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A PROJECT REPORT

ON

INDIAN ACCOUNTING AND INTERNATIONAL


ACCOUNTING STANDARD

FOR THE PARTIAL FULFILLMENT OF MASTER IN

BUSINESS ADMINISTRATION

SUBMITTED BY:
SUBMITED TO:

PRAKASH K. SUTARIA (09M29)


DR. ASHISH MEHTA
SANJAY K. DAMOR (09M37)

G.H.PATEL PG INSTITUTE OF BUSINESS MANAGEMENT,

SARDAR PATEL UNIVERSITY, VALLABH VIDYANAGAR,

ANAND
PREFACE

In the globalization age, corporate sector of the country has to grow


rapidly for which every industry needs finance to stand in highly competitive
market for day to day requirement modernization and further expansion.

This project report is submitted as a partial requirement for complete of


managerial accounting subject undertaken by us. Knowledge about practical
implication of management skills is very important in any corporate. This
subject has helped us to gain the knowledge about accounting system of Indian
as well as accounting system in international.

The project report contains details about all the internal accounting
system and Indian accounting system and what is the difference between in
different aspects. Also we can understand the how it can benefit for us to
prevailing accounting system and how it functions in global scenario.

G.H.PATEL PG INSTITUTE OF BUSINESS MANAGEMENT, VALLABH VIDYANAGAR, ANAND. Page 2


ACKNOWLEDGEMENT

Knowledge is itself a continuous process. But at this moment of our


substantial enhancement we find no words to express my gratitude to those
who had helped me directly or indirectly in making this report a success. We are
indebted and thankful for the assistance received from various individuals. To
have such an opportunity to learn something in such a big organization is
overwhelming. We are extremely fortunate to get educate in such a big
organization.

We express with a deep sense of gratitude our indebt to our Prof. Ashish
Mehta who gave us his kind permission not only to have a learning platform in
“Managerial Account-1.” but also for giving us a chance to show our capabilities.

We would like to thank for provide us his preeminent and precious support
in completion of this report without his support, this project report wouldn’t
have shaped up the way it was.

We are greatly thankful to our parent, seniors, friends and colleagues for
their kind and constant inspiration and loving support through many days when
they wondered where the priorities lay.

PRAKASH K. SUTARIA
SANJAY K. DAMOR

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INDEX

1. Introduction - Indian and International Accounting Standards & Practices

2. Objectives of the study


3. Accounting standards prevalent all across the world
4. Issues in adopting global accounting standards
5. International Harmonisation of Accounting Standards
6. The current status of IAS (Indian Accounting Standards)
7. A significant criticism of IAS

8. Restatement to US GAAP
9. Indian accounting standards - a perspective
• Rationale of Accounting Standards
• Accounting Standards-setting in India
• Composition of the Accounting Standards Board
• The Accounting Standards-setting Process
• Present status of Accounting Standards in India in harmonisation
with the International Accounting Standards
10. International Accounting Standards
11. Objectives of international accounting standard
12. Importance of international accounting standards
13. A Short Summary of IAS 1 through IAS 41
14. disadvantages of an international harmonization of accounting:
15. Current Problems in Accounting and Auditing
• Standards Setting

• Auditor Independence

• Corporate Governance

• Market Forces:

• Solutions:

16. Conclusion
17. Bibliography

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Indian and International Accounting Standards & Practices

Introduction:
Accounting Standards are used as one of the main compulsory regulatory
mechanisms for preparation of general-purpose financial reports and
subsequent audit of the same, in almost all countries of the world. Accounting
standards are concerned with the system of measurement and disclosure rules
for preparation and presentation of financial statements. They appear with a set
of authoritative statements of how particular types of transactions, events and
other costs should be recognized and reported in the financial statements.
Accounting standards are devised to furnish useful information to different users
of the financial statements, to such as shareholders, creditors, lenders,
management, investors, suppliers, competitors, researchers, regulatory bodies
and society at large and so on. In fact, such statements are designed and
prescribed so as to improve & benchmark the quality of financial reporting.

The rapid growth of international trade and internationalization of firms,


the Developments of new communication technologies, the emergence of
international competitive forces is perturbing the financial environment to a
great extent. Under this global business scenario, the residents of the business
community are in badly needed of a common accounting language that should
be spoken by all of them across the globe. A financial reporting system of global
standard is a pre-requisite for attracting foreign as well as present and
prospective investors at home alike that should be achieved through
harmonization of accounting standards.

Accounting Standards are the policy documents (authoritative statements


of best accounting practice) issued by recognized expert accountancy bodies
relating to various aspects of measurement, treatment and disclosure of
accounting transactions and events As relate to the codification of Generally
Accepted Accounting Principles (GAAP). These are stated to be norms of

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accounting policies and practices by way of codes or guidelines to direct as to
how the items, which go to make up the financial statements should be dealt
with in accounts and presented in the annual accounts. The aim of setting
standards is to bring about uniformity in financial reporting and to ensure
consistency and comparability in the data published by enterprises.

Objectives of the study


The Paper is presented with the following objectives:
1. To understand the various Accounting standards that exit as of now, and
the governing bodies of such accounting standards.
2. To understand the significance of harmonizing global accounting
standards.
3. To understand the issues in globalizing the accounting standards.

Accounting standards prevalent all across the world:


• Accounting standards are being established both at national and
international levels. But the variety of accounting standards and principles
among the nations of the world has been a sustainable problem for
globalizing the business environment.
• There are several standard setting bodies and organizations that are now
actively involved in the process of harmonization of accounting practices.
The most remarkable phenomenon in the sphere of promoting global
harmonization process in accounting is the emergence of international
accounting standards.
• The International Accounting Committee (IASC), now International
Accounting Standards Board (IASB) was formed on 29th June 1973, by
the recognized professional accounting bodies in Canada, Australia,
France, Japan, Germany, Mexico, Netherlands, United Kingdom and the
United States of America, with its secretariat and head quarters in
London.

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• National standard setting bodies like Financial Accounting Standards
Boards (FASB) of USA, Accounting Standards Boards (ASB) of UK, and
Indian Accounting Standards (IAS) in India generally frame accounting
standards in the line of IASC after due consideration of the local laws and
conditions.
• In India the Accounting Standards Board (ASB) was constituted by the
Institute of Chartered Accountants of India (ICAI) on 21st April 1977 with
the function of formulating accounting standards.

Do we need to harmonize the accounting standards of different bodies?


Different companies observe it from published annual accounts of various
Indian companies that there are divergent accounting practices for the same
transaction. This in effect is defeating the comparability of financial statements.
The reasons for the different accounting practices may be:
a) Too many alternative accounting treatments in the accounting standards;
b) Lack of harmony among government, standards setting body, and
regulatory agencies;
• Adoption of different accounting standards causes difficulties in making
relative evaluation of performance of companies. This phenomenon
hinders the valuation and consequently the decision making process.
• To overcome these problems, harmonization of accounting standards has
already been started. Accounting harmonization is not an end by itself,
but it is a means to an end. The ultimate objective of harmonizing
accounting practices among countries is to foster international
comparability of accounts.
• But still the harmonization process has a long way to go. Many standard
setting bodies and regulators of different nations are ardent protectors of
their local standards; they are in no mood to allow their job being taken
over by a foreign entity.
• Thus winning the consent of these bodies is vital for international
accounting standards to don the mantle of common accounting code, i.e.

