ASSIGNMENT

MBA –III SEMESTER

INTERNAL AUDIT AND CONTROL
CODE: MF 0004 – CREDITS 2
MAXIMUM MARKS: 30
SET I
NOTE: Answer all the questions and each question carries 10 marks.

1) Write the details note on Analytical procedures as one of the techniques of collective evidence in
auditing.
Ans:
Analytical procedures
We have studied how this procedure is used as technique in collecting evidence. It is also treated as audit
procedure itself because of its peculiar nature i.e. the analytical feature which collects evidence not available
through other two procedures. Important to note here is this procedure is not a substitute for Tests of
details and need not be relied upon by auditor at times.
Some Uses of Analytical Procedures:
Analytical review procedures are used for the following purposes:
(a) To assist the auditor in planning the nature, timing and extent of other audit procedures;
(b) As substantive procedures when their use can be more effective or
efficient than tests of details in reducing detection risk for specific financial statement assertions;
(c) As an overall review of the financial statements in the final review stage of the audit.

The extent of reliance that the auditor places on the results of analytical review procedures depends on
materiality of the items involved, assessment of inherent and control risks of businesses.

When to apply analytical procedures?

(1) At the planning stage
To identify areas of potential risk and accordingly plan the nature, timing and extent of his auditing procedures.
(2) During the course of audit. To get evidence about items in financial statements normally in conjunction with
other tests.
(3) For an overall review of the financial information at or near the completion of the audit-to form an
overall opinion about the consistency of the financial information as a whole with his knowledge of the entity's
business and relevant economic conditions.

To what extent can the auditor rely on analytical procedures?

The extent of reliance that the auditor places on the results of analytical procedure depends on the
following factors:

(a) Materiality of the items involved

For example, when inventory balances are material, the auditor does not rely only on analytical procedures in
forming conclusions. However, the auditor may rely solely on analytical procedures for certain income and
expense items when they are not individually material.

(b) Other audit procedures directed towards the same audit objectives
For example, other procedures performed by the auditor in reviewing the recoverability of accounts
receivable, such as the review of subsequent cash receipts, might confirm or dispel questions raised from
the application of analytical procedures to an aging schedule of customer’s accounts;

(c) Accuracy with which the expected results of analytical procedures can be predicted
For example, the auditor will ordinarily expect greater consistency in comparing gross profit margins from one
period to another than in comparing discretionary expenses, such as research or advertising.

(d) Assessments of inherent and control risks

For example, if internal control over sales order processing is weak and, therefore, control risk is high, more
reliance on tests of details of transactions and balances than on analytical procedures in drawing conclusions on
receivables may be required.
2) Describe the responsibility of the management and auditors for the frauds and errors committed.
Ans:
Responsibility for frauds and errors

1. Responsibility of the management

The primary responsibility for the prevention and detection of fraud and error rests with the management of an
entity. The respective responsibilities of management may vary from entity to entity. Certain areas where
management is responsible are:

To set the proper tone, create and maintain a culture of honesty and high ethics,
To establish appropriate controls to prevent and detect fraud and error within the entity.
To see that the integrity of an entity's accounting and financial reporting systems.
To see that appropriate controls are in place, including those for monitoring risk, financial control and
compliance with the laws and regulations
To establish a control environment and maintain policies and procedures to assist in achieving the objective of
ensuring, as far as possible, the orderly and efficient conduct of the entity's business.
To implement and ensure the continued operation of accounting and internal control systems, which are designed
to prevent and detect fraud and error.

2. Responsibility of auditors
Internal Auditors are also responsible for frauds and errors in that they have
to check for their existence and suggest better internal controls.
External auditors though not primarily responsible to detect frauds and
errors, are still responsible to take care to verify the strength of internal
control to prevent and detect frauds, existence of symptoms of fraud.
Hence indirectly they are also responsible for controlling frauds.
Thus it is important to note here that internal controls are very important in detecting frauds and errors of any
kind. Those who are establishing internal controls should have sufficient knowledge of different types of
frauds or symptoms frauds that might occur in particular business.

