Building Trust – Organisation’s Key Enabler in the Sustainability Journey

(With contributions from team members Ishita Bhartia and Prachi Majumdar)

As the global community grapples with issues of rapid urbanisation, resource constraints, climate change, the COVID-19 pandemic and more, sustainability is no longer just a topic of hypothetical consideration, but a necessity for the sustenance of the human race on planet Earth. It is imperative that sustainability be practiced by everyone today - as an individual, a community, a country or an organisation. Several decades back, the ‘polluter pays principle’ emphasised the responsibility of companies or communities to compensate for the environmental degradation resulting from the unrelenting pursuit of economic growth without due care for sustainability. 

Climate crisis is among the top sustainability issues in current times. With the Paris Agreement of 2015 and the Conference of Parties’ (COP) broader agenda, the onus falls upon not just the governments of the nations, but also on the private and public entities to work towards a sustainable future for all. As organisations pursue their sustainability journey, trust-building has become a critical component. Whether it is top organisations being accused of greenwashing or critique on emissions data at a city or country level, the credibility of a sustainability journey is indeed important. In order to limit global warming to 1.5 degrees Celsius, which is believed to be a reasonable and optimal trade-off between prosperity and sustenance, the sustainability actions of every organisation need to be earnest. Simultaneously, it is of immense importance for an organisation to win the trust of its multiple and diverse stakeholders, who often have conflicting expectations. Trust building is therefore not just important to an organisation’s sustainability journey, but is an integral component.  

Trusted partner in sustainable development

The sustainability crisis crosses boundaries of race, culture and region. A climate disaster in one country can lead to disruptions in the value chain of an organisation located in a different region. For example, the 2011 Tohuku earthquake and tsunami in Japan, led to disruptions in the supply chain of automobile manufacturers not only in Japan but worldwide. Such global disruptions are becoming more and more commonplace due to the increased frequency of climate-related disasters. An organisation’s sustainability journey, which focuses not just on mitigation, but also adaptation, helps in minimising the impact in such situations, continues value creation in adverse situations, and in turn, aides in developing confidence amongst stakeholders. 

The key ingredient of trust is to seek multi-stakeholder (employees, investors, supply chain, customers, etc.) inputs in developing ESG-related strategies, that ensure its own system of checks and balances. Such sustainability strategies not only meet the need of a diverse set of stakeholders but also manages organisations’ risks most effectively and creates opportunities for the organisation in the long term. And such trust empowers the organisational leaders to ensure the embedding of sustainability considerations in decision-making processes across functions. 

The Environment, Social, Governance (ESG) approach to sustainability promotes behavioral change not just within the organisation, but also across its entire value chain. This sequentially contributes towards change on a larger scale, across industry sectors as well as regional levels eventually contributing towards a global sustainability agenda. Going beyond the regulatory requirements, such actions build up trust and confidence among the stakeholder groups, including the investors. Aligning organisational sustainability goals with that of region or nation effectively ensures that the company’s efforts are not in a silo, but rather in sync with the bigger picture of transformational shift. In recent times, we see multiple instances where organisations disclose their attempt at such alignments of endeavours, strategies, targets and contributions towards the Global Goals, i.e. the UN Sustainable Development Goals (SDGs).

With the growing global concern over climate change, as well as countries striving for green recovery post the pandemic, consumer awareness is at an all-time high. As organisations aggressively push forth the sustainability agenda within their respective development strategies, building the trust of such customers is important like never before. ESG targets play a critical role in developing consumer trust, as they act as a yardstick against which progress can be measured. On climate action, for instance, an effective way of target setting is through alignment with global initiatives and institutions such as the Science Based Targets initiative (SBTi). For example, a prominent German automobile manufacturer has set a target of an 80% reduction of Scope 1 and 2 emissions per automobile in its manufacturing process, from its 2019 levels by 2030. Organisations can also align their targets with sectoral targets, such as the Net-Zero target for the cement and concrete sector by the Global Cement and Concrete Association (GCCA). Such an alignment gives a scientific foundation to the targets, as well as aligns them with similar organisations in the sector across the globe. 

Increased transparency through quality sustainability disclosure

Along with setting targets and aligning with relevant local and global institutions, sustainability disclosures are an effective way of trust building for an organisation. For several decades, since GRI and other sustainability disclosure frameworks have gradually taken shape, there has been a rapid rise of voluntary disclosures across the world and India has been no exception. Such disclosures effectively bring out the non-financial performance of a company, which supplements the financial performance that typically is disclosed to the shareholders and regulators.