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harmonization of common accounting standards, which will make
implementing countries more competitive internationally.
• Accounting standards vary from one country to another. There are various
factors that are responsible for this. Some of the important factors are
a) legal structure
b) sources of corporate finance
c) maturity of accounting profession
d) degree of conformity of financial accounts
e) government participation in accounting and
f) Degree of exposure to international market.
Diversity in accounting standards not only means additional cost of
financial reporting but can cause difficulties to multinational groups in the
manner in which they undertake transactions. It is quite possible for a
transaction to give rise to a profit under the accounting standards of one
country where as it may require a deferral under the standards of another.

When a multinational company (MNC) has to report under the standards


of both the countries it might lead to some extremely odd results. For instance,
Daimler Benz, who was the first German to secure stock market listing in the
United States, reported a net profit of DM 158 m for the six months to June
1998 based on German GAAP. The U.S GAAP reconciliation statement revealed
that the company had incurred a loss of DM. 949m.

Similarly, British Telecom Inc. reported a net profit of £1767 for the year
ended 31-3-1994 under the UK GAAP but under the US GAAP reconciliation- the
net profit reduced to £1476.

Although there are different solutions that have been suggested to resolve
the problems associated with filling financial statements across national
boundaries like reciprocity and reconciliation, but they not free from limitations.
International accounting standards serves the purpose of reducing diversity in

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accounting practices but invites qualitative differences of financial accounting
and reporting systems.

Again these qualitative differences may be removed if a single set of


internationally accepted standards can be used for all cross-border listed
financial statements. These differences may be reduced if the recognized
professional accounting bodies of the world arrange a happy marriage between
the national and international accounting standards.

Issues in adopting global accounting standards:


There seems to be a reluctance to adopt the International Accounting
Standards Committee (IASC) norms in the US?

This is definitely a problem. The US is the largest market and it is


important for IASC standards to be harmonized with those prevailing there. The
US lobby is strong, and they have formed the G4 nations, with the UK, Canada,
and Australia (with New Zealand) as the other members. IASC merely enjoys
observer status in the meetings of the G4, and cannot vote. Even when the
standards are only slightly different, the US accounting body treats them as a
big difference, the idea being to show that their standards are the best. We
have to work towards bringing about greater acceptance of the IASC standards.

How real is the threat from G4?


G4 has evolved as a standard setting body and has recently issued its first
standard on pooling of interest method. (Mergers can either be in the nature of
purchase or in the form of pooling of interest like HLL-BBLIL). It is also
expected to publish new or revised papers on reporting financial performance,
business combinations, joint ventures, leases, and contributions. So far, the
FASB (the US standard setting body) was the world's standard setter because of
mandatory compliance with US GAAP for listing on the New York Stock

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Exchange (NYSE). The US congress had to, however, step in and overrule the
FASB standard on stock option.

International Harmonisation of Accounting Standards

Recognising the need for international harmonisation of accounting


standards, in 1973, the International Accounting Standards Committee (IASC)
was established. It may be mentioned here that the IASC has been
reconstituted as the International Accounting Standards Board (IASB). The
objectives of IASC included promotion of the International Accounting
Standards for worldwide acceptance and observance so that the accounting
standards in different countries are harmonised. In recent years, need for
international harmonisation of Accounting Standards followed in different
countries has grown considerably as the cross-border transfers of capital are
becoming increasingly common.

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The current status of IAS (Indian Accounting
Standards):
In India, the Statements on Accounting Standards are issued by the
Institute of Chartered Accountants of India (ICAI) to establish standards
that have to be complied with to ensure that financial statements are
prepared in accordance with generally accepted accounting standards in
India (India GAAP). From 1973 to 2000 the IASC has issued 32
accounting standards. These standards, as a matter of fact, most of the
countries in the world, which are interested, and confidence in adopting
these standards may be followed. But it is observed that many countries
are not adopting the standards in the presentation of accounting
information.

With a view to examine the time gap for indenisation of


International Accounting Standards, the information is analyzed and
presented in Annexure - I. The table shows that the average gap for
indenisation of International Accounting Standards is 6.13 years. It shows
that for adopting IAS in India, it is taking 6.13 years for one accounting
standard. This analysis points out the poor research work, and
development in the accounting field.

A significant criticism of IAS;


• That the standards are too broad based and general to ensure that
similar accounting method is applied in similar circumstances. For
Instance, the accounting for expenses incurred under a Voluntary
Retirement Scheme ( VRS),in which the methods used range from
pay-as-you-go to Amortization of the present value of future
pension payments over the period of benefit.
• It may be noted that in several important areas, when the Indian
Standards are implemented, the accounting treatment in these

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areas could lead to differences in the restatement of accounts in
accordance with US GAAP. Some of these areas are:
 Consolidated financial statements
 Accounting for taxes on income
 Financial Instruments

 Intangible Assets

Restatement to US GAAP:
A restatement of financial statements prepared under India GAAP to
U.S. GAAP requires careful planning in the following areas:
 Involvement of personnel within the accounts function and the time
frame within which the task is to be completed.
 Identification of significant accounting policies that would need to be
disclosed under U.S. GAAP and the differences that exist between
India GAAP and U.S. GAAP
 The extent of training required within the organisation to create an
awareness of the requirements under U.S. GAAP
 Subsidiaries and associate companies and restatement of their
accounts in conformity with U.S. GAAP
 Adjustment entries those are required for conversion of India GAAP
accounts.
 Reconciliation of differences arising on restatement to U.S. GAAP in
respect of income for the periods under review and for the
statement of Shareholder's equity.

The timetable for restatement of the financial statements to US


GAAP would depend upon the size of the company and the nature of its
operations, the number of subsidiaries and associates. The process of
conversion would normally take up to 16 weeks in a large company in the
initial year. It is thus necessary to streamline the accounting systems to
provide for restatement to U.S. GAAP on a continuing basis. At first sight

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the restatement of financial statements in accordance with U.S. GAAP
appears to be formidable.

However, as the Indian accounting standards are built on the


foundation of international accounting standards, on which a truly global
GAAP might be built, there is no cause for concern. Another reason for the
prevailing divergent accounting practices is the Accounting Standards; the
provisions of the Income Tax Act 1961 and Indian Companies Act 1956 do
not go together.

(a) Company law and Accounting Standards:


In India, though accounting standards setting is presently being
done by ICAI, one could discern a tentative and half hearted foray by
company legislation in to the making of accounting rules of Measurement
and reporting. This action by itself is not the sore point but the failure to
keep pace with the changes and simultaneously not allowing scope for
someone else to do it is disturbing.

A study of the requirement of company law regarding the financial


statements reveal several lacunae like earning per share, information
about future cash flows, consolidation, mergers, acquisitions etc.

(b) Income Tax Act and Accounting Standards:


The Income Tax Act does not recognize the accounting standards
for most of the items while computing income under the head "Profits &
Gains of Business or Profession". Section 145(2) of the I.T. Act has
empowered the Central Government to prescribe accounting standards.
The standards prescribed so far constitute a rehash of the related
accounting standards prescribed by ICAI for corporate accounting. On a
close scrutiny of these standards one is left wondering about the purpose

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and value of this effort. Examples are application of prudence substance
over form, adherence to principles of going concern etc.

(c) Other regulations and accounting standards:


In respect of banks, financial institutions, and finance companies
the Reserve Bank of India (RBI) pronounces policies among others,
revenue recognition, provisioning and assets classifications.

Similarly the Foreign Exchange Dealers Association (FEDAI)


provides guidelines regarding accounting for foreign exchange
transactions. Since the Securities & Exchange Board of India (SEBI) is an
important regulatory body it would also like to have its own accounting
standards and in fact, it has started the process by notifying cash flow
reporting format.

