Sunil Talati, M.Com., LL.B, FCA Past President ICAI

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1 Challenges before the Accounting and Auditing profession Are we geared up? Indian perspective Sunil Talati, M.Com., LL.B, FCA Past President ICAI

2 The Accounting and Auditing Profession is Centuries old. Gained momentum and recognition. Scenario in Fifties when Population was less than 40 crores Few hundred Chartered Accountants -Now 120 crore Indians and 1,75,000 C.As. From under developing economy to developing economy.

3 Times have Changed. Opportunities and Areas are different from 1950 to Improved from 1990 to Totally changed from 2001 onwards.

4 The statistics of the professional speaks otherwise. Even now more than 80 per cent, i.e. around 80,000 Chartered Accountants, who are in practice, are either Proprietor or Partnership of two to three. With the Foreign Consulting firms practicing in collaboration with many Indian firms with different names and different services under one roof at exorbitantly high fees it is for the professional to decide how small and medium firms of Chartered Accountants can consolidate and meet the ever increasing expectations from the business community and the dire needs of industrialists, who are spreading their wings across the globe in various countries by acquisition and takeovers left, right and centre.

5 Tremendous potential for new smart techno savvy and for small and medium firm to grow and develop the practice particularly doing away the disparity in remuneration and rewards Next 10 years time scope of substantial improvement and services and financial rewards. Prime Minister s Vision India 2020 and ICAI s Vision 2021 Document

6 Accountability - Breakdowns Recent accountability breakdowns in Private Sector right from Enron - World common Cruest Tyco Adulfia Zerox and several others including recent one on Delloite and in our country Satyam and now 2G scam. Were they compromising with clients for money or clear case of negligence corporate failure or failure on the part of Auditors a dire need a for introspection particularly by Big Firms and Seniors.

7 Accountability Environment In fact Auditors are enjoying tremendous respect and regards from Society considered as most noble profession money/remuneration/fees vis-à-vis status and respect in Society. Now everything is measured on monetary terms total receipts and remuneration. Competition within Big Firms also to remain first.

8 Partners remuneration growth and elevation depends on new clients and what additional remuneration rather than how many qualifications and how many detection of errors and frauds. Society will look on such auditors differently and therefore, need to strike a perfect balance to claim to be a perfect Auditor.

9 Accountability - forces 1) Individual and Corporate greed 2 ) Inadequate Corporate Governance system 3 ) Audit Committee Coffee Cashew eating or goal accomplishment. 4) Ineffective Regulations from MOC inspite of FRRB and peer review and now quality review by ICAI. 5) Enforcement of Accounting Standards IFRS Will it serve the purpose? When?

10 Applicability and Enforceability of Auditing Standards and approaches 1. Financial Managers and Advisors working to achieve certain reporting results focusing on the legal form vis-à-vis economic substance of the transaction. 2. Executive Compensation arrangement hefty packages compromises 3. Auditors doing what is required under the Act active in complying standards

11 Applicability and Enforceability of Auditing Standards and approaches 4. Confusion over whom the Auditors work for 5. Auditors delivering services to clients that impaired their independence Transfer Pricing work Advance Ruling work Restructuring, Merges, Acquisitions and Consultancy work with hefty fees. 6. Statutory and Internal Audits under same umbrella by using Private Limited Companies.

12 Reaching our Goals Changing the Current Regime Regulators and others must address the issue of auditor liability in order for the profession to forge ahead with the recommendations made in this report. One alternative may be for the MOC to oversee potentially problematic audits to ensure they are completed to the highest possible standards.

13 Adjusting Auditing Practices Auditing firms must place the appropriate value on the partners who conduct to- quality audits, not solely on those `rainmakers who bring in the most new business. The goal must be to maintain topnotch auditing standards.

14 Reinvigorating Audit Committees Audit committees must be continually upgraded, so that their members are both qualified and able to challenge management and auditors alike on the reasons behind particular judgements or auditing decisions. Audit committees must reassert their pre- eminence in the audit process, and ensure that they provide full backing and support to independent external auditors as well as to internal auditors in the event of clashes with management.

15 Structural Challenges 1. Rules base Versus Principles base Standards 2. Revised extended XBRL Financial Reporting 3. Enhanced Audit and Attestation Standards including Internal Audit Standards. 4. Issues of Big Audit Firms 5. Latest report by Council and action by MOC 6. Reduction of new entrants in Audit practice.

16 Reasons Answers The problem is that 80 per cent of the activities in life contributed to 20 per cent of the results and 20 per cent of events and activities would contribute to 80 per cent of the results. Therefore, it is very necessary for Chartered Accountants to concentrate on important few clients rather than more clients paying less by undervaluing our services. A Chartered Accountant must do ABC analysis and rate of client based on parameters like fees per client, quality of client, potential of growth, profile of client etc. Who is a Cynic? Man who knows the price of everything and the value of nothing. Chartered Accountant must dispense with this category of clients. Learn to pass on the client where 20 per cent of revenue is coming from 80 per cent of your time.

17 Reasons Answers In spite of Institute and Council doing so many efforts endlessly every year for net working and for systematic growth of small and medium practicing Chartered Accountants, the fruits and results are not yet up to the expectations. Now that MCA has cleared the path for LLP we all must think big and in turn start acting big. Not as an answer or competition with big firms, but to really grow big and see that profession of Accountancy and Auditing in India becomes world s best

18 Additional structural changes for gearing up 1. Redefine structures in auditing. 2. SMEs please awake and join hands. 3. Need for a continuous audit approach 4. Expectation gap What an Auditor does and What not Who is responsible for What?

19 Additional structural changes for gearing up 5. Think about tomorrow and act accordingly. 6. Be clear on Ethical Standards and Independence and rebuild the public trust. 7. Public interest above personal interest do what is right and acceptable use judgements complete checklist recognized continuous improvisation and changes in trade, business and commerce - mould yourself accordingly Trust is hard to earn but very easy to loose

20 What should Financial Reporting Look Like in the Future? The balance sheet of the future will be a more flexible instrument, able to adapt to a wide variety of industries and circumstances. It will include a variety of non-financial information, and should encompass a wider array of numbers so that users recognize when management and auditors are making judgements on transactions and asset valuations that are not, and cannot be, `hard and fast.

21 Improving Auditing and Financial Reporting Standards New attestation standards are needed. The current stand is appropriate for some, but not all, transactions. Going forward, auditors should be prepared to offer, and investors to accept, more limited attestations when the facts require them.

22 Preparing the Next Generation of Professionals Accounting firms must seek out job candidates with a strong knowledge of business and finance. We believe that the Big accounting firms are ideally positioned to establish the gold standard when it comes to subsequent professional training.

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