3) Go through the following case and give your analysis of the situations with respect to Satyam
debacle.

Financial statements do not provide enough information on which investments and loans made by a
company are to its subsidiaries and associated firms. In addition, poor quality of consolidated
accounting and segment reporting leads to misrepresentation of the true picture of a business group."
On the issue of the BoD (board of directors), Ms Som bemoans that board members are selected by
the promoters on the basis of existing contacts. "The SEBI code on CG does not help the situation as it
abstains from prescribing nomination committees and chooses a narrow definition of independent
directors." Excerpts from the interview: In situations such as what we see in Satyam, when everyone
else is on a sort of witch-hunt to find who the culprit is, who do you think has to shoulder the first
blame, and why? The Chairman and the MD of the company, the Raju brothers, have already set the
ball rolling by owning up to the default. The chairman in his letter to SEBI has also denied that his
family or anybody in the board was responsible for this default.

From BUSINESS LINE, January 22, 2009 the currently unfolding Satyam episode raises a challenge for
analysts, shareholders and policymakers about how to distinguish ticking the boxes from actual practice,
observes Ms Lalita Som, author of Stock Market Capitalization and Corporate Governance (www.oup.com).
Ms Som, an independent researcher based in Paris, focuses on areas such as corporate governance in
emerging markets, human capital and social capital. And her book, which dealt specifically with the low- ap
companies (LCCs) accounting for about 80 per cent of our listed companies, suggested that LCCs because
of their low capitalisation escaped the radar of domestic and foreign institutional investors, banks, and any
'well-managed companies' (for a takeover), resulting in their poor governance, which in turn leads to their
being in the low-cap category for a long time with no opportunities to move up to mid-cap category. Such
companies also do not have access to directors with the right credentials, adds Ms Som, during the course of
a recent email interaction with Business Line.
"Counting on the challenges in promoting internal corporate governance (CG) culture in India, my book
looked into issues of the quality of board directors, disclosure standards and transparency. These issues have
been at play in the Satyam case." In India, the level of disclosure is poor and creative accounting extensive,
Ms Som rues. She finds that the greatest drawback of financial disclosures in India is the absence of detailed
reporting on related party transactions.

"Financial statements do not provide enough information on which investments and loans made by a
company are to its subsidiaries and associated firms. In addition, poor quality of consolidated accounting
and segment reporting leads to misrepresentation of the true picture of a business group." On the issue of the
BoD (board of directors), Ms Som bemoans that board members are selected by the promoters on the basis
of existing contacts. "The SEBI code on CG does not help the situation as it abstains from prescribing
nomination committees and chooses a narrow definition of independent directors." Excerpts from the
interview: In situations such as what we see in Satyam, when everyone else is on a sort of witch-hunt to find
who the culprit is, who do you think has to shoulder the first blame, and why? The Chairman and the MD of
the company, the
Raju brothers, have already set the ball rolling by owning up to the default. The chairman in his letter to
SEBI has also denied that his family or anybody in the board was responsible for this default.
The culpability of the top management becomes severe because by their nature, the directors on the board
largely rely on information from the management and auditors, with their capacity to independently verify
financial information being quite limited, while auditors, as this case suggests, have also been equally reliant
on management information.
The relevant issue here is the extent and the depth of auditors' effort in their exercise of due diligence.
Excessive reliance on information from the management is symptomatic of the ownership or control of
companies in India by business families, and that poses a particular challenge for corporate governance in
India.
If the board is in awe of the family executive, it makes it difficult for the board sometimes to ask tough
questions or at other times the right questions at the right time in order to serve the interests of the
shareholders better.
As a result truly independent directors are rarely found in Indian companies.
Lastly, the stock exchanges and the regulatory authority SEBI will be held responsible for the huge losses
incurred by shareholders.
Doesn't corporate law have enough and more safeguards for shareholders, and also offer them ample
opportunities to assert their rights during the normal running of business? Apart from their rights to
participate and vote in company meetings, the Companies Act in India has the following special safeguards
for shareholders:
i) Investor Protection Cell - where grievances of investors against companies can be lodged, electronically
since 2005.
ii) MCA 21 - e-filing of documents under company law.
iii) Investor Education and Protection Fund.
iv) There is also a provision through which small shareholders can nominate a small shareholders' director to
the board.
There are other safeguard measures too at the stock exchange level. India has also seen many corporate
governance codes and reports which have all emphasised on the principles of transparency, accountability
and responsibility (to varying degrees).
So in terms of laws, provisions and codes, I do not think that India is short on protecting the interests of
shareholders. But much of this is rendered ineffective if the ethos, ethics and enterprise culture do not have
the interests of shareholders and stakeholders at the heart of the functioning of a company.
One significant implication of this form of enterprise culture and a weak legal system is obliteration of the
rights of minority shareholders and other stakeholders.
Your suggestions on how corporate governance can be strengthened.

