The Hindu Business Line : Choice is off the records

AN INTERESTING and highly revealing aspect of the Indian versus Big Four accounting spat is that there is no mention of the role of the consumer. The primary consumers of the services of the accounting industry are the investors and lenders who put their savings in the equity and bond markets. Who serves them better: Indian firms or the Big Four? This is simply not an issue in the ongoing fight and that omission takes away much of the power of the holier-than-thou statements.

A detailed case against the Big Four has been presented by the spokespersons for Indian firms. In fact, people who know the system much better have written excellently on the subject. An example is The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America, by Alex Berenson, financial correspondent of The New York Times (Random House, New York, 2003) and Take on the Street: What Wall Street and Corporate America Don't Want You to Know, by Arthur Levitt, former chairman of the SEC (Pantheon Books, New York). So there is no need to go over these once again here.

What about the activities of Indian accounting firms? Is there any authoritative work on them? Unlike the Big Four, Indian firms do not publish annual financial reports. No significant compilation of the results of a scrutiny is publicly available, apart from occasional newspaper articles about specific auditor observations that focus on the clients rather than the auditors. The absence of such publications does not mean that these firms are squeaky clean. Indian scams surface with unfailing regularity, unlike the monsoon.

Any `Accounting 101' student would know that accountants could have blown the whistle on these scams, even if they could not have altogether prevented them. They could have helped fellow Indians take care of their lifetime savings by avoiding investment in shady companies. The 1992 securities scam was investigated by the Joint Parliamentary Committee, but it is still not clear which firms were involved and what action has been or is being taken.

You don't have to take the trouble of dusting up old newspapers that back, because there is a report about a new scam every other day. Try asking the common Indians man about what they think of auditors. Their responses would make you rue your fate for having asked that question.

To my mind, this entire debate should be about consumer choice: Will consumers become better off or worse off by employing international firms? The answer to that question should shape our response to the debate.

Size is important, because depending on the cost function of the accounting industry and of individual accounting firms, there may be scale economies and benefits from investments in the form of quality that can be passed on to the consumer (and in a competitive market these will be). At the same time, size can lead to problems if there is cartelisation by the big players.

So the argument finally reduces to the costs and benefits of competition versus consolidation.

A better approach would be to ask the Competition Commission of India to investigate into the alleged anti-competitive activities of accounting firms, and of course this should cover both Indian firms and international firms.

What should Indian accounting firms do now?

The simple answer is that they should consolidate and professionalise. Most Indian accounting firms are of uneconomic size and are run as extensions of their owners, rather than as professional organisations. Practices are frequently inherited.

Indian firms should think in terms of a series of sizeable mergers and acquisitions and become large practices before it is too late. That would enable them to compete effectively against one another as well against the Big Four and other international firms.

A large organisation can pay its employees and students better, invest in training, technology and research, and attract superior talent. That Indian accountants are among the most competent is proved by the fact that they have passed the CA examination, one of the most pitiless and competitive examinations of its kind in the world.

There is every reason to hope that they can form internationally competitive accounting firms, just as other talented Indians have formed some of the finest software, pharmaceutical and biotech companies. International accounting firms are brand names, just like brands in other industries. sIf those brands are not good enough, consumers will switch to better brands. If all goes well, one day in the near future we should be able to see the financial statements of Microsoft attested by a firm called KPMG (Krishnan, Patel, Mukherjee, and Gupta).

(Concluded)

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