Accounting Education and Research as Infrastructure for a Modernizing Economy

1. Accounting Education and Research as Infrastructure for a Modernizing Economy Shyam Sunder James L. Frank Professor of Accounting, Economics and Finance, Yale School of Management New Haven, CT, USA 29th All India Accounting Conference University of Delhi, December 22-23, 2006

2. An Overview • Importance of infrastructure for modernization of Indian economy • Service infrastructure just as important as the physical • Accounting is a critical element of service infrastructure for organizations and economy • Development, modernization and innovation of all parts: • Financial reporting, management accounting, internal controls, government and not-for-profit accounting, governance, financial analysis, forensic and investigative, internal and external auditing, government financial management, program evaluation • In academia, special and immediate attention to curriculum, research, and doctoral education • Indian accounting can become the envy of others (just as the software did) if this community is so determined Shyam Sunder: Accounting as Infrastructure

3. Better Infrastructure of Modernizing India’s Economy • The awareness of the critical need to develop the physical infrastructure in India to support a modern economy is a recent and welcome development. • No economy can survive, much less thrive, without provision of efficient transportation, communication, and utilities. Shyam Sunder: Accounting as Infrastructure

4. But, That is Not Enough • All the Seven Wonders of the Ancient World? • Great Pyramid of Giza • Hanging Gardens of Babylon • Temple of Artemis • Statue of Zeus at Olympia • Mausoleum of Maussollos • Colossus of Rhodes and the • Lighthouse of Alexandria. Shyam Sunder: Accounting as Infrastructure

5. Shyam Sunder: Accounting as Infrastructure

6. What is Missing? • All these are physical constructions—tangible—things you can see and touch • Was it Alexander’s physical strength and skill that made him so great? Or was it his skills of management? • The tangible and visible nature of physical infrastructure obscures the role and criticality of equality important institutional, human skills, soft, and services infrastructure of society which is no less important Shyam Sunder: Accounting as Infrastructure

7. Accounting is Part of Services Infrastructure • Services infrastructure of which accounting—the profession, education and research—is an important part • India has an ancient tradition of bookkeeping for merchants running proprietary businesses (bahee-khata) • However, the broader forms of accounting to support efficient manufacturing and efficient capital markets may have lagged behind the western practices • What can Indian accountants, educators, researchers and the government do to develop accounting in India so it becomes a leading innovator in the world in its own right? Shyam Sunder: Accounting as Infrastructure

8. Elements of Accounting to Modernize the Indian Economy • Management accounting • Financial reporting • Internal controls • Government and not-for-profit accounting • Corporate governance • Financial analysis • Forensic and investigative accounting, • Taxation • Internal auditing • External auditing • Government financial management and program evaluation • Curriculum • Research • Doctoral education Shyam Sunder: Accounting as Infrastructure

9. Management Accounting • When a proprietorship business grows into a multi-level managerial hierarchy, the simple bookkeeping system is no longer sufficient • Bookkeeping must be expanded to include cost accounting, performance evaluation, compensation, transfer pricing etc. to run the organization efficiently • Work with managers to observe and share their accounting innovations • Field studies of improving operational efficiency • Examination of performance measurement and compensation systems • Operational efficiency in services sector (banking, software, government offices, etc.) Shyam Sunder: Accounting as Infrastructure

10. Financial Reporting • With large capital needs, no single individual can own the enterprise, and capital must be gathered from a large number of shareholders • To meet the needs of such enterprises, bookkeeping and managerial accounting expanded into financial reporting—the most comprehensive form of accounting developed to serve the needs of organizations with publicly traded ownership shares • Financial reporting has come to be dominated by written standards (e.g., FASB and IASB) • Standards alone are not sufficient to ensure good financial reporting • Developing social norms of “true and fair” financial reporting in accounting and business community—role of professors • Developing an open process for creating competitive standards to ensure efficiency in financial reporting • Development of alternative methods of accounting, field testing, and research on link to security markets • International participation and engagement Shyam Sunder: Accounting as Infrastructure

11. Internal Controls • Development of internal controls to ensure the preservation of organization’s resources • Measurement of pilferage, wastage • Cost effectiveness of internal controls • Reporting mechanisms for internal controls violations (CEO, in-house counsel, board of directors) Shyam Sunder: Accounting as Infrastructure