Corporate governance is crucial as it not only helps companies boost their share prices but also helps create
a credible and professionally driven business system that can transform living conditions for a majority of
the population. For corporate governance to take root in true sense of the word, it involves more than the
corporate sector and includes wide-ranging issues of the legal enforcement mechanism and the enterprise
culture.
Although laws in India are generally comparable to those in the UK, the court system in India is seen as
inadequate to handle the volume of cases being brought to trial.
Delays in the delivery of verdicts, high costs of litigation and the low quality of judges in the lower courts
make the legal enforcement mechanism ineffective.
An amendment to the Companies Act of 2002 required the establishment of special courts to handle
securities and finance-related crimes. There has been little progress made on this front so far; to improve the
rights of shareholders, this system needs to be established and strengthened.
The last 10 years have seen a series of codes, regulations and laws, encouraging the principles of greater
transparency, accountability, responsibility and participation of independent directors on the board.
However, for these principles to entrench themselves and function effectively at the company level, it is
imperative that there is a change in enterprise culture and behavior and this usually takes time to occur.
For example, once the family executives understand the value independent directors bring, the board
dynamics will change accordingly, and independent directors will be able put forward their honest opinions.
The onus is on the chairperson of the board to steer the discussion in such a way that dissenting opinions
also find place.
Another example: A change in the culture would also ensure that employees, if and when in doubt, would
reveal any information they may have been exposed to, or have withheld.
Is the auditing profession ill-equipped to handle the attest needs of large organisations? Also, do we need a
better monitoring of the work of audit firms? In India, the two audit-related issues which are commonly
recognised are that of auditor independence (which is a problem worldwide) because of the large if
segmented market in accounting services, and the perceived powerlessness of auditors in the face of
corporate pressure.
In the face of the current malfeasance, auditors have been quick to point out that they have followed
international standards in conducting their audit. Standards set a floor and not a ceiling and auditors are
certainly free to do a better job than mandated by the Standards.
But conducting thorough audits and exercising professional judgment in emitting the right signals at the
right time have to be balanced against competitive pressures to keep the costs of audit down. These are some
of the constraints and dilemmas facing the auditors.
Having said this, I do not think they are ill-equipped to handle the needs of large companies, because in the
face of an audit failure, it is very difficult to discern whether the auditors were complacent or they were
pressured by the concerted efforts of the insiders.
In the aftermath of the Satyam case, SEBI has decided to introduce a peer review mechanism to review the
accounts prepared by a company's statutory auditor. In addition, SEBI has also decided to constitute a panel
of auditors to review the financial statement of all BSE Sensex and NSE Nifty companies. These initiatives
will add more layers to regulations but the benefits of these may not be significant.
The concept of rotation of auditors was introduced by the Institute of Chartered Accountants of India
(ICAI), which mandates change of auditors after seven consecutive years with a listed company. This will
be operational from April 2009 onwards.