It is also in the process of issuing a standard on the accounting


policies for mutual funds. It appears as if several authorities in our
country are keen to have a say in the matter of framing accounting rules
of measurement and reporting. The tentative and half hearted legal and
regulatory intervention in accounting in our country, has come in the way
of development of robust, continuously evolving and dynamic accounting
theory and standards.

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INDIAN ACCOUNTING STANDARDS - A PERSPECTIVE:

The paradigm shift in the economic environment in India during last few
years has led to increasing attention being devoted to accounting standards as
a means towards ensuring potent and transparent financial reporting by
corporate. Further, cross-border rising of huge amount of capital has also
generated considerable interest in the generally accepted accounting principles
in advanced countries such as USA. Initiatives taken by International
Organisation Securities Commission (IOSCO) towards propagating International
Accounting Standards (IASs)/ International Financial Reporting Standards
(IFRSs), issued by the International Accounting Standards Board (IASB), as the
uniform language of business to protect the interests of international investors
have brought into focus the IASs/ IFRSs.

The Institute of Chartered Accountants of India, being a premier


accounting body in the country, took upon itself the leadership role by
establishing Accounting Standards Board, more than twenty five years ago, to
fall in line with the international and national expectations. Today,
Accounting standards in India have come a long way. Presented hereinafter are
some salient features of the accounting standard-setting endeavours in India.

Rationale of Accounting Standards


Accounting Standards are formulated with a view to harmonise different
accounting policies and practices in use in a country. The objective of
Accounting Standards is, therefore, to reduce the accounting alternatives in the
preparation of financial statements within the bounds of rationality, Thereby
ensuring comparability of financial statements of different enterprises with a
view to provide meaningful information to various users of financial statements
to enable them to make informed economic decisions.

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The Companies Act, 1956, as well as many other statutes in India require
that the financial statements of an enterprise should give a true and fair view of
its financial position and working results. This requirement is implicit even in the
absence of a specific statutory provision to this effect. The Accounting
Standards are issued with a view to describe the accounting principles and the
methods of applying these principles in the preparation and presentation of
financial statements so that they give a true and fair view.

The Accounting Standards not only prescribe appropriate accounting


treatment of complex business transactions but also foster greater transparency
and market discipline. Accounting Standards also helps the regulatory agencies
in benchmarking the accounting accuracy.

Accounting Standards-setting in India


The Institute of Chartered Accountants of India (ICAI) being a member
body of the IASC, constituted the Accounting Standards Board (ASB) on 21st
April, 1977, with a view to harmonise the diverse accounting policies and
practices in use in India. After the avowed adoption of liberalisation and
globalisation as the corner stone’s of Indian economic policies in early ‘90s, and
the growing concern about the need of effective corporate governance of late,
the Accounting Standards have increasingly assumed importance. While
formulating accounting standards, the ASB takes into consideration the
applicable laws, customs, usages and business environment prevailing in the
country. The ASB also gives due consideration to International Financial
Reporting Standards (IFRSs)/ International Accounting Standards (IASs) issued
by IASB and tries to integrate them, to the extent possible, in the light of
conditions and practices prevailing in India.

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Composition of the Accounting Standards Board
The composition of the ASB is broad-based with a view to ensuring
participation of all interest groups in the standard-setting process. These
interest-groups include industry, representatives of various departments of
government and regulatory authorities, financial institutions and academic and
professional bodies. Industry is represented on the ASB by their apex level
associations, viz., Associated Chambers of Commerce & Industry (ASSOCHAM),
Confederation of Indian Industries (CII) and Federation of Indian Chambers of
Commerce and Industry (FICCI). As regards government departments and
regulatory authorities, Reserve Bank of India, Ministry of Company Affairs,
Comptroller & Auditor General of India, Controller General of Accounts and
Central Board of Excise and Customs are represented on the ASB. Besides these
interest-groups, representatives of academic and professional institutions such
as Universities, Indian Institutes of Management, Institute of Cost and Works
Accountants of India and Institute of Company Secretaries of India are also
represented on the ASB. Apart from these interest groups, certain elected
members of the Central Council of ICAI are also on the ASB.

The Accounting Standards-setting Process


The accounting standard setting, by its very nature, involves reaching an
optimal balance of the requirements of financial information for various interest-
groups having a stake in financial reporting. With a view to reach consensus, to
the extent possible, as to the requirements of the relevant interest-groups and
thereby bringing about general acceptance of the Accounting Standards among
such groups, considerable research, consultations and discussions with the
representatives of the relevant interest-groups at different stages of standard
formulation becomes necessary. The standard-setting procedure of the ASB, as
briefly outlined below, is designed in such a way so as to ensure such
consultation and discussions:

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• Identification of the broad areas by the ASB for formulating the
Accounting Standards.
• Constitution of the study groups by the ASB for preparing the preliminary
drafts of the proposed Accounting Standards.
• Consideration of the preliminary draft prepared by the study group by the
ASB and revision, if any, of the draft on the basis of deliberations at the
ASB.
• Circulation of the draft, so revised, among the Council members of the
ICAI and 12 specified outside bodies such as Standing Conference of
Public Enterprises (SCOPE), Indian Banks’ Association, Confederation of
Indian Industry (CII), Securities and Exchange Board of India (SEBI),
Comptroller and Auditor General of India (C& AG), and Department of
Company Affairs, for comments.
• Meeting with the representatives of specified outside bodies to ascertain
their views on the Finalisation of the Exposure Draft of the proposed
Accounting Standard on the basis of comments received and discussion
with the representatives of specified outside bodies.
• Issuance of the Exposure Draft inviting public comments.
• Consideration of the comments received on the Exposure Draft and
finalisation of the draft Accounting Standard by the ASB for submission to
the Council of the ICAI for its consideration and approval for issuance.
• Consideration of the draft Accounting Standard by the Council of the
Institute, and if found necessary, modification of the draft in consultation
with the ASB.
• The Accounting Standard, so finalised, is issued under the authority of the
Council.

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Present status of Accounting Standards in India in harmonisation with
the International Accounting Standards:
As indicated earlier, Accounting Standards are formulated on the basis of
the International Financial Reporting Standards (IFRSs)/ International
Accounting Standards (IASs) issued by the IASB. Of the 41 IASs issued so far,
29 are at present in force, the remaining standards have been withdrawn. Apart
from this, 8 IFRSs have also been issued by the IASB. Corresponding to the
IASs/IFRSs, so far, 30 Indian Accounting Standards on the following subjects
have been issued:

AS 1 Disclosure of Accounting Policies


AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts
AS 8 Accounting for Research and Development (Withdrawn pursuant to
AS 26 becoming mandatory)
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 Employee Benefits
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases

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AS 20 Earnings per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income
AS 23 Accounting for Investments in Associates in Consolidated Financial
Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
AS 30 Financial Instruments: Recognition and Measurement
AS 31 Financial Instruments: Presentation

Compliance with Accounting Standards


Accounting Standards issued by the ICAI have legal recognition through
the Companies Act, 1956, whereby every company is required to comply with
the Accounting Standards and the statutory auditors of every company are
required to report whether the Accounting Standards have been complied with
or not. Also, the Insurance Regulatory and Development Authority (IRDA)
(Preparation of Financial Statements and Auditor’s Report of Insurance
Companies) Regulations, 2000 requires insurance companies to follow the
Accounting Standards issued by the ICAI. The Securities and Exchange Board of
India (SEBI) and the Reserve Bank of India also require compliance with the
Accounting Standards issued by the ICAI from time to time.

