Union Finance Minister Mr. Pranab Mukherjee asked Chartered Accountants to apply Accounting Standards uniformly and assist in presenting the true picture of the financial health of the company while ensuring accountability in all aspects. He said that we should not fiddle with Accounting Standards, even if financial performance of a company is volatile. Shri Mukherji was addressing the 42nd Annual Conference of Southern India Regional Council of the Institute of Chartered Accountants of India (ICAI) in Kochi today.

The Finance Minister said that standardizing of the accounting practices help in mitigating the problem of information asymmetry between various stake holders such as managers, owners and creditors. He said, while managers have the incentive to be more forthcoming on good news about the company’s performance and prospects, they may want to hold back bad news. But the accountants as information intermediaries between managers and shareholders need to identify and recognise losses at an early stage, thereby mitigating asymmetry in information, the minister added.

The Finance Minister Mr. Mukherjee said that, as India gets more integrated with the global economy, we must have stronger disclosure standards in keeping with the international best practices. He said that, we must also build stronger supervisory frameworks to provide incentive for more responsible corporate conduct. Mr. Mukherjee said that the Chartered Accountants must be aware that the Ministry of Corporate Affairs has brought out voluntary guidelines for corporate governance in December 2009,he urged all companies to adopt this guideline in the spirit of self regulation.

Mr. Mukherjee said that recently there have been instances where the auditing community has been found wanting in its professional propriety while valuing complex financial products.He said that, he is confident that ICAI as a mentor will plug those loopholes. He further said that must promote and encourage ethical use of information by avoiding, controlling and disclosing conflicts wherever they arise. While doing so we should ensure that the procedures established to control conflicts are not porous, he added.

Concluding his address Mr. Mukherjee said that as the Government and the market regulators continue to exercise vigil on the markets, it is up to the other stakeholders to contribute their share in ensuring good governance. He said that good governance makes for growth and long term sustainability in business.

The Complete text of the address of the Finance Minister Mr.Pranab Mukherjee is given below:

“I am very happy to be here today at the 42nd Annual Conference of Southern India Regional Council of the Institute of Chartered Accountants of India (ICAI. I believe this is a prestigious annual event which has become well known for deliberating topical issues of professional importance to your association. Issues like the International Financial Reporting Standards (IFRS) and the imminent implementation of our tax reforms have a bearing on the future of our reporting and disclosure framework which needs attention of a forum such as this.

2. If one were to go back a decade, few would have anticipated the Indian GDP to grow at rates of 8-9 per cent, or our stock market indices- SENSEX and NIFTY- to reach the levels that we see today. The resilience that India has demonstrated in recent times has been recognised and appreciated across the globe. There has been a significant increase in the economy’s capacity to absorb shocks without major disruptions. It reflects a maturing of our management of economic policy and developments. That this has happened even as the economy has become far more globally integrated over the years indicates that globalisation and economic resilience can go hand in hand.

3. We have all contributed to this progress in our respective domains. Let me complement ICAI for their initiative to work with financial institutions in streamlining and fine tuning the financial reporting, auditing and accounting architecture of India. Such efforts create greater awareness among stakeholders about the challenges and opportunities that we have before us and help in identifying issues that need to be addressed for accelerating and sustaining the development tempo.

4. The Government is aware of the fact that India’s economic legislation needs to be progressive and be in tune with global norms and best practices. Towards this end we have introduced the Direct Taxes Code Bill. The thrust of the Code is to improve efficiency and equity of our tax system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base. The language has been simplified to enable better comprehension, remove ambiguity and encourage voluntary compliance. The new Code is designed to provide stability in the tax regime as it is based on well accepted principles of taxation and best international practices. I am confident that together with GST, this will streamline the tax administration of the country by making it efficient and equitable.

5. We have concluded tax information exchange agreements with eight countries and jurisdictions including Bahamas, Bermuda, British Virgin Islands, Isle of Man, Jersey, Monaco, Cayman Islands and Argentina. Active negotiations are in progress with other jurisdictions. The renegotiation of Double Taxation Avoidance Agreement (DTAA) with treaty partners is being actively pursued and a revised DTAA with Switzerland has already been signed.

6. Indian companies are increasingly accessing the global markets to meet their capital needs by listing their securities on the stock exchanges outside India. To be able to communicate and effectively engage with the world we need a common language that is understood by every market in the world. This was the main objective of converging our national accounting standards with IFRS. India as a member country of G20 is committed to achieving a single set of high quality global accounting standards. The use of globally acceptable accounting framework helps in promoting investors’ confidence and brings more clarity and uniformity for users of financial statements.

7. The use of standardised accounting practices helps in mitigating the problem of information asymmetry between various stakeholders such as managers, owners and creditors. While managers have the incentive to be more forthcoming on good news about the company’s performance and prospects, they may want to hold back bad news. The accountants as information intermediaries between managers and shareholders need to identify and recognise losses at an early stage, thereby mitigating asymmetry in information. Accounting standards have to be based on principles, be uniformly applied and assist in presenting the true picture of the financial health of the company, while ensuring accountability in all respects.

8. This will help in avoiding unknown risks and allow everyone to have a fair assessment of the company. If financial performance is volatile, the function of a sound accounting procedure is to report the volatility. Volatility in the market can be managed by risk management tools. We should not fiddle with accounting standards to fix such problems.

9. The responsibility for corporate governance is multilayered. Within a company internal audit department is the proverbial foot soldier to detect and prevent fraud on a day to day basis. The Board of Directors have the ultimate responsibility for in-house oversight. At the external level there are several components like market regulators, external auditors, tax authorities, banks and financial institutions besides investor groups or associations. Providing essential financial information on a company’s performance to its shareholder and other stakeholders is an integral and important part of good corporate governance.

10. We need to regulate better and at the same time ensure that regulation does not degenerate into obsessive control. While too tight a regulation may lead to a lack of development in financial products, a very lack regulatory structure may encourage financial misdemeanour. Indeed, market regulation is no longer viewed as an irrelevant intrusion but is considered necessary to help achieve developmental goals. The recent experience from the global financial crisis has reinforced this belief.

11. As India gets more integrated with the global economy, we must have stronger disclosure standards in keeping with the international best practices. We must also build stronger supervisory frameworks to provide incentive for more responsible corporate conduct. I am sure you are all aware that the Ministry of Corporate Affairs brought out voluntary guidelines for corporate governance in December 2009. I urge all companies to adopt this guideline in the spirit of self regulation.

12. Recently there have been instances where the auditing community has been found wanting in its professional propriety while valuing complex financial products. I am confident that ICAI as a mentor will plug those loopholes. We must promote and encourage ethical use of information by avoiding, controlling and disclosing conflicts wherever they arise. While doing so we should ensure that the procedures established to control conflicts are not porous. As the Government and the market regulators continue to exercise vigil on the markets, it is up to the other stakeholders to contribute their share in ensuring good governance. Indeed, good governance makes for growth and long term sustainability in business.

I wish you all an enriching deliberation and a successful conference”.

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