The current case may make the ICAI to rethink the time period allowed before auditors can be changed.
Once malfeasance or negligence is proved on the part of a participating audit firm, sanctions such as censure
and class action suits follow, and I believe these act as significant deterrents than any increase in regulation.
Since the fraud in this case is said to have been around for many years, will a restatement make the required
amends? Would you suggest a proactive move (internally) by other companies to assess if a restatement may
be necessary in their cases? I think that a restatement for the past seven years would mean huge costs for a
marginal benefit. This case should serve as a signal to other companies that one can hide information only
for so long.
Transparency is a basic tenet of corporate governance, as with appropriate information shareholders can
exercise their rights and it is also a remedy for fraud and manipulation. As one of the judges of the US
Supreme Court Lewis Brandeis succinctly put it - sunlight is the best disinfectant and electricity the best
policeman.
Can corporate governance benefit from an effective framework for whistle-blowing? A person who chooses
to be a whistleblower has to make a very difficult choice, while keeping in consideration loyalty to the
fellow colleagues as well as towards the company. Given the great emphasis we place on these loyalty
issues, to my mind any framework for whistle-blowing will remain ineffectual.
However, if an employee seeks to reveal information on inappropriate acts, any whistleblower framework
should allow for anonymity and access to independent directors on the board. Currently, there is a Bill
called the Whistleblowers (Protection in Pubic Interest Disclosures) which was introduced in the Rajya
Sabha in 2006 and is still pending in Parliament.
Ans:
Analysis:
 There has to be complete information regarding the related party discloser & subsidiaries
companies.
 Professionals (like C.A.s, C.S.s, Layers etc.) need to give equal importance to the social
responsibilities, & work much deeper as compared to the test basis & user there judgment on
management information rather than directly relay on the same.
 Corporate Governess has to provide some special level of Power to the Internal Auditor in the
Industries.
 Customs & Laws like SIBI, Income Tax, Excise, & Other Government Authority need to work
loyally towards the social objective of society.
• Investor need to protect in any circumstances.
• Companies Act need to protect the shareholders rights.
• Decision making are need to be adhere on the judgment rather than high level authorities
respect.
 Need to provide Details information in financial statement instead of completing the formalities.
&
Finally as per my knowledge frauds like Satyam are not possible without involvement of the of high
authority like BOD, CA, Lawyers, High level Government Authority etc.

Hence we need to improve the system first & change there thinking towards society

ASSIGNMENT
MBA –III SEMESTER
INTERNAL AUDIT AND CONTROL
CODE: MF0004 – CREDITS 2
MAXIMUM MARKS: 30
SET II

1) Describe the internal control for cash and bank transactions of a company.
Ans:

Internal Control for Cash and Bank Transactions:

Internal control for cash and bank transactions has been provided here by categorizing them according to
important features of internal controls as General & Application Controls. This is also one useful way to set up
internal controls and also to evaluate them.

Internal Control for Cash Transactions

A) Controls over cash receipts:
1. Managements controls over Cash:
Policies can be formed in the following areas:
Daily banking of cash collected.
Limits and authorities to be fixed as to cash collection by different levels of employees.
Expenses should not be paid out of cash collected but separate cheques are to be drawn for payment of expenses.
IOUs (taking of money from the cash box for emergencies by employees) should not to be allowed.

2. Organization of cash function

Cash management policies should be decided by the management.
“Cash collection centers” can be set up at various places, cities, towns.
Cash counters, safe lockers are to be provided in the cash collection centers.
Remittance methods of cash from such centers to banks or between two centers are to be formally decided.

3. Recruitment policies, Honest and loyal persons should be recruited to handle cash.

4. Reports & Reviews Areas where such reports, reviews can be made use are
Reporting of daily cash balances of branches.
Report of discrepancies in cash is to be verified.

5. Supervisory controls
These can be exercised in areas like:
Surprise checking of cash balances by supervisory authorities.
Use of Closed Circuit Television as to cashier’s operation.

6. Segregation, rotation duties

Cashiers should have no other responsibility, particularly not of recording transactions in the books of account.
No/Limited access to cash counter should be provided for other persons/employees.
Rotation of cashier job is a must. In fact you might have observed in banks cashiers post in frequently rotated
among the employees of the branch.

