Navigating through global crisis

Dubai: When the global financial crisis hit in 2008, everyone started blaming the bankers and accounting professionals. How could they get things so wrong?

While bankers took most of the public wrath, the accounting professionals were also accused of not getting their numbers right. However, it is the accounting professionals who are guiding companies through the challenging economic situation.

Most restructuring and cost-cutting in the corporate world is being done by them. In crunch time they have to be ruthless, especially when it comes to cutting jobs to save companies from going bankrupt.

Gulf News caught up with C.A.G. Ramaswamy, President of the Institute of Chartered Accountants of India (ICAI). India produces some of the best accounting professionals. That's why a large number of global corporates rely on them. They lead companies' finance strategies as finance heads and chief financial officers across the globe.

C.A.G. Ramaswamy shares his thoughts on the current economic situation and the state of his profession. Excerpts:

Gulf News: What are the causes of the present financial crisis?

C.A.G. Ramaswamy: The financial crisis under which the global economy is now reeling is different from the one we faced three years ago. In 2008, it was a financial crisis due to breakdown, bankruptcy and fall of major financial institutions, especially in the US market, which had a ripple effect globally. Today, the financial crisis is seen as a ‘meltdown' as a result of non-payment of debts. In India, the impact of the 2008 financial crisis was minimal primarily because of its prudence-based accounting principles and norms issued by the Reserve Bank of India.

How can we improve transparency, accountability and governance?

The key element in improving transparency, accountability and governance is to win the trust of various stakeholders. It could be achieved if companies establish, and then maintain, accounting procedures that eliminate any possibility of so-called ‘creative' accounting.

In addition, financial reports must be capable of withstanding close scrutiny; they should be auditable and supported by relevant data. Further, such reports should be tamper-proof. Systems need to be in place which can identify who has accessed data, and when, so that a full audit stream can be identified.

How can accountants and auditors help monitor manipulation of financial resources?

The objective of an audit of financial statements is to express an opinion on their truth and fairness. The scope of such an audit does not extend to detection of fraud nor are the auditor's procedures designed to specifically identify fraud. However, this is not to say that the auditor can turn a blind eye to the risk of material misstatements in the financial statements; he is required follow audit procedures that are effective for detecting fraud. However, the primary responsibility for managing the affairs of a company, including accounting for the transactions, rests essentially with the board of directors. While the auditor may be able to identify potential opportunities for fraud, it is difficult for the auditor to determine whether misstatements in judgment areas, such as accounting estimates, were caused by fraud or error.

How do you view the accountancy profession in India?

The Institute of Chartered Accountants of India (ICAI) regulates the profession of Chartered Accountants in India. Since its establishment, it has been making relentless efforts to bring an overall qualitative improvement in financial reporting in India.

India and Indian CAs always have always been regarded as conservative. However, the crisis of 2008 proved that this is a prudent approach, and today Indian CAs are the most successful professionals worldwide, including in the UAE.

The accounting profession is booming and Chartered Accountants are in high demand in India. They are paid very highly and are positioned in middle to senior level positions in India and worldwide. Most of the chartered accountants (CAs) are directly hired by multinational corporations during on-campus meetings organised by the Institute. The success of small and medium enterprises (SMEs) and industries in India surviving the recession is attributed to the fact that accountants provided the right support to most of the organisations/SMEs.

How do you view the accountancy profession in Mena, particularly in the UAE?

The changing imperatives in the Mena region's economy require the Mena industry to take note of the global corporate agenda in raising local practices to international standards in areas of governance, financial transparency and accountability.

This requires improvements in the standards of financial reporting leading to transparency, better governance and increased accountability.

While the accounting profession can address the challenge of organising appropriate accounting systems, it calls for the creation of an enabling framework in which trained professionals while being exposed to the best of international practices in accountancy are groomed through further training and courses designed for skill development. ICAI, which has a strong footprint in the Middle East with more than 5,000 members, has initiated steps to work with UAE authorities in creating measures for sharing technical know-how with local constituents.

What recommendations would you make and how can we benefit from the accounting and auditing profession to a maximum extent?

The Middle East has a strong probability for harmonisation of accounting standards, since these countries share the same accounting values. The accounting profession can play a key role in boosting investor confidence in the Mena region, which is facing a crisis and foreign investors are running away due to unrest in the region.

In the UAE, all accounting professionals qualified from various accounting professional organisations of different countries, such as ICAI/ACCA/ICAEW and other Arab accounting professional organisations, should be brought under one umbrella by creating the UAE's first independent accounting and auditing regulatory body.

In this regard, in 2006, ICAI signed an MOU with the Centre of Excellence for Applied Research and Training to create the UAE's first accounting body and to conceptualise and devise an international curriculum in accountancy.

The UAE's economy is dominated by SMEs. While preparing the books of accounts, the SMEs are compelled to adopt full IFRS, which is mainly designed for public listed companies. In 2010 IASB launched International Financial Reporting Standards for SMEs. I recommend that SMEs should switch over from full IFRS to IFRS for SMEs at the earliest.