Adoption of International Financial Reporting Standards could accentuate volatility, driving capital away from the markets. The ICAI should defer the introduction of IFRS and first constitute a committee of experts to identify the need for this convergence.
Indian industry is set to experience significant regulatory changes in the next couple of years. A new direct tax code is on the anvil. A nation-wide GST regime is being proposed. A new company law is being legislated by the Government. Further, the Finance Minister in his Budget speech for 2010-11 also spoke of a super regulator to oversee the functioning of the RBI, the SEBI, the IRDA and others. Given the state of preparedness exhibited by various arms of the Government, we seem to be heading for confusion and chaos.
The Institute of Chartered Accountants of India (ICAI) seeks to add fat to the fire by proposing convergence of Indian accounting with International Financial Reporting Standards (IFRS) with effect from the accounting year 2011-12. By this time next year, accountants and auditors have to be prepared to draft and sign financial statements that are IFRS compliant. The timing couldn't have been worse.
Fraught with risks
The ostensible justification for this convergence to IFRS is the commitment made by the Prime Minister at the G-20 meet last year. The Prime Minister must have not been aware that this convergence is fraught with risks. To begin with, the ICAI has yet to announce a proper training and certification programme in IFRS for chartered accountants. In fact, we do not even have a set of trainers who can conduct such training across the nation. The demand supply is so skewed that everyone seems to be conducting some training programme for IFRS with the sole exception of the ICAI.
To be fair, the ICAI has been conducting some day-long programmes on IFRS which are grossly inadequate. The general impression of the auditing profession is that the ICAI's exposure drafts are merely copy-paste exercises of international standards, prepared with utter disregard to Indian scenario.
If even today, as many members feel, the ICAI lacks the necessary in-house expertise to prepare an original document on this subject, why give an assurance to the nation about implementing IFRS within the next couple of years?
The primary consumers of the financial reporting are the small investors who even now find it virtually impossible to decipher the annual financial statements. Now IFRS will usher in a brand new paradigm wherein such small investors will have to unlearn their understanding of financial reporting practiced till date in India. In direct contrast, the entire exercise of converging to IFRS could well benefit the FIIs and large investors.
What is galling is that the Indian households (read small investors) contribute approximately 80 per cent of the total domestic savings in India which stands at a healthy 37-39 per cent of GDP with a corresponding impressive domestic investment rate.
This makes the very discussion on foreign investments (which is at a mere 2-3 per cent of GDP) otiose in the Indian context. Yet, it is indeed unfortunate that policy in India is constantly tweaked to favour the foreign 2 per cent vis-à-vis the domestic 37 per cent. Nowhere in the world is this scenario acceptable wherein the domestic are placed at a distinct disadvantage vis-à-vis the foreign. Do we really need to change the ground rules of reporting to pamper this miniscule 2 per cent?
The concept of mark-to-market — the bedrock of the entire IFRS regime — is being debated in the very country of its origin. Crucially, it is seen as one that exaggerates boom in a bull run and exacerbates gloom during a bear run. Economists such as Joseph Stiglitz and Nouriel Roubini have repeatedly warned national policy framers against adopting such economically disruptive ideas. In the process, IFRS, it is argued, accentuates the volatility in the markets and thereby ends up actually driving capital away from markets.
Yet, it is repeatedly misrepresented that the IFRS regime will accelerate capital flows into the Indian economy.
Interests of Big Four
At the height of the economic crisis in October 2008, several accounting firms in the US had suggested to the Securities and Exchange Commission (SEC) to suspend fair value accounting rules. While these were debated within the US, the Big Four expressed their opposition to the same on the specious plea that its suspension could “negatively impact their business.”
That in fact was in direct contrast to the position taken by the other accounting firms in the US thus clearly establishing the nexus between the Big Four and their business interests in ushering the IFRS regime.
Why is it that the ICAI has not carried out any internal debate within the profession before accepting the convergence? Why has the ICAI failed to invite economists, members from trade and industry before announcing its plan for IFRS convergence?
The ICAI should defer the introduction of IFRS and constitute a committee of experts to first identify the need for this convergence. Second, let us understand that as each country is unique, India too has her share of uniqueness.
Any convergence to another paradigm has to factor the local issues. Finally, with several countries facing increasing risk of sovereign defaults, experts opine that currency, commodity and capital markets will face significant volatility in coming months. In such a scenario, why should the ICAI add to the uncertainty by implementing IFRS?
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