7. Accounting controls
“Cash scroll” is to be maintained by cashier to record his transactions.
Counting of cash by denominations and recording should be systematic.
Writing of cash book by a different person than cashier is must.

8. Physical Controls
Cash counters, safe lockers are to be provided.
Soiled and cut notes to be sorted out.
Counting machines are to be provided.
Detection of fake notes should be made possible.

B) Controls over Cash Payments:

Objectives:
All cash payments are rightly made.
All payments are correctly recorded.

Some internal control measures as to payments are as follows:

1. Limits, authority levels for payment to be fixed.

2. Mode of payment is to be decided at policy level.

3. Signing powers for approving payments to be decided by the top management.

4. Organizing of Cash payment function like place where the payment is made, cash counter, safe lockers etc are
to be decided.

5. Some Accounting controls:

Cash vouchers are to be designed properly.
Checking of totals, quantities and approvals before payment is must by cashier.
No payments are to be made out of cash received; the latter should be banked daily.
Maintenance of “petty cash book” under IMPREST system is most useful.
“Paid” stamp to be fixed on expense vouchers which have been paid so that double payment is avoided for
same voucher or bill.
2) What is internal audit? Who can undertake internal audit in India? Can the spouse of a CEO of a
company be its statutory auditor? Explain the conditions.
Ans:

 Internal Audit:
It is undertaken mainly on behalf of Management. The auditor is appointed by the management. The objective
may be prevention and detection of fraud or error, compliance of laws, safeguarding of assets or even
achieving effectiveness or efficiency in managing the organization through better

Definition of internal audit

Internal audit is an independent management function, which involves continuous and critical appraisal of the
functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall
governance mechanism of the entity, including the entity’s risk management and internal control system. “– ICAI
definition on internal audit.”

 Internal Auditor is appointed by Management.

Qualifications for undertaking internal audit:

In India at present the internal auditors need not have a formal qualification or professional status. At the same
time the external auditors while evaluating the internal audit function of a company have to ascertain the
technical Competency of the internal auditor. In other words the persons to be appointed as internal auditors
should have adequate technical training and proficiency. Work of internal audit is wider than that of external audit,
but having a similar nature that of an external audit, it is desired that only Chartered Accountants or persons
having equal qualifications be appointed as internal auditors. In fact, most of the companies in India appoint
Chartered Accountant firms for the job of internal auditing.
Hence all the qualifications that are applicable to Statutory Auditors usually apply to internal auditors in India.
However, in United States professional bodies like Institute of Internal Auditors regulate the profession of internal
audit. Hence the qualifications or disqualifications promulgated by that Institute determines who should undertake
internal audit in that country.

 Spouse of a CEO of a company can not be its statutory auditor

To see that qualities like independence, integrity and competence and skill exist in auditors various statutes
throughout world, while prescribing qualifications for appointment of auditors have exercised care and have
imposed restrictions.

Companies Act 1956 in India has following provisions as to qualification of a statutory auditor:
Auditor should be a Chartered Accountant or firm of Chartered Accountants within the meaning of the Chartered
Accountants Act, 1949.
The following persons are not qualified for appointment as auditors of a company;
• A body corporate (Company)
• An officer or employee of the company;
• A partner or employee of an officer or employee of the company;
• A person who is indebted to the company for more than Rs.1,000 or who has given any guarantee or
provided any security in connection with the indebtedness of any third person to the company for
more than Rs.1,000.
• A person who holds any security (share or stock) in the company he audits
• A person is not eligible for appointment as auditor of any company, if he is disqualified from acting as
auditor of that company's subsidiary or holding company or of any other subsidiary of the same holding
company.
• If an auditor, after his appointment, becomes subject to any of the \disqualification specified
above he shall be deemed to have automatically vacated his office.
 • Further the Act lays down the ceiling on number of audits that can be undertaken in a year audits by an
auditor.
• In case of Government Companies the auditor is appointed by Comptroller and Auditor General of
India.

