Initially, when I started to teach at a reputed business school, I was dismayed by the fact that an average MBA student who does not want to specialise in Finance is quite happy if she can obtain a C plus (the minimum pass grade) in the basic accounting course.
It is the same with middle-level managers coming to business schools for executive education. Most of them lack accounting literacy and do not find the subject interesting. The situation is no different in the USA or Europe.
This phenomenon surprised me because I have always felt that managers should have a clear understanding of the language in which companies communicate with investors.
Given our experience with this group, which is more educated than average investors, we may not be too wrong to conclude that most retail investors have no interest at all in understanding the rules for corporate financial reporting. A little enquiry reveals that the reason for this lack of interest: the complexity of accounting rules.
Accountancy is a business language, but not a language that common investors understand. It has become too technical and complex, too legalistic and full of jargon. General investors find it difficult to acquire even the basic knowledge of accountancy.
Investors who do not have accounting literacy cannot read reports of companies in which they have invested their savings. Annual financial reports issued by companies have become so bulky that it is difficult for even an investor who has some accounting knowledge to find the information that he wants.
Some may argue that corporate financial reports are meant for analysts only. Therefore, efforts of a company to prepare the bulky report is not a waste. But even analysts are finding corporate financial reports increasingly irrelevant. The information provided in these reports are either stale or are already available elsewhere. It is not contextual and therefore not relevant.
It has been said that corporate accountants arrange building blocks (raw data) to build an excellent building and analysts dismantle the same because they want to see the building blocks. Therefore, it can be argued that companies should provide raw data and provide narratives to explain the same.
In fact, there may not even be any need to circulate the hard copy of the financial report. With the use of technologies like Extensible Business Reporting Language (XBRL), it is possible to make the raw data accessible to stakeholders. With the help of narratives, they can then themselves construct financial statements to suit their own needs.
But the requirement to provide narratives will become a rule in the near future itself. Narratives have become important simply because businesses are complex and numbers cannot tell the complete story. Therefore, narratives should be an integral part of the financial report.
This year, the International Accounting Standards Board (IASB) may add a project on this topic in its active agenda. Accounting rules can be simplified if companies provide adequate narratives as an integral part of their financial reports.
To make corporate accounting interesting and useful to common investors, we need to simplify accounting standards. Simplification of accounting standards is a very difficult task. IAS-39, Recognition and Measurement of Financial Statements, is an example of how complex an accounting standard can be. It is a rule based accounting standard. IASB and FASB of USA are currently attempting to rework it in a joint project aiming at a principle-based solution.
There cannot be any argument against the proposal for simplifying standards. The movement for simplification has just started and it is gathering momentum fast. Report Leadership, an initiative that challenges the established thinking on corporate reporting, was established in the year 2006. The group has come together to develop simple and practical ways to improve narrative and financial reporting.
Simplification of accounting rules will demand a high level of integrity of managers, accountants, audit committee and auditors. Simplification will relax control on accounting policy and every company will have a wider choice in selecting the accounting policy based on its judgement of the nature and economic consequences of a transaction or event. The accounting profession has to raise the bar of ethical standards to provide assurance to users of financial statements that the choice of accounting rules is appropriate.
India might find it difficult to join the movement since research in accountancy does not get preference among professionals and academia here. Institutions of higher education in India find it difficult to get faculty to teach and to carry out research in accountancy and corporate financial reporting. In business schools and universities, it is rare to find a teacher who specialises in accountancy.
In India, accountancy as a subject has not received due attention in academia. Business schools and universities fail to attract good research students in the area of accountancy. Good students, who have an interest in accountancy and related subjects, join professional courses like Chartered Accountancy rather than joining a post graduate course in commerce with specialisation in accountancy.
Professional accountants do not join the teaching profession because of the huge difference between earnings of an accounting teacher and that of an accounting professional in practice or working in the industry.
This is not the situation in the US and Europe. Most researches in accountancy come from North America and Europe. Contribution of Asian countries is too meagre to create any impact in the development of the subject and on policy decisions. Unless and until accountancy gets its rightful position in academia, India will remain a follower, rather than a leader in the field of accountancy.
It is the social responsibility of the Institute of Chartered Accountants of Indias to be proactive in strengthening research in the accounting area and to improve accounting literacy of the country.