With the coming to light of various accounting scams in the USA, of which we are so used to in India, I felt it would be appropriate to share some thoughts on accounting for success in business.

At the outset, we must try to answer the questions: Why we should account at all? What happens if we do not account? Will the heavens come down?!!!

It is very difficult to answer in one line. To give a comparison, it is like asking, why do we live? In fact, in India many wonder why at all they are born? So why not in that vein also ask a question why do we need to account?

It is common knowledge that financial management is the core for every business existence and success in business depends on how well finance is managed.

We must also account because it is in an economic context that a company associates and interacts with others in the world. Through tax compliance and proper accounting, we ensure social well being of the country. Though one may jump to refute this statement, it cannot be denied that we live a better life today than our parents and forefather’s inspite of the hue and cry about our political system and corruption.

Business and economics is all about money and a business effort cannot be measured without accounting. Accounting is nothing but recording of transactions as they happen in business in money or moneys worth.

Accounting is meant to record transactions, for providing information that is useful for making business and other economic decisions and for this reason it is also referred to as the language of business.

Sadly, most of the times accounting is done more as a matter of routine to comply with legal requirements than as an essential tool for successful business management. With computers being widely used for business accounting, it is very easy to prepare financial statements to aid business decisions and management of finance better. But how many in India view it this way? Generally, small and medium enterprises who employ the maximum banking resources in business, have least respect for adopting good accounting principles and practices.

As a social science, accounting is the product of it’s environment. However, accounting also influences the social environment. Thus there is interdependence between accounting and the environment in which it exists. Our country, which followed a mixed economic policy model till July 1991, encouraged improper and unethical accounting practices due to bad tax policies, political influence in economic affairs, narrow-minded financial regulations and banking set up. All these factors influenced business accounting and might have worked to give certain benefits but have lead to habits, which we find difficult to reverse.

Post liberalization, there is not much sympathy for the above mentioned situation and with e-governance on the horizon, it is better we wake up to the realities and mend our views and approach to accounting

Many successful business enterprises have gone bust due to bad accounting / reporting ( Xerox, Worldcom, Enron) and it is very common in companies who look for raising capital / loans for business. Not to mention the auditor’s collusion in this accounting mess. However it needs to be clear to all business enterprises, that they account for themselves first and then to others.

Financial statements like profit and loss account, balance sheet and cash flow statements are a summary of the accounting records, as they indicate not only the financial position but also the character of the management and the expectation of results to come in the future. Therefore, to be useful for decisions, the accounting records should depict only the truth. After all, any truth is true only when naked and it is a lie when dressed up. In a lighter vein the human race has multiplied and grown only when naked and by analogy business also would grow only when figures are naked and not dressed up.

Why are accounting statements fudged?

1. To overstate profits and show better financial position, to raise capital or loan, to declare better dividend - How long would this practice help? Very short term- many a time only once. Also such companies who have raised money by dubious disclosure are no more in the market.

Only those who raised funds through good means are able to survive and grow and they set examples for the rest to follow. Many such companies in India are- Infosys, ICICI, Hero Honda, HDFC.

2. Understate profits to avoid or postpone taxes -It does not help in the long run. There remains a permanent threat of falling under the taxman’s lens and the legal complication on being caught is not worth the tax saved. Also if the successful do not share with the Govt, how can a good society be created?

3. Hope of turnaround: Turn around has occurred very rarely when inefficiency is not overcome by analysis. It is common in financial statements of companies to overstate stocks, under provide liabilities, defer / capitalise expenses. These practices by themselves do not change the business prospects. Manipulations lead only to a sense of insecurity, lack of wisdom in corrective decision-making,

A small scale sector company in the power utility business recently lost it’s credibility and a golden opportunity to grow because of bad accounting. The investors could not stand the levels of manipulation in the company’s books and this was the main reason for the take over falling off. Also manipulations do not stop ultimate death and it is better to close shop early in business rather than after all the potential is lost.

Over the past decade, business in India has gone global and investments are expected from overseas investors. Apart from the political and economic climate, these investors mainly depend on financial statements of the companies to judge the potential for investments. Also the other developing countries like China, SE Asian Countries and the African countries offer good potential for overseas investors and the only way to attract investments to India is by projecting ethical accounting standards and reporting practices. .

It is time for all Indian Companies to embrace good accounting practices for this is the only true mirror, which shows how pretty the company is. This will lead to better performance and also better opportunities including partnerships with others.

(The Author Murali is from DoMore Financials & Consulting (P) Ltd. which provides financial counselling and a helping hand for all financial needs. For feedback send mail to This e-mail address is being protected from spam bots, you need JavaScript enabled to view it )

Issue BG16 July02

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