Capital markets all over the world consistently recognise the value of sustainability or ESG disclosures in pursuance of responsible investment. Such recognition has gradually motivated companies to participate in disclosures across multiple platforms. For instance, disclosing carbon emissions and water at Carbon Disclosure Project (CDP) or responding to sustainability indices, such as DJSI, MSCI and others. On many occasions, non-disclosure or inappropriate disclosure fail to attract investment for business growth due to a lack of investor trust. Such disclosures, though still voluntary, are therefore becoming a compulsion for organisations in some way.

In addition to this, non-financial disclosure is also driven by regulation in many regions or countries. A recent example is a requirement of BRSR (Business Responsibility & Sustainability Reporting), mandated in India from reporting cycle FY22-2023 for the top 1,000 Indian companies by market cap. It is encouraging to see that BRSR draws elements from multiple global frameworks and standards, that not only encourage companies to disclose based on materiality, buts also provide nudges for acting on appropriate climate action as well as considering ESG in the value chain.

In the US and Europe, in recognition of the growing share of climate concerns among sustainability issues, regulatory directives on corporations for more climate-related disclosure are under active consideration, which is expected to inevitably influence the disclosure requirements in regions where the value chains of these companies are extended. 

The sustainability disclosure practice can be seen as a loop between the public mandates and regulatory frameworks, the business of the organisation itself and society. All these factors influence each other and hence keep this loop moving and evolving. The BRSR from the Securities and Exchange Board of India (SEBI) in India is one example of a new framework. The recent setting up of the International Sustainability Standards Board (ISSB) under the IFRS Foundation is an example of an attempt towards integration of multiple frameworks of sustainability disclosure. 

The sustainability disclosure landscape is dynamic and fast-moving. While this helps in the transition to an increased degree of robustness over time, sometimes it leads to a sense of overwhelm for organisations on their sustainability journey. Organisations tend to face a capacity crunch either in terms of knowledge or technical skills in producing high-quality disclosures, building internal capacity and working closely with sectoral peers - locally and globally, through aligning knowledge, skill and capacity resources which can all help build an effective ecosystem for sustainability disclosures at a sectoral level.

Enhancing trust and confidence in sustainability information

Sustainability targets and disclosures are critical for trust building. The credibility of the same tends to contribute significantly towards validating an organisation’s sustainability progress. Assurance, both internal and external, are an effective way of enhancing the credibility of an organisation’s sustainability information. Sustainability reporting frameworks such as GRI, also lay emphasis on the need for assurance, especially third-party assurance for the information being disclosed by the organisation. Over years, several standards are used by professionals for the assurance of non-financial information, ISAE3000 and AA1000AS being the most adopted globally as well as in India.

The legitimacy of sustainability data adds more credibility to an organisation’s performance when its impact is visible across the different facets of the business. 

The emphasis on Integrated Reporting is gaining strength over the years; this is an attempt being made to address the intertwined nature of the financial and non-financial performance of a company in creating enterprise value, further enhancing trust building.

End note

An organisation’s sustainability journey cannot be de-linked from the core strategy of its business. Managing risk and leveraging on opportunities need to be looked at from both a financial and non-financial perspective in an integrated manner. The viability of a business model needs to be assessed by its sustainability impact along with the economic and financial impacts. 

As organisations take their sustainability journey forward and work towards inspiring trust amongst their stakeholders in their ESG endeavors, professionals and experts from multiple disciplines, such as process & technology, finance, accounting, business management and sustainability, play an important role to ensure that sustainability becomes an integral part on an organisation’s business imperative. The ability to interpret the interplay between sustainability actions and business performance is becoming one of the fastest key business priorities, and the collaborations between accounting professionals with business leaders and ESG practitioners will facilitate an organisation’s business success in a significant way.

[Views expressed are personal]

ESG & Sustainability Accounting Standards - A Primer

In 2015, countries reached an agreement (“the Paris Agreement”) to mandate companies to include climate related financial disclosures. Globally, companies are striving to increase transparency in their ESG (Environment, Social, Governance) & sustainability disclosures and provide insight into their compliance with the Paris Agreement. 

Investors as well are gravitating towards sustainability & ESG focused companies and seek actionable information about the sustainability measures taken by them. Thus, sustainability disclosures are now becoming essential to a company’s operational and financial performance. The rising importance is spurring the shift towards better reporting practices and standardization. As per the Governance & Accountability Institute, 90% of S&P 500 companies published sustainability reports in 2019. Also, a recent study by the US SIF  (The Forum for Sustainable and Responsible Investment) reported a 42% increase in sustainable investing strategies from $12 trillion in 2018 to $17 trillion in 2020.