12. Government and Not-for-profit Accounting • Choosing accounting approaches according to the economic characteristics of the product • Private goods (clothes, cars, electricity) • Public goods (sanitation, courts, police) • Municipal, state and union governments • Standards and norms for the sector Shyam Sunder: Accounting as Infrastructure

13. Corporate Governance • A great deal of good governance depends on good accounting (both in corporations as well as in other sectors of the economy) • Audit committees and their effectiveness • Public roles: vigilance and monitoring by small shareholders • Role of the press in good corporate governance • Convincing management of their fiduciary role and responsibility • Managing and reporting executive compensation Shyam Sunder: Accounting as Infrastructure

14. Financial Analysis • Huge growth industry for India: analytical service exports • Using financial reports and other sources of information to make investment decisions • Brokerage • Investment banking • Mutual and hedge funds • Bankruptcy analysis and vulture funds • Educating accounting and business students in financial analysis Shyam Sunder: Accounting as Infrastructure

15. Forensic and Investigative Accounting • Analysis of financial reports and other information to: • Detect financial malfeasance • Investigate fraud • Gather evidence for prosecution and defence • Corruption • Educating students in detection techniques and statistical analysis Shyam Sunder: Accounting as Infrastructure

16. Taxation • Efficiency of revenue collection (cost-benefit analysis) • Efficiency of audit decisions in taxation • Economic analysis of consequences of taxation • Alternative means of revenue collection (VAT vs. sales tax, etc.) Shyam Sunder: Accounting as Infrastructure

17. Internal auditing • Role and extent of internal auditing • Reporting relationships of internal auditors (executives, board, etc.) • Divide of work between internal and external auditing Shyam Sunder: Accounting as Infrastructure

18. External auditing • Hiring, managing and firing of external auditors • Cost and pricing of external auditing • Organization of market for auditing • Auditor liability analysis and consequences • Competition and independence • Audit quality: definition and measurement Shyam Sunder: Accounting as Infrastructure

19. Government financial management and program evaluation • Improving financial management in government sector • Evaluation of government programs for effectiveness and efficiency • Budgeting techniques • Comparative analyses of government financial management within country and internationally Shyam Sunder: Accounting as Infrastructure

20. Curriculum • Dynamic development of curriculum • Curricular development support and incentives • University rules and regulations: rigidity versus flexibility • Balance of theory and practice in curriculum • Case, books, and problem development • Publication of curriculum oriented academic journals • Financial support and testing of curriculum Shyam Sunder: Accounting as Infrastructure

21. Research • Interaction between instruction, practice and research • Engagement of research and professional communities (CA, CWA, investment and commercial banks, mutual funds, financial service intermediaries, government and auditor general of India, etc.) • Refereed research journals with rigorous standards • Innovation and international leadership in accounting Shyam Sunder: Accounting as Infrastructure

22. Danger Signs: Quality and Quantity of Scholarship • As an expatriate Indian who has retained his Indian citizenship after 36 years abroad, please forgive me for sharing one concern I have about a critical weakness in India’s development • This concerns research and scholarship, as reflected in high quality PHD programs, not only in accounting and management, but in virtually all aspects of academia (with the fortunate exception of chemistry). • PhD programs, like high quality seed needed for agriculture, are expensive in time and money. • Yet, unless we have the foresight to find ways of attracting at least 5 percent of the brightest students in each year’s class to scholarly careers, India would have no hope of being able to compete in the world awash in talent and better educational systems. • Since there is no time today, I shall expand on this analysis in my address at the India Habitat Center at 6:30 PM on January 9. Shyam Sunder: Accounting as Infrastructure

23. To Summarize • Development of these dimensions of accounting will help India increase the efficiency of its administrative structures and economy, and compete more effectively and equitably in the world markets. • It will also enable accounting to become a vibrant academic discipline in universities and practice in business community • Advancement of the practice, education and scholarship of accounting will help India develop an internal and exports market for accounting-related services listed above. Shyam Sunder: Accounting as Infrastructure

24. The Challenge • What is it that Indian software engineers can do to be among the best in the world that Indian accountants and scholars cannot? • Innovation and leadership is a state of mind. • Indian accounting is ready for the challenge Shyam Sunder: Accounting as Infrastructure

25. Thank You! Shyam.sunder@yale.edu www.som.yale.edu/faculty/sunder Theory of Accounting and Control