Section 211 of the Companies Act, 1956, deals with the form and
contents of balance sheet and profit and loss account. The Companies
(Amendment) Act, 1999 has inserted new sub-sections 3A, 3B and 3C to
Section 211, with a view to ensure that the financial statements are prepared in

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accordance with the Accounting Standards. The new sub-sections as inserted
are reproduced below:

Section 211 (3A):


‘Every profit and loss account and balance sheet of the Company shall
comply with the accounting standards’

Section 211 (3B):


‘Where the profit and loss account and the balancesheet of the company
do not comply with the accounting standards, such companies shall disclose in
its profit and loss account and balance sheet, the following, namely:-
a) The deviation from the accounting standards;
b) The reasons for such deviation; and
c) The financial effect, if any, arising due to such deviation’

Section 211 (3C):


‘For the purposes of this section, the expression “accounting standards”
means the standards of accounting recommended by the Institute of Chartered
Accountants of India, constituted under the Chartered Accountants Act, 1949
(38 of 1949), as may be prescribed by the Central Government in consultation
with the National Advisory Committee on Accounting Standards established
under sub- section (1) of section 210A:

Provided that the standards of accounting specified by the Institute of


Chartered Accountants of India shall be deemed to be the Accounting Standards
until the accounting standards are prescribed by the Central Government under
this sub-section. It may also be mentioned that the National Advisory
Committee on Accounting Standards NACAS) has been constituted under
section 210A as referred to under section 211 (3C) to advise the Central
Government on formulation and lying down of the accounting standards for
adoption by companies or class of companies.

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It is of significance to note that on the recommendation of NACAS, the
Ministry of Company Affairs, has issued a Notification dated 7th December,
2006, whereby it has prescribed Accounting Standards 1 to 7 and 9 to 29, as
recommended by the Institute of Chartered Accountants of India, which are
included in the said

Notification:
As per the Notification, the Accounting Standards shall come into effect in
respect of accounting periods commencing on or after the publication of these
Accounting Standards, i.e., 7th December, 2006. Specific relaxations are given
to particular kinds of companies, termed as Small and Medium Sized
Companies, depending upon their size and nature.

The above legal provisions have cast a duty upon the management to
prepare the financial statements in accordance with the accounting standards.
The corresponding provision to report on the compliance of accounting
standards has been inserted under section 227 of the Companies Act, 1956,
thereby casting a duty upon the auditor of the company to report on such
compliance.

A new clause (d) under sub-section 3 of Section 227 of the Companies


Act, 1956 is read as under: ‘whether, in his opinion, the profit and loss account
and balance sheet comply with the accounting standards referred to in sub-
section (3C) of section 211’ As far as the reporting of compliance with the
Accounting Standards by the management is concerned, clause (i) under the
new sub-section 2AA of Section 217 of the Companies Act, 1956, (inserted by
the Companies Amendment Act, 2000) prescribes that the Board’s report
Should include a Directors’ Responsibility Statement indicating therein that in
the preparation of the annual accounts, the applicable accounting standards had
been followed along with proper explanation relating to material departures.

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International Accounting Standards

Accounting bodies in more than 140 countries the world over are
members of the IASB. So far it has issued 41 standards out of which 7 have
been withdrawn, and thus 34 are in force. The very fact that 140 countries are
its members means the standards issued by its represent a wide cross- section-
view of accounting bodies the world over and thus are supposed to reflect a
harmonized effort in the standard formulation. The standards issued by it
earlier, during the IASC days, were known as International Accounting
Standards (IASs) and now as International Financial Reporting Standards
(IFRSs). IASB does not possess any authority to mandate the compliance of its
standards by its member countries but at the same time plays a major role in
influencing the accounting standards formulation on the lines of its standards in
these countries.

OBJECTIVES OF INTERNATIONAL ACCOUNTING STANDARD

The IASB is the standard-setting body of the IASC foundation. The


objectives of the IASC Foundation, as stated in its new constitution are:

1) To develop, in the public interest, a single set of high quality,


understandable and enforceable global accounting standards that require
high quality, transparent and comparable information in financial
statements and other financial reporting to help participants in the world’s
capital markets and other users make economic decisions.

2) To promote the use and rigorous application of those standards, and

3) To bring about coverage of National Accounting Standards and


International Accounting Standards and International Financial Reporting
standards to high quality solutions.

IMPORTANCE OF INTERNATIONAL ACCOUNTING STANDARDS


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The international accounting standards have assumed great importance in
recent times for the following reasons:
1. Globalisation of the economy has led to Indian companies expanding their
operations across the borders and this calls for uniformity in accounts of
units located in different countries.
2. Foreign investors would give more weightage to the accounts of those
companies, which are based on International Accounting Standards.
3. It is necessary to understand these principles because the primary roles
of accounting might differ between the home country and the host
country.
4. Accounting appears to be a Cause and Effect of changes in the domestic
capital markets. For example, the profit figures of a company depend
upon the type of accounting practices that is used.
5. At international level the principles are determined by International
Accounting Standard Committee (IASC) and International Organisation of
Securities Commission (IOSC).
6. These standards determine rules and requirements related to accounting.
7. They support financial reporting and these reports are required for
financial institutions such as banks stock market investors and
international entrepreneurs.
8. On the recommendation of IMF, World Bank and Agricultural Development
Bank it was decided to establish a robust accounting system which is
accepted by all the international entrepreneurs.
9. These standards are the basis of formulating and enforcing the
regulations for managing accounting standards in a standard manner.

If there is a conflict between the International Accountings Standards and


the local standards or the local laws and regulations, the local standards, laws
and regulations will prevail.

Table of Contents

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IAS 1: PRESENTATION OF FINANCIAL STATEMENTS 3
IAS 2: INVENTORIES 3
IAS 7: CASH FLOW STATEMENTS 3
IAS 8: NET PROFIT OR LOSS FOR THE PERIOD, FUNDAMENTAL ERRORS
AND CHANGES IN ACCOUNTING POLICIES 4
IAS 10: EVENTS AFTER THE BALANCE SHEET DATE 4
IAS 11: CONSTRUCTION CONTRACTS 4
IAS 12: INCOME TAXES 4
IAS 14: SEGMENT REPORTING 4
IAS 15: INFORMATION REFLECTING THE EFFECTS OF CHANGING PRICES
IAS 16: PROPERTY, PLANT AND EQUIPMENT 5
IAS 17: LEASES 5
IAS 18: REVENUE 5
IAS 19: EMPLOYEE BENEFITS 5
IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF
GOVERNMENT ASSISTANCE
IAS 21: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES 6
IAS 22: BUSINESS COMBINATIONS 6
IAS 23: BORROWING COSTS 7
IAS 24: RELATED PARTY DISCLOSURES 7
IAS 26: ACCOUNTING AND REPORTING BY RETIREMENT BENEFIT PLANS
IAS 27: CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING FOR
INVESTMENTS IN SUBSIDIARIES
IAS 28: ACCOUNTING FOR INVESTMENTS IN ASSOCIATES
IAS 29: FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES
IAS 30: DISCLOSURES IN THE FINANCIAL STATEMENTS OF BANKS AND
SIMILAR FINANCIAL INSTITUTIONS
IAS 31: FINANCIAL REPORTING OF INTERESTS IN JOINT VENTURES
IAS 32: FINANCIAL INSTRUMENTS: PRESENTATION AND DISCLOSURE
IAS 33: EARNINGS PER SHARE
IAS 34: INTERIM FINANCIAL REPORTING

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IAS 35: DISCONTINUING OPERATIONS
IAS 36: IMPAIRMENT OF ASSETS
IAS 37: PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
IAS 38: INTANGIBLE ASSETS
IAS 39: FINANCIAL INSTRUMENTS, RECOGNITION AND MEASUREMENT.