3) From the following case of the accounting standards, as appeared in The Hindu Business Line, on
30th April, 2007, State what are the implications of adopting International Accounting Standards with
regard to corporate.

Indian business has gone global in a big way in recent years, which is clearly reflected in more companies setting
up overseas arms, raising money from the market and acquiring companies. The coming years will only see an
increase in the number of companies getting more globalised in their operations. In such a scenario, there is a
pressing need for adoption of global Accounting Standards (AS), says Mr. R. Narayanaswamy, Professor of
Finance and Control at IIM- Bangalore.
Speaking to Business Line on the wide-ranging implications of adopting global AS and how it can benefit
corporates and the country as a whole, he urges the shift towards these standards as they have "wide international
recognition because of their quality, coverage and acceptability. Indian companies can communicate cost-
effectively with the rest of the world if their financial statements comply with global standards."
According to him, investors — especially from overseas — customers, suppliers and employees will then have
more faith in the numbers that the companies churn out.
Other benefits include lower cost of raising equity and debt capital, greater liquidity for shares and lower bid-ask
spreads. "All of these result from reduced information asymmetry between managers and outsiders."

Global Standards
Currently, the standards and other pronouncements issued by the IASB and FASB are the two systems that are
competing for this status.

Would such a move entail dismantling of national AS structures such as the ASB of the
ICAI? Mr. Narayanaswamy, a PhD in Accounting from the University of New South
Wales, Sydney, clarifies that a country that adopts international standards examines them for conformity with
national laws and practices. "We would still need a national accounting standard-setter with superior technical and
financial resources."
He cites the example of the Australian Accounting Standards Board, which continues to exist and play an
important role, though Australia has adopted IAS/IFRS. There are no international standards that do not apply to
India, he adds. On the Indian system of AS generation, which involves authorities and organisations such as the
RBI, the SEBI, the
ICAI and the CBDT, the biggest problem is multiplicity, "which happened mainly because the accountants were
slow and lukewarm in their response. For a long time, I have been making a case for an independent accounting
standards body with full-time members."
After all, accounting is too serious a matter to entrust to accountants, he quips.

No Monitoring
On a more serious note, Mr. Narayanaswamy, a member of the ICAI, the ICWAI and the
ICSI, expresses concern that there is little effective monitoring of reporting entities following the mandatory AS.
"I doubt if anyone is monitoring compliance. Both the SEBI and the MCA do not have the kind of technical staff
they need. This is a task that the ICAI cannot do satisfactorily, because there are obvious conflicts."
According to him, the Securities Exchange Commission (of the US) provides an excellent model for high-quality
monitoring of all corporate filings. In the UK, the
Financial Reporting Review Panel raises important questions and in many instances gets the statements amended.
These are worthy of emulation, he adds.
On the gaps in Indian GAAP, and how they can be plugged, he says: "We do not have a set of Indian standards
dealing with financial instruments, but the exposure drafts have been out for a while. There is no standard on
business combinations; the one that we have — AS 14 — deals only with amalgamation, but businesses largely
come together by means of inter-company investments."
According to him, some of our standards are "very much out of date and need to be reworked," especially those
relating to revenue recognition, leases and presentation of financial statements. To most readers of annual reports,
AS references may be abstruse. So, how does a company go about effectively communicating to the business
reader the effect accounting standards have on reported financial performance?
"The lay reader needs assurance that managers prepare financial statements faithfully in accordance with high-
quality AS and the company's auditors are satisfied with the statements."

