (iii) encouraging small audit firms to merge - so that they can invest in technology, training and good quality staff, for them to carry out their tasks deligently and with distinction, (iv) the large / Big 5 audit firms can jointly recruit and train local auditors (similar to the manner in which the law firms are currently doing so - particularly when it comes to appearing in the UAE courts for interpretation of the local laws and the Arabic text of which must prevail) and (v) the nationalisation of the profession that will obviously have to be a measured target; towards which progress will need to be made. Indeed many of these issues are and should be why and what associations are all about i.e. to further the common causes, professionally and properly. The AAA needs to entrench itself (in the minds of its members and) in the financial community that it caters to with greater conviction and clarity. It is too early to expect it to attain full credibility; given the much prevalent healthy cynicism and sharp comments as to the local practices and acceptance by the authorities and the industry.

It is therefore essential that the Ministry of Economy & Commerce, constitutes a specialist cell or an auditing boards' authority, which can serve as the regulatory body. Given the Enron & Anderson fiasco over shredding of email and other records, the regulations should mandate "central archiving of audit files" of public joint stock companies. Where the audit file notations and correspondence concern a wide body of shareholders, the auditors have a fiduciary role and accountabilities that go far beyond 'convenient document retention policies' within a firm, be it a Big 5 in (or out of) character!

The Anglo-Saxon influence on the accounting profession world wide comes out loud and clear in a November 2001 Accountancy article. It is believed that there are more accountants in the U.S., U.K., and the former British colonies (including Australia, Canada, India, Singapore) than anywhere else and more in Germany, France or the Eastern European countries. China is the only exception with a large body of some 129,000 members that belong to the Chinese Institute of Certified Public Accountants; although the U.S. leads the league table, with 335,000. The U.K. , with less than 1% of the world's population, has 13% of the accountants. But these numbers represent the aggregate membership of accounting and auditing bodies and not the actual number of qualified accountants in a country.

The accountancy profession is going to be where the education-intensive societies of China and India in this Century, will want to dominate. With its English language facility, the Indian professional class does have an edge. It is such respectable skills-based activities that will witness, going forward, jobs-creation on a massive scale, so as to absorb the escalating and aggravating unemployment problems in different parts of the world.

Should accountants and auditors be allowed to set and operate a self-regulatory mechanism? A good analogy would be to consider the parallel of stock market brokers who collectively own and run a few stock exchanges. The resultant conflicts of interests that come to the fore are immeasurable and as a body driven by members with commercial interests at risk, will find itself quickly weaving a 'tangled web'.

On the other hand, the brokers / auditors can bring and grasp considerable amount of industry-specific insights, that no bureaucrat, far removed from ground realities, can be aware of or accept. This gap is what can be bridged through the creation of an authoritative National Standards Board, with non-practising members and experts alike constituting an International Advisory Board, so as to bring in the best talent from different parts of the world; both from established organisations and individuals of repute.

Ultimately, in such matters, my view would be to favour adoption of a simple rule of thumb. Similar to playing football / soccer per global rules of the game (irrespective of whether you play in Stockolm or Singapore or Sharjah), one needs to operate under globally accepted minimum rules and referee-supervision. This globalisation is what will bring out the best talent to the fore in a disciplined manner. There is no need to reinvent the wheel in the regulation of cross-border or contemporary financial activities. While there can be some local nuances and flavour that need to be implanted as an overlay (more like icing on the cake), there is no need to recreate the work book / manual itself. On the other hand, the need is to enforce it rigorously and vigorously and with quality supervision, which should then distinguish the well governed from the ill smitten regimes. This in itself, will improve the transparency and the credibility of the accounting profession. Auditors and accountants will then be regarded as a cut and class above the rest. This will serve to enhance their role as being the true watchdogs and conscience of the community; without necessarily having to be blood-hounds on the one hand or poodles on the other, wagging their tails and mouths, in any arbitrary direction - if I may continue with my canine analogies!

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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