A Short Summary of IAS 1 through IAS 41

The following brief presentation of the individual International Accounting


Standards (IAS) should provide easy orientation for anyone who encounters an
individual standard in the context of their work or who simply wants to obtain a
quick overview. The explanatory texts don't intend to completely describe the
complex regulations. Their intent is to foster an initial understanding by
providing an introduction to the content of the standards. The standards, IAS 1
through IAS 41, which are currently in force, are covered. Those not mentioned
are already superseded.

The current IAS can be found in the following publication: International


Accounting Standards Committee (ed.): International Accounting Standards
2001. London 2001.

IAS 1: Presentation of Financial Statements


This standard describes the preparation and presentation requirements of
financial statements. It defines the requirements which a financial statement
has to observe to achieve a fair presentation (i.e. to provide a picture that
corresponds to the actual economic conditions). According to IAS a complete
financial statement has to contain the following components: a balance sheet,
an income statement, a statement showing Changes in equity, a cash flow
statement and explanatory notes. In the Appendix to IAS 1 an illustrative

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structure for a financial statement is presented which, unlike the one given in
the 4. European Council Directive is not obligatory.

IAS 2: Inventories
The accounting treatment of inventories is carried out according to the
historical cost system. IAS 2 defines how to determine the costs of purchase
and conversion and states that the inventories "should be measured at the
lower of cost and net realisable value". In addition, it describes treatments
which are permitted for calculating the costs of inventories.

IAS 7: Cash Flow Statements


The cash flow statement is a required component of an IAS financial
statement. IAS explains this requirement by the benefits of cash flow
information which it provides. It defines cash and cash equivalents and
stipulates the rough structure of a cash flow statement. The cash flows are to
be differentiated into those obtained from operating, investing and financing
activities.

IAS 8: Net Profit or Loss for the Period, Fundamental Errors and
Changes in Accounting Policies
This standard is supposed to guarantee that all enterprises present their
income statement in a consistent form. It defines ordinary business activities
and requires disclosing extraordinary items separately. The disclosure of single
items of income and expense is dependent upon how relevant the information is
for explaining the performance of the enterprise. In addition, it regulates how to
handle fundamental balancing errors from prior accounting periods and under
which circumstances changes in the accounting policy are permitted.

IAS 10: Events after the Balance Sheet Date

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If the enterprise receives information after the balance sheet date which
leads to an adjustment in the amounts recognised in the financial statement, it
has to follow the instructions of this standard. This could, for example, be the
bankruptcy of a customer shortly after the balance sheet date, which leads to a
retroactive adjustment of the corresponding trade receivable account, or also
the discovery of an error or fraud.
IAS 10 provides information about which events should be adjusted and which
are not.

IAS 11: Construction Contracts


Construction contracts often span several accounting periods. IAS 11
determines how the revenue and costs of a contract should be recognised and
how they should be allocated to the accounting periods.

IAS 12: Income Taxes


This standard establishes how current taxes for the accounting period and
deferred tax liabilities have to be accounted. Deferred taxes arise due to
temporary differences between the carrying amount of an asset and its tax
base.

IAS 14: Segment Reporting


To be able to better judge the risks and returns of individual business
areas, segment reporting is helpful. IAS 14 distinguishes between business and
geographical segments for which separate reports should be given. In addition,
the different disclosures for the primary and secondary reporting formats are
identified.

IAS 15: Information Reflecting the Effects of Changing Prices

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Since no consensus could be reached concerning the application of this
standard, it isn't obligatory. The purpose of IAS 15 is to bring clarity about the
effects of changing prices on the measurement of balance sheet items.
Therefore corresponding disclosures are required, such as the amount of
depreciation or cost of sales adjustments.

IAS 16: Property, Plant and Equipment


This standard determines which assets may be accounted as property,
plant and equipment, under which conditions their recognition is carried out,
how they are to be measured, and which depreciation method should be
chosen. In addition it describes, what the financial statement should disclose.

IAS 17: Leases


IAS 17 distinguishes between finance and operating leases. The
respective assignment has considerable consequences for the way in which the
leased asset is balanced. In addition, it establishes how to deal with any excess
of sales proceeds and leaseback transactions.

IAS 18: Revenue


The date at which revenue is recognised is important for the accurate
determination of the enterprise's success. According to IAS 18 the revenue
should be recognised "when it is probable that future economic benefits will flow
to the enterprise and these benefits can be measured reliably". There are
requirements for the measurement of revenue, for the identification of the
transactions and for recognising revenue from different business activities.

IAS 19: Employee Benefits


Employees receive various benefits: salaries and wages, supplementary
payments, pensions, specific leaves, termination and equity compensation
benefits. IAS 19 standardises the recognition and measurement of all short-
term and long-term employee benefits as well as post-term employment

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benefits. The treatment of obligations of resulting retirement benefits are of
increasing importance.

IAS 20: Accounting for Government Grants and Disclosure of


Government Assistance
If an enterprise receives direct government grants, then, according to the
standard, these are to be recognised as income and assigned to the accounting
periods in which they are intended to provide compensation for corresponding
expenses by the enterprise.

IAS 21: The Effects of Changes in Foreign Exchange Rates


Business transactions in foreign currencies carry the risk of fluctuations in
the exchange rate. IAS 21 regulates the initial recognition of a foreign currency
transaction and the subsequent reportage, particularly the determination of the
correct exchange rate that applies to later balance sheet dates. Furthermore it
determines how to deal with exchange differences.

IAS 22: Business Combinations


A business combination can occur either in the form of an acquisition of
an enterprise or a uniting of interests. IAS 22 establishes the procedure for
preparing a financial statement according to these two forms. For example, it
determines that the purchase method should be applied in accounting for an
acquisition and that goodwill (the difference between the cost of purchase and
the fair value of the acquired assets) should be amortised on a systematic basis
over its useful life.

IAS 23: Borrowing Costs


Interest charges and other costs which arise in connection with the
borrowing of funds are recognised under IAS 23 as an expense. The
capitalisation of borrowed funds as part of the acquisition or production costs of
so-called "qualifying assets" is alternatively permitted. "Qualifying assets" are

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those which take a substantial period of time for the conversion into a
serviceable or marketable condition.

IAS 24: Related Party Disclosures


Related enterprises or individuals which exert a significant influence or
even control over the reporting enterprise could have an effect on its financial
position and operating results. For example, they could carry out transactions
with the enterprise which a third party wouldn't do. IAS 24 requires detailed
information about links to related enterprises and persons, provided that there
exists control. If business was carried out between related parties, the type of
transaction and the nature of the related party relationship should be disclosed.

IAS 26: Accounting and Reporting by Retirement Benefit Plans


If the employer guarantees retirement benefits, then their balancing
under IAS 26 is dependent upon whether the retirement benefit plan is a
defined contribution plan (usually a pension fund) or a defined benefit plan. The
latter is processed via funds or provisions for pension fund liabilities. Accounting
and disclosure requirements for retirement benefit plans are specified in this
standard.

IAS 27: Consolidated Financial Statements and Accounting for


Investments in Subsidiaries
According to IAS 27 all domestic and foreign subsidiaries are in principle
to be included in the consolidated financial statement of the parent company,
unless the subsidiary is solely held for the purpose of subsequent disposal or it
is significantly impaired by severe long-term restrictions in its ability for funds
transfer to the parent. IAS 27 also establishes the procedures regarding
consolidation.