But, increasingly, standards seem to getting more complex and addressing the needs of professional analysts and
investors more than shareholders. "This is because business transactions are getting more complex."
He adds: "For example, to be able to understand the standards on financial instruments, stock options, pensions or
segments, the reader should have a good knowledge of business and financial operations. However, management
should make its point in plain English."
Mr. Narayanaswamy is all for accountants understanding how business organisations work. "Accounting follows
business. So, it would be useful for accountants to understand how new products are developed, how projects are
managed, what drives M & As, how tax planning relates to business planning, or how risk is managed using
financial instruments such as derivatives."
According to him, providing comparisons with other jurisdictions, and then explaining reasons for any differences
in AS, is another way of igniting interest in standards.
Another "appealing method" is using published annual reports and media reports to illustrate the difference
between good and bad accounting.
Can changes in the law give AS a boost? "A simple way would be to empower shareholders by allowing private
shareholder litigation against company management and auditors. As the company and securities laws stand now,
only the company can sue its managers and auditors for damages for their failure to show due care and diligence in
their work, " says Mr. Narayanaswamy whose current research interests include corporate disclosure policy,
earnings management and strategic cost management.
Since shareholders cannot sue even though they are the real losers in company failures, he wants them to be
allowed to take care of their interests. "That would be a major step forward, though I am not for class action suits
at the moment."
Equally important is strengthening the corporate governance system, especially independent directors and audit
committees, improving audit quality and independence, and reforming the legal regime.

Are software hardwired?

Do accounting software products factor in AS, thus reducing the compliance worry for accountants? "Gradually,
many products are becoming XBRL-compliant. Adoption of XBRL will greatly reduce the cost of preparing
financial statements for multiple purposes, such as shareholder reporting, tax reporting and reporting to regulatory
agencies. Nevertheless, costly modifications to information systems are often unavoidable."
Going beyond technicalities and looking at the bigger picture, he says that managers should focus on the larger
purpose of financial reporting. Principle-based accounting standards presumes that we can the trust accounting and
business professionals to make fair and reasonable judgements. If someone breaches that trust, everyone will have
end up having to pay a huge cost by having to comply with horrible rule-based accounting standards. I hope we
don't have to get there."

Ans:

• There are no international standards that do not apply to India, he adds. On the Indian system of AS
generation, which involves authorities and organisations such as the RBI, the SEBI, the ICAI and the
CBDT, the biggest problem is multiplicity, "which happened mainly because the accountants were slow
and lukewarm in their response. For a long time, I have been making a case for an independent
accounting standards body with full-time members."
• SEBI and the MCA do not have the kind of technical staff they need. This is a task that the ICAI cannot
do satisfactorily, because there are obvious conflicts."
• Financial Reporting Review Panel raises important questions and in many instances gets the statements
amended. These are worthy of emulation.
• Some of our standards are "very much out of date and need to be reworked," especially those relating to
revenue recognition, leases and presentation of financial statements
• The lay reader needs assurance that managers prepare financial statements faithfully in accordance with
high-quality AS and the company's auditors are satisfied with the statements.
• To understand the standards on financial instruments, stock options, pensions or segments, the reader
should have a good knowledge of business and financial operations.
• To understand how new products are developed, how projects are managed, what drives M & As, how
tax planning relates to business planning, or how risk is managed using financial instruments such as
derivatives."
• Providing comparisons with other jurisdictions, and then explaining reasons for any differences in AS, is
another way of igniting interest in standards.
• Another "appealing method" is using published annual reports and media reports to illustrate the
difference between good and bad accounting.
• A simple way would be to empower shareholders by allowing private shareholder litigation against
company management and auditors. As the company and securities laws stand now, only the company
can sue its managers and auditors for damages for their failure to show due care and diligence in their
work.
• Equally important is strengthening the corporate governance system, especially independent directors
and audit committees, improving audit quality and independence, and reforming the legal regime.

• Adoption of XBRL will greatly reduce the cost of preparing financial statements for multiple purposes,
such as shareholder reporting, tax reporting and reporting to regulatory agencies. Nevertheless, costly
modifications to information systems are often unavoidable."
• Managers should focus on the larger purpose of financial reporting. Principle-based accounting
standards presumes that we can the trust accounting and business professionals to make fair and
reasonable judgements. If someone breaches that trust, everyone will have end up having to pay a huge
cost by having to comply with horrible rule-based accounting standards.