GAAPs in the accounting system

View Point

It's become the holy grail in India, but it's not always foolproof

Contemporary thought in India has it that Generally Accepted Accounting Practices (GAAP) is a mantra for clean balance-sheets while Indian accounting standards lead to debatable ones. If an Indian company is setting out its balance-sheet according to the American accounting standard, then the company is "cleaning up its act".

GAAP attained further respect a few days ago when a newspaper report praised Infosys as a company setting standards. It further opined that its balance-sheet reported under GAAP norms is a benchmark and that both Arun Jain of Polaris and M V Subbaiah of the Murugappa group recognise this. Thus, GAAP has acquired holy status "" a potent danger since it is far from being a litmus standard.

This state of indiscriminate faith in GAAP is dangerous. It is also neo-colonialism at its worst. Let us trace the rise of GAAP in India. It is inextricably linked with Infosys Technologies.

Historically speaking, when Infosys started to report its balance-sheet according to the American standard called GAAP, the whole country and the press were agog with excitement. That the profits of Infosys after taxes reduced according to this methodology added to the credibility of the situation.

Ignored were its balance-sheet and profits according to another five countries where the results were mixed. Once this path-breaking annual report was published, a new norm was born in India.

With the waxing fortunes of Infosys, GAAP attained commanding heights. ICICI, Silverline, Sify and other companies followed suit. Listing on Nasdaq and NYSE became de rigeur in corporate India last year. Thus, with more and more of these companies going in for a balance-sheet according to GAAP, it became a byword.

Is this an accurate impression of GAAP? An examination of recent events and recent history will reveal this to be far from the truth. What emerges, is that the Indian press and current thinking in corporate India ignores the current and past record of US companies under GAAP. It reveals our readiness to believe in media hype and foreign thought. It reveals our faith in things foreign. Let us take a closer look.

Current news will reveal that the US-based Enron is guilty of manipulating accounts, flouting accounting norms in a fashion that would put every scandal-sheeter in India to shame. In reality, Enron has set standards for other similar-minded persons (aka, scamsters) to emulate.

With Enron, two holy icons of the US can be set to rest. One is Arthur Anderson "" or Accenture as it is now called "" and the other is GAAP. Kenneth Lay, the chairman of Enron, knew all that was happening and quite possibly encouraged it.

Accenture was the enabler or systems integrator for creative accounting. GAAP was a mute testimony to the blatant flouting of truth as distorted account after distorted balance-sheet was presented to the darling investors, Wall Street and the international media.

What was the use of this GAAP? As skeletons roll out of the closet, it is clear that GAAP was adhered to, or allegedly adhered to, and yet Enron is today a textbook case for duping shareholders through false accounts. It is also mortally bankrupt.

Another example. In the days when Al "Chainsaw" Dunlap ran the Sunbeam Corporation he was a corporate hero, a darling of the press and a living example of what high quality American management achieved in the free market economy.

Last year, when he was sacked ignominously, it was revealed that Al Dunlap had falsified accounts, inflated profits, suppressed bad debts and exaggerated income. He did this to achieve a high share price that would help in a merger he was planning. Unfortunately for him, the truth came to light. Unfortunately in India, this did not make editorials or headlines. The mute witness to this blatant scandal was GAAP.

No less a person than Warren Buffett suggests that the blatant hypocrisy or fairy tales that are sworn to under GAAP force him to analyse each and every company from scratch. It is surprising that none of the Indian luminaries swearing by GAAP have read this other genuine legend called Buffett.

GAAP is similar to the Indian set of accounting standards. If followed faithfully and interpreted correctly, both will give an accurate set of accounts under their respective norms. And therein lies a story. It is possible to interpret creatively and it is possible to hire a sympathetic auditing firm. Standards are norms, and if the people behind the standards are corrupt, no set of standards in the world can prevent fraud.

Thus, GAAP cannot be a benchmark, the same way as neither the Indian accounting standards or the German accounting standards or the Japanese accounting standards are by themselves guarantees of truth. It is the people behind these standards that finally determine the results. As always, people can and do distort, manipulate for pecuniary gain.

Why then do we look up to these foreign standards? The Americans distrust the German standards, the Germans view the American accounts under GAAP as American fables, the Japanese reveal very little under their accounting standards and the Indians believe all these to be gospels. The Indian accounting standard "" over the last few years "" has been held by Indians with disdain in comparison to GAAP.

As the hosannas are sung about GAAP and as scandal after scandal hits Wall Street, our inability to believe in ourselves and our own standards is colonialism of thought at its worst. Even at the height of British rule we had business leaders and political leaders with indigenous thought and independent views.

Ardeshir Godrej produced vegetable oil-based soap for the first time in India and Jamsedji Tata introduced the pension system for his employees when the West did not even understand this term. With such firsts to our credit under political subjugation by a foreign power, it is a tragedy that instead of setting standards we are now reduced to praising shallow standards in independent India.

As wave after wave of globalisation hits the country and as the mad rush for the market economy "" as practised in the US "" is underway, the neo-colonialism of our intellect as exemplified by the suzerainty of GAAP, is a sharp wake-up call.

Who in India does not swear by GAAP? It is as if the thought processes of an entire nation has got suspended. In the world of images we need some help. Let Enron be the symbol. Enron is what GAAP leads to. GAAP means Enron. When you think of GAAP, think Enron. We are well rid of both.