IAS 28: Accounting for Investments in Associates

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If the reporting enterprise has significant influence in, but not control
over, another enterprise, then it is considered an associate. IAS 28 requires the
equity method be applied in balancing such enterprises. The investment in
these enterprises should be recorded at cost and, thereafter, to be adjusted for
the change in the investor's share of the profit or losses.

IAS 29: Financial Reporting in Hyperinflationary Economies


Without the necessary adjustments, the reporting in hyper inflationary
economies can be misleading due to a severe loss in purchasing power. IAS 29
characterises the concept of "hyperinflationary economies" and establishes that
the measuring unit has to reflect the price levels, respectively the purchasing
power at the balance sheet date. So the historical costs are to be adjusted to
the current costs at the balance sheet date.

IAS 30: Disclosures in the Financial Statements of Banks and


Similar Financial Institutions
Due to their economic significance and the special character of their
business operation, specific rerequirements exist for the financial statements of
banks. That's why in this standard - amongst other issues - a detailed
breakdown of the income statement is required with regard to the interest,
dividend income, fee and commission income and expense, gains less losses
arising from dealing securities, investment securities and foreign currencies.
The listing of the assets and liabilities, reflecting their relative liquidity, is
characteristic for a bank balance sheet. Also of great importance are the
instructions for stating the contingencies and risks of banking.

IAS 31: Financial Reporting of Interests in Joint Ventures


Joint ventures are jointly controlled operations, enterprises or assets. IAS
31 stipulates that jointly controlled entities should be reported by proportionate
consolidation (the equity method is, however, permitted as an alternative).
IAS 32: Financial Instruments: Disclosure and Presentation

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A financial instrument is defined by IAS 32 as a contract which both gives
rise to a financial asset of one enterprise and a financial liability or an equity
instrument of the other. These can be both traditional primary financial
instruments, such as bonds, and also derivative financial instruments, such as
interest rate or currency swaps. Derivative instruments are frequently
undertaken to protect the business activities against currency or interest rate
risks; however, they can also serve as speculation. IAS 32 standardises the
presentation and the disclosure of the financial instruments. Additionally
detailed information is required concerning interest rate and credit risks as well
as the risk management policies of the enterprise.

IAS 33: Earnings per Share


An important figure for enterprises, whose shares are traded publicly, is
the measurement EPS (earnings per share), by which the performance of the
enterprise can be compared with other enterprises. Undiluted, basic earnings
(the net profit or loss after deducting preference dividends attributable to
ordinary shareholders) are distinguished from diluted earnings (the net profit or
loss adjusted for the effects of all potential ordinary shares).

IAS 34: Interim Financial Reporting


The interim financial report provides timely information within the
accounting period, particularly for the investors, creditors etc. IAS 34 doesn't
mandate interim reports, but merely requires that such reports by enterprises
conform to IAS. Therefore an interim financial report should, at a minimum,
include a condensed balance sheet, income statement, change in equity
statement, cash flow statement and selected explanatory notes. Furthermore it
is stipulated that in the interim financial report the same accounting practices
and treatments should be employed as are found in the annual financial
statement.

IAS 35: Discontinuing Operations

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This standard describes how to balance an enterprise's operations which
are intended to be disposed of or discontinued.

IAS 36: Impairment of Assets


An asset is regarded as impaired if its carrying amount exceeds the
amount which could be recovered through use or sale of the asset. IAS 36
stipulates how the impairment is identified and how the impairment loss is to be
recognised and measured. If an impairment loss decreases or no longer exists it
is mandatory to carry out a reversal of an impairment loss.

IAS 37: Provisions, Contingent Liabilities and Contingent Assets


Under IAS 37 provisions are liabilities which are uncertain with regard to
their timing or amount. IAS 37 defines under which circumstances provisions
have to be recognised and to what amount they have to be balanced.
Contingent liabilities and contingent assets should not be recognised. However,
details regarding these can be required, provided that the realisation of
contingent liabilities or assets is probable.

IAS 38: Intangible Assets


Every enterprise is in possession of intangible assets, such as patents,
licenses, computer software, copyrights, trademarks, customer lists or supplier
relationships. Provided that an intangible asset is clearly identifiable and the
enterprise has control over it, it is required to be accounted according to IAS 38
if it is probable that a future economic benefit will flow to the enterprise from
the asset and its costs can be reliably measured. The asset should be "allocated
on a systematic basis over the best estimate of its useful life".

IAS 39: Financial Instruments, Recognition and Measurement

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IAS 39 amends IAS 32 particularly with instructions related to so-called
"derivatives". These are, e.g. swaps, option contracts, futures, forwards or
complex, hybrid financial instruments which frequently serve for speculation
purposes. IAS 39 regulates the recognition and measurement of these
instruments. The distinctive feature of the relatively new IAS 39 is the
subsequent measurement of financial assets at their fair values.

IAS 40: Investment Property


IAS 40 should be applied in the recognition, measurement and disclosure
of investment property. This can be land or a building or a part of a building
held to earn rentals or for capital appreciation rather than for the purposes of
other business processes. This standard provides the possibility to choose
between two models, the fair value model and the cost model.

IAS 41: Agriculture


This standard concerns accounting of biological assets, agricultural
produce at the point of harvest and governmental grants related to a biological
asset. Basis for recognition and measurement of biological assets is the fair
value model.

Although this is choppy, here is a quick rundown of some disadvantages


of an international harmonization of accounting:

 Political reasons
 Nationalism- will the public accept? The U.S. is still on the standard
system for measurement, using this as an example, would a country like
ours really want to stimulate this juxtaposition?
 Dennis Beresford, former chairman of the FASB states that everyone who
seriously considers global accounting harmonization as a potential method
affirms that nationalism is one of the top constraints to becoming a
reality.

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 Already a global capital system- those companies that see a benefit from
using an international approach will do so and those companies that do
not see benefits will not. Those that make the wrong decision will lose out
on the opportunity.

Current Problems in Accounting and Auditing

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1: Standards Setting:
Standards and Guidelines for Accounting and Auditing are set mainly by
the accounting bodies in the US, Canada, the UK and Australia with minor input
from other institutions around the world. These have been generally accepted
and supported by Regulators for the major stock markets and in some cases
reporting requirements have been extended or modified by them. The main
accounting bodies are the CPA or Chartered Accountant institutes and they in
their turn are largely controlled and influenced by the partners of the major
accounting firms internationally. Each Institute operates in these areas by leave
of their national government and legislation, under their claims to protect the
interests and rights of the general public. This power could now change because
of recent events.

The current mess arises from the inadequacy of the Generally Accepted
Accounting Principles (GAAP) and the non compliance by auditors to the
Generally Accepted Auditing Standards (GAAS). In each separate country, the
local Institute determines the requirements for companies registered in their
jurisdiction or for those reporting to local stock markets where they are listed.
In the case of international groups of companies they may be required to meet
local standards in each place they operate and then the group accounts must
follow the rules for the residency of the Head Office and places those groups
holding shares are traded. For many years there have been attempts to produce
one set of internationally recognized GAAP or GAAS rules that would harmonize
local rules and remove the reporting and related confusion. The European Union
is only now starting to arrive at one set of comprehensive standards that might
eventually apply across all their member countries.

