Will the real bottomline please stand up?
I don't know how many CFOs in India are fans of Eliot's The Wasteland, but I do know that it is a sentiment which most of them will agree heartily with, writes Ravi Srinivasan.Updated: May 03, 2007 03:39 IST
"April is the cruellest month," wrote TS Eliot. I don't know how many corporate chief financial officers (CFOs) in India are fans of Eliot's The Wasteland, but I do know that it is a sentiment which most of them will agree heartily with. Not because of the scorching heat of the sub-continent's summer, but because April marks the start of the 'results' season, when Saturn enters the dominant house for most CFOs.
With stock price becoming the dominant driver of the public perception of any listed entity, there is huge covert, and often, overt pressure on CFOs to come with 'good numbers'-read good results.
If a company is really tanking, there is precious little any CFO can do. But if it is not, the bewildering multiplicity of accounting standards, practices and interpretations opens up huge amounts of elbow room. So much so, that it is often practically impossible to tell whether a company has actually made any profits at all, or how much.
The multiplicity of standards (and standard-setters) in India is a problem. There are legislative standards set under the Companies Act, other standards set by various authorities like the Reserve Bank of India, the direct and indirect tax departments of the government, the Securities and Exchange Board of India, the National Advisory Committee on Accounting Standards and the like to contend with. Then come the interpretations of these rules. The Institute of Chartered Accountants of India comes up with guidelines. These are often broadly termed as Indian GAAP (Generally Accepted Accounting Principles), although an agreed legal definition of what exactly is Indian GAAP does not exist. CFOs of globally listed Indian companies also have to deal with US GAAP, or International Financial Reporting Standards (IFRS) when coming up with numbers.
The result is chaos. I have seen annual reports of large Indian companies, where there are wide differences in the numbers, depending on which GAAP report you are looking at.
A recent survey of CFOs of 175 large Indian companies by Ernst & Young threw up some startling findings. Only 12 per cent of CFOs, for instance, felt that regulatory review of financial statements in India is "adequate." Nearly one out of three CFOs felt that improvements were required to meet stakeholder needs, notably in the areas of adequacy, clarity and relevance.
These are scary numbers, because they represent the views of the insiders. So where does it leave the ordinary investor with minimal knowledge of accounting practices?
Pretty much clueless.
Rating giant CRISIL's subsidiary Global Data Services brings out a very interesting publication called 'Accounting and analysis: The Indian Experience." In one chapter which analyses the practices adopted in reporting profit after deferred tax, its figures varied by anything from 35 per cent to, in one incredible case (Pentasoft Technologies, 2004-05), 37,796.41 per cent!
The even more incredible part is that these firms did nothing illegal-they just 'interpreted' the numbers.
No wonder CFOs dread April!