The spice trade first brought European explorers, most notably the Portuguese adventurer Vasco da Gama, to the shores of the Indian sub-continent in the late fifteenth century. In the mid-eighteenth century, Great Britain used a series of military excursions to gain control over several major Indian provinces and effectively made the country the largest colony within its far-flung empire. For almost a century, Britain’s colonial rule of the country was administered through the infamous British East India Company. After Great Britain thwarted the bloody Indian Rebellion of 1857, the British East India Company was abolished and India became subject to direct rule by the British monarchy. Periodic rebellions, civil unrest, and ultimately the massive civil disobedience campaign orchestrated by Mahatma Gandhi culminated in India gaining its independence from Great Britain in August 1947. Britain’s colonial rule would leave a lasting imprint on all aspects of Indian society, including its economy, financial reporting system, and accounting profession. During the two centuries that Britain controlled India, a large number of British citizens immigrated to India seeking opportunities in banking, insurance, accounting, and other financial services industries and professions. Alexander Fletcher Ferguson arrived in India in the late 1880s. A few years later, he organized an accounting firm, A. F. Ferguson & Co., that would become one of India’s most prominent professional services organizations and its largest accounting firm.

Native Indians typically did not welcome British immigrants who, like Ferguson, often took advantage of their British “connections” to further their careers and otherwise elevate their social status. Making matters worse, the new immigrants often treated Indians as second-class citizens in their own country. Not surprisingly, after India gained its independence, an isolationist mindset prevailed in the country. Because of that mindset, India’s central government established protectionist policies to prevent foreign companies, professional firms, and other organizations from dominating the new nation’s economy. These policies included significant tariffs on imported goods, limits on equity investments in Indian companies by foreign nationals, and, most important, the so-called “License Raj.” The License Raj was an extensive set of government rules and regulations established by India’s first Prime Minister, Jawaharlal Nehru, that gave India’s central government effective control over the nation’s economy.1 Under the License Raj, any major business venture proposed by a domestic or foreign entity had to be approved by a central government planning commission. India’s protectionist economic policies discouraged the major international accounting firms from establishing significant operations in India. However, when India’s central government announced that it planned to relax its protectionist policies in the early 1990s, those firms quickly began pursuing practice development opportunities in the world’s second-largest nation. Over the following decade, a bitter controversy erupted regarding the aggressive expansion efforts of the major international accounting firms within India. Before examining that controversy, it will be helpful to review the recent history of the Indian accounting profession.

Shortly after India gained its independence from Great Britain, India’s Parliament passed the Companies Act to set up a regulatory infrastructure for the new nation’s capital markets. That infrastructure closely resembled the regulatory framework for Britain’s capital markets that was created by the series of Companies Acts adopted by the British Parliament beginning in the mid-nineteenth century. Britain’s Companies Acts also served as a blueprint for the federal securities laws enacted by the U.S. Congress in the 1930s. The regulatory agency charged with overseeing India’s capital markets is the Securities and Exchange Board of India (SEBI), the equivalent of the Securities and Exchange Commission in the United States. Similar to the comparable federal statutes in Great Britain and the United States, India’s Companies Act mandates that publicly owned companies issue periodic financial statements audited by an independent accounting firm. In 1949, India’s Parliament passed the Chartered Accountants Act. This statute created the New Delhi-based Institute of Chartered Accountants of India (ICAI) to oversee the nation’s accounting profession. In carrying out its responsibilities, the ICAI works closely with the SEBI. Unlike such professional organizations as the American Institute of Certified Public Accountants (AICPA), the ICAI is a federal agency that has a wide range of statutory authority. The ICAI’s regulatory mandate includes, among other responsibilities, issuing accounting standards and ethical rules of conduct for Chartered Accountants (CAs), overseeing India’s independent audit function, administering the series of examinations that must be passed to become a CA, and sanctioning CAs and public accounting firms that violate their statutory, ethical, or other professional responsibilities.

Since its inception, the ICAI has embraced Great Britain’s financial reporting model that requires public companies to prepare periodic financial statements providing a “true and fair” view of their financial condition and operating results. Although not expressly defined, “truth” and “fairness” in this context are generally determined in reference to the economic environment in which a company is operating, unique conditions or challenges facing the company, and accounting and financial reporting concepts relevant to the company’s financial affairs.2 Most important, the true and fair view demands that the economic substance of transactions prevails over their legal form. The true and fair reporting model is not nearly as “prescriptive” as the “fair presentation” model that underlies the U.S. financial reporting system. That is, the British and Indian financial reporting model relies more heavily on general concepts to guide financial reporting and accounting decisions rather than a large number of detailed accounting standards, such as those issued by the Financial Accounting Standards Board in the United States.......

Questions 

1. Research online and hardcopy databases to identify important recent developments within the Indian accounting profession. Summarize these developments in a bullet format.

2. In the United States, the accounting profession is regulated at the state level, while in India the accounting profession is regulated by a federal agency. Identify and briefly discuss the comparative advantages and disadvantages of each regulatory structure.

3. In India, independent auditors are considered to be “watchdogs” but not “bloodhounds.” How, if at all, does that concept of the auditor’s role differ from the prevailing concept of the independent auditor’s role in the United States? Explain.

4. Do you believe it was appropriate for the major international accounting firms to establish networks of “surrogate” firms in India for the purpose of gaining wider access to the professional services markets in that country? Was that decision “ethical”? Defend your answers.

5. State boards of accountancy in the United States have allowed accounting firms and individual CPAs to advertise for approximately three decades. Identify the pros and cons of allowing professionals to advertise. In your opinion, should professional accountants be allowed to advertise and otherwise market their services?

6. In a bullet format, identify the parties impacted by regulatory policies designed to protect domestic professionals from foreign competitors. Briefl y explain how each of these parties is affected by such policies. In your opinion, are such policies justified or appropriate? If so, under what circumstances?

7. What are the principal issues that organizations such as the ICAI and NASBA should consider in deciding whether or not to establish reciprocity agreements with other countries?

8. When CPAs outsource professional services to accountants in other countries do they have an ethical responsibility to disclose this fact to their clients? Does your answer change depending on the type of professional service being outsourced?