US GAAP are a set of distinct rules for accounting treatment of specific


items whereas other Institutes apply a principles based approach. The rules
based method allows more loopholes and freedom to act in areas that are not
specifically covered or where the stated conditions can be said not to fully

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apply. The principles based approach states the generally desirable goal for
measures and requires the application of professional judgment to find the
proper treatment for items based on that guidance. The US rules are generally
less conservative and provided greater latitude for companies to play the rules
as it best suited their interests. It also allowed lawyers and others to argue
pedantically over wording and to ignore the application of appropriate
judgment. This often led to inflation of Net Profit and Financial Statement values
on translation from other to US rules.

When trying to arrive at International standards for GAAP and GAAS, the
US body has always maintained a veto position and taken the view that they
will only approve those measures that they like. This mainly means them only
approving of items they originated and rejecting attempts from all the other
bodies to widen or deepen any issues. It is hard to believe that this attitude will
change given their current general approach to almost all matters from foreign
policy on down.

The influence of the major accounting firms should not be


underestimated. Those Institutes are basically at the 'beck and call' of their
senior partners. Much of the committee work and other academic studies could
not be carried out without a large amount of volunteer time from members and
most for this work is staffed and led by members and partners from those firms.
Their senior members also figure conspicuously each year on the leadership
positions that seem to get rotated mostly among themselves or current
business leaders who are audited by or were trained by the major firms. In
effect, over the last many decades, nothing has come out of those Institutes
that they would find inconvenient or has failed to serve their interests. It is hard
to image how this can be changed in the short term.

2: Auditor Independence:

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Back in the 80's the position of auditors started to change in small ways.
Till then audit fees had been an almost automatic thing and were increased
each year in line with costs and possibly a desire by firms to increase their
margins. It was also normal to reappoint the auditor ad infinitum. Management
of companies started to question this and initially put pressure on auditors to
reduce their fees or at least their increases each year. To apply greater pressure
it was also suggested that audits should be put up for open bidding on a
periodic basis. Without their normal level of co-ordination on such issues of self
interest, the firms began to tender against each other and this drove down the
fees they would put forward. Part of their reasoning was that they could make
up this lost ground from the lucrative tax and consulting work they could then
attract from those audit clients. Their marketing for such services increased
considerably at this time and this formed an atmosphere of mutual interests
between them and senior management that is the root of our current problems.
The audit fee situation became one of a 'loss leader' they could accommodate.

Costs were a main problem and so firms generally, not just the majors,
began to look for ways to control and reduce them. For many years GAAS and
academic studies had endorsed more efficient methods for conducting the audit
work, using analytical review and some reliance on the client's systems of
internal accounting control. This lessened the amount of detailed testing of
transactions that was needed to provide adequate assurance and confidence.
Many studies were also carried out to find acceptable methods for sampling that
would provide some mathematical certainty and the basis to be able to estimate
the impact of errors found in monetary terms. This should have added to the
quality and depth of coverage that was then possible for all audits.
As fee and cost pressures increased, partners began to cut back on any
work they considered unnecessary, not always accompanied by a reworking of
their audit manuals and their stated standards and methods for achieving
GAAS. Documentation and evaluation of internal controls were seen as a costly
approach and required deeper training of staff. Much of this work was curtailed

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or abandoned altogether, but without the required increase of other work or
testing levels to compensate. Sample sizes were also reduced and became what
can only be described as judgmental samples and no longer representative ones
that were statistically valid. At the same time they continued to apply
estimation techniques to errors found when there was no longer a mathematical
basis for so doing. Some firms even set an arbitrary maximum sample size like
40 items that had no bearing on audit risks or materiality for the audit in
question.

At the time when companies were moving more and more to


computerized accounting methods, the auditing firms also became less
interested in performing work to document and understand the nature, control
and conduct of those systems and hence the impact such practices could have
on the associated audit risks, and the reliance that could be placed on financial
statements prepared from those records. For similar reasons they often
considered the use of Computer Assisted Audit Techniques (CAATs) to be
generally unproductive, time and cost consuming, as well as requiring better
trained staff and other resources that had their own overhead.

More and more emphasis was placed on esoteric analytical review and
supposed use of judgment to support an audit opinion that was less and less
evidenced and documented. The final partner review and clearing of issues, as
well as their own intimate knowledge of the company and management,
became the basis of reliance. But at the same time their own interests were
more and more bound up with those of the client and in the need to gain
additional fee generating work, to meet their own annually increasing targets
and fellow partner expectations. We should not also underrate the influence and
feelings of mutual symbiosis from interchanges between the auditing firms and
their client companies - both auditors who joined management and the rarer
opportunities for senior managers to transfer to the firms as consultants as they
approached retirement.

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To increase the appearance of proper auditing standards being applied,
and in response to earlier scandals and evidence of inadequacies, many
institutes introduced what were called 'peer reviews'. This provided for other
firms to check the work, standards and methodology employed by firms
together with a review of the evidence maintained in a sample of audit files. In
the case of the big firms, this review work was largely carried out by other
major firms on the argument they were best able to understand and assess the
adequacy of the work carried out. Unfortunately they were also those most
interested in not finding fault in those that also had to assess them. As in all
other institutional issues, the major firms seem to act as a cartel and in their
own joint interests, just as with standards setting and all other matters of
regulation within the profession.

3: Corporate Governance:
The late 80's and early 90's were littered with a series of scandals, in the
US with Savings and Loans, but elsewhere and other clients too, that disclosed
problems of optimistic accounting treatments and the accompanying lack of
auditor awareness or concern with the practices, that led to many spectacular
company failures. Partly in response to that the US Congress started a process
known as COSO to suggest and promulgate new means of corporate
accountability combined with proper standards for corporate management
practices. In Canada these were picked up and extended as CoCo and, in the
UK, recommendations that followed from the findings of the Cadbury
Commission. Australia also had their own response to the situation and ideas
that spread worldwide.
Corporate governance was seen as the necessary protection for
shareholders and other company stakeholders. By following risk management
and control principles, combined with appropriate policies and practices,
together with full accountability and annual statements of compliance from
senior management, such recurrences were not meant to happen. In the

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absence of enforcement rules or independent assessments for adequacy, there
was little direct change in practical terms. All that they introduced was a written
statement by management that they had followed the recommendations and
attained appropriate control, attached to their annual report, required for
quoted members on major exchanges, but the initiative soon lost focus and
interest. Major audit firms offered to train company staff at vast expense but
otherwise had no part in the process. After a few years the goals to be achieved
seemed to be forgotten, perhaps because management very rarely wants to be
measured and criticized in any public way. Internal Audit departments also
started to become vogue at the same time but it soon became obvious that
management's wish was for the appearance of independent review of their
performance rather than real substance.

By the late 90's the topic was passé and it slipped from everyone's
attention. Recent events have caused the terms and ideals to be reawakened
but the focus now seems to be more towards criminal punishment and personal
responsibility than in setting up a coherent and workable solution to the malaise
in business conduct. Another underlying cause was also the personal and
corporate acceptance of the notions of greed that emerged into common
business motivations from energized expectations of potential profits, fired by
the same unrealistic short-term goals that led to the bubble in Internet
companies. Morals or honesty or even reputation were no longer seem as
requirements or matters of long lasting importance. Make what you can,
however you can, while you can. Accountability seemed escapable. Make you
profits and get out quick.

4: Market Forces:
The factor of greed was widespread. Shareholders and investors were
quite happy with spectacular and irrational rewards just as long as they were
winning and share values kept rising. Over the 90's the markets rewarded
companies and their managers while they could maintain an aggressive up tick

G.H.PATEL PG INSTITUTE OF BUSINESS MANAGEMENT, VALLABH VIDYANAGAR, ANAND. Page 42


for the shares and could continue to show ever increasing returns and values.
There were and still are not any realistic limits to those expectations - its seems
that the ideals of pyramid selling are all fine and well as long as the game
continues to be played - just ask the Albanians where such excesses were state
sponsored. Eventually every bubble will burst. Some of the major forces fanning
these expectations were the financial services industry members themselves,
albeit for very self interested reasons. Everyone's focus was on the very short
term.

Rewards for management further fuelled this lunacy, almost encouraged


by the market players whose clients' long term interests could only eventual
suffer and take the resulting fall. Professional investors and money managers
stood by as salaries and bonuses for senior management and particularly CEO's
rose to hideous heights. Initially this was to be responsive to results achieved
but as later markets fell, the same remuneration levels were maintained or ever
increased again. A new tool for reward was also used widely by granting
executives either options on shares or direct subsidies on company shares
awarded to them that were used as a further incentive.

The eventual impact of many of these rewards was the reverse of that
intended. Instead of making management focus on the real and continual
increase in shareholder value over the long term, management were able to
gain quickly by looking at short term increases and returns at the expense of
the longer term needs of the company as a whole. Many service contracts also
made provision for golden handshakes and golden parachutes either at
retirement or when they were let go early. This was also mostly underpinned by
exceedingly generous pension rights that would allow many executives to retire
with immunity after only a few years commitment.

And let’s not forget that the old shell game has always been present
where directorships are rewards for friends who use their influence and

G.H.PATEL PG INSTITUTE OF BUSINESS MANAGEMENT, VALLABH VIDYANAGAR, ANAND. Page 43


connections in ways that best help their compatriots. Even 'outside directors'
and their supposed control over audit committees and management
remuneration, all measures introduced as a check on excessive actions by
management and as an assurance for the recognition of shareholders' rights
and interests, can now be seen as another shell game. In all this there has
always been a conspiracy of silence by all those with personal interests, no
matter what their professional background, to not rock the boat or cry wolf until
the bitter end. Of course, those were not the same people who would pick up
the cheque for the final and inevitable collapse - they are well aware of the
methods by which they can hedge their risks.

5: Solutions:
Some of the same old remedies are being trotted out again for this set of
scandals and malfeasance as for past times when accountability issues hit the
headlines. Suggestions for new standard, tighter control and criminal
prosecutions head the list as well as suggestions for new oversight boards or
commissions. For anyone with any real memory of the past 25 years or so, this
all smacks at déja vu and gives one as much confidence as an aspirin for a
major wound. It is very likely that those in the driving seat and responsible for
the past will create yet one more shells game if they are left in place.

This is an international problem but yet it is not likely that some


international body or set of standards could be created that could fix the
problem. You only have to look at the United Nations to see that nothing
sensible can come out of any international committee or body where only
politics seems to be able to survive. The same with the EU for Europe - they
would swamp everything in bureaucratic lunacy. Certainly there should exist a
set of universal standards for GAAP and GAAS but how can they be arrived at
even with limited national input while the US feels to be supreme and, in its
own way, unaccountable to others.

G.H.PATEL PG INSTITUTE OF BUSINESS MANAGEMENT, VALLABH VIDYANAGAR, ANAND. Page 44


Market oversight and regulation of the issues sounds attractive but then
their interactions of the past have not had any noticeable impact nor have they
prevented any failures to date. Who would be the master regulators and where
they would be based are just two of the first hurdles, plus how would it be
funded? No government inspired or run body seems capable of performing
effectively and efficiently, let alone economically. What chances for a super
regulator to work out?

A revamping of the current setup certainly needs to happen and then all
the old ties need to be cut too. The main checks and balances thought to exist
where different groups or professions were supposed to cross check each other
has never really worked where they can find any mutual self interests. One
body that does sound attractive is the professional fund managers who have the
knowledge and leverage to hold management accountable and yet it can be
seen that their own results and hence remuneration can also be dependent on
and rewarded by the status quo.

Auditing firms that have no other business interests and where partners
and senior staff are required to record all their outside financial interests, just
like many politicians, could be one approach as well as extra reporting
responsibilities such as for Corporate Governance. Their total independence and
dedication to their duties must be assured to provide any confidence.

In addition, company directors, CEO's and others active in markets and


publicly owned businesses should make an annual declaration, in writing, with
respect to their compliance to tougher fiduciary responsibilities and regulations,
such that proof that they lied in that statement would in itself be grounds for
criminal prosecution and liability. Fines should ensure that any rewards from
malfeasance are totally recovered from assets those people can control and/or
benefit from. When found guilty those persons should be publicly identified and
denied the right to act in those same areas for an appropriate period in those

G.H.PATEL PG INSTITUTE OF BUSINESS MANAGEMENT, VALLABH VIDYANAGAR, ANAND. Page 45


circumstances. If many people are not willing to act honestly on their own
accord they should be compelled to recognize the overriding interests of the
greater public. Perhaps they and public companies should also be required to
carry full insurance coverage and then it would be those organizations that
would have a vested interested in keeping everyone on track as well as
protecting the innocent

G.H.PATEL PG INSTITUTE OF BUSINESS MANAGEMENT, VALLABH VIDYANAGAR, ANAND. Page 46


Conclusion

India is slowly entering the arena of accounting standards. But the


progress of formulation of accounting standards has been very slow compared
with the developments at international levels.

Bringing about harmonization in accounting practices among countries


throughout the world is indeed a very formidable task. The vision of a
harmonized accounting world may inspire many minds but in the practical field
it is hard to go about embracing a situation where accounting principles and
procedures are perfectly harmonized among countries throughout the world.

The development of harmonized accounting rules and a uniformity of


approach among countries towards education and training of professional
accountants should accompany principles. Furthermore, the harmonization of
accounting rules and principles among countries should also be accompanied by
inter country harmonization in auditing principles and standards. Harmonization
initiatives are now working much more effectively than ever before.

Many of the initial hurdles have been overcome and much progress
towards harmonizing accounting principles and procedures among countries has
already been achieved. Differences are still there but they are narrowing. It is
expected that the pace of progress in the sphere of harmonization will
accelerate further in the coming years.

G.H.PATEL PG INSTITUTE OF BUSINESS MANAGEMENT, VALLABH VIDYANAGAR, ANAND. Page 47


Bibliography

REFERENCES:

 http://www.icai.org/resource/o_ac_standard.html
 http://www.icai.org/resource/o_ac_standard.html.
 http://wiki.answers.com/Q/What_are_advantages_and_disadvantages_of
_International_Accounting_Standard#ixzz1CdoeaOui

 Shri A.K. Chowdhury Ph.D., Student, Department of Accounting,


University of Western Sydney, Australia – "Compliance with accounting
standards in India, why and how?" (Management accountant, March 2000,
ICWAI.)
 Dr. K. Raji Reddy, reader in Commerce, Department of Commerce and
Business Management, Kakatiya University, Warrangal (A.P) and Shri V
Prudvi Raju, Counsellor, SDLCE Study Centre, L.B. College, Warrangal. –
"Accounting standards and Gaps in Practices in India." (Management
accountant, April 2000, ICWAI.).)
 Dr. Jagannath Hati W, and Debdas Rakshit Lecturer in Commerce,
Syamsundar College, Burdwan, West Bengal.- "Integrating accounting
standards — A step towards harmonization " (Management accountant,
ICWAI .)
 India Infoline Newsletter-Vineet Madan, IMT Ghaziabad "RE-STATEMENT
UNDER US GAAP"

G.H.PATEL PG INSTITUTE OF BUSINESS MANAGEMENT, VALLABH VIDYANAGAR, ANAND. Page 48