The momentum for ESG and sustainability investing is set to continue to grow, with another $20 trillion expected to go into ESG funds over the next two decades, according to Bank of America.

To facilitate companies in generating reliable, transparent performance, the Sustainability Accounting Standards Board (SASB) provides data standards and reporting frameworks as a step toward resolving the sustainability reporting issue.

A.    Sustainability Accounting Standards Board and its Standards

Founded in 2011, SASB (www.sasb.org) is one of the most used frameworks and standard setting agencies followed by Global Reporting Initiative (GRI) Standards and Task Force on Climate-Related Financial Disclosures (TCFD) Recommendations. 

Currently, it is managed by the Value Reporting Foundation (VRF). SASB develops and publishes accounting standards for financially material sustainability issues. These standards are sector-specific and created for investors who require sustainability related information that impacts a company's valuation.

The concept of sustainable investment is becoming increasingly popular among investors. By harmonizing reporting standards, SASB is not only able to address the proliferation of disclosure frameworks, but also to provide more consistent comparisons between sustainable investments.

These standards enable businesses to report on impacts on the environment, social capital, human capital, business model, innovation, and leadership and governance from a financially material point of view. Over 1300 companies worldwide use SASB standards to report on all three ESG pillars. 

Illustration 1: Table - Disclosures of sustainability issues under SASB materiality map

B.    Growing prevalence of SASB 

As the threat of climate change looms, it becomes even more critical for companies, investors, and regulators to spearhead ESG activism. This gives more weightage to companies which are ESG compliant and report comprehensive disclosures on sustainability.

As per the analysis of Center for Audit Quality (CAQ) on the annual ESG reports published by S&P 500 companies, third-party assurance or verification was received by over 60% of S&P 500 companies that issued an ESG report disclosing the data in their reports.

Illustration 2: Chart – Acquired Assurance or Verification

In light of the growing demand for assurance from regulators and others, this number is likely to continue to grow. The analysis also found that the percentage of accounting firms engaged in assurance increased to 15%. 

C.    Conclusion

As investors become aware of the correlation between long-term profitability and corporate transparency. It is the responsibility of companies to provide investors with information that will influence their investment decisions. Information related to sustainability is included in this.

The SASB standards can be useful for any organization that wants to report on sustainability in detail. In addition, these standards can be used to develop sustainability strategies for the company around the most critical issues in industry. Additionally, these standards help raise the value of sustainability for both corporations and investors, as well as supporting consumer needs and global sustainability goals.

Growth Enterprises – Leveraging Available Technologies to Support Growth

India is one of the fastest-growing economies globally, and the MSME (Micro, small & medium enterprises) sector with is growth in double digits is a key driver of this progress. The unparalleled entrepreneurial abilities of the founders/promoters supported by the ‘Make in India’ and other government initiatives are key enablers for the quick growth of this sector.

MSMEs traditionally rely more on people than processes or technology and hence, as their operations expand, they begin to face newer challenges around operational visibility, controls, regulations, quality, etc. With the operational overheads increasing, they start to take attention away from the growth strategy. A timely transition from people-centric structures to process & technology-led organisations, could result in saving operational overheads. Operating model changes, a strong controls framework and an integrated technology backbone can help stay focused on the growth journey and build a robust foundation to transition into a large enterprise.

Operating Model Evolution: From centralised founder-driven decision-making to decentralised business heads-driven decision-making, the process requires fundamental changes in the ways of working. The firms need to hire diversified talent, empower them with the right support and provide a collaborative framework for different departments to work together in alignment with the overall business vision. Organisations need to find ways to reduce bottlenecks, from founders’ availability of time, availability of credit, the availability of resources and so on. Industry benchmarking can help identify the right operating model for the firm, a progressive organisation structure can enable employees to exceed their KPIs and an agile and collaborative way of working can help bring internal and external partners together for improved productivity.

Process Standardisation: As businesses scale, the leadership team requires standardised processes in place to ensure the smooth functioning of the business while having control over operations. The standard processes like order to cash, procure to pay, record to report, etc. help create end-to-end visibility into an organisation’s operations and also help standardise controls (e.g. credit limits, approval authority, 4 eye checks, etc.) across the process life-cycle. Process standardisation creates a business rules-driven environment, takes subjectivity out of decisioning processes and sets up the stage for automated operations and control.

Technology Adoption: An integrated technology backbone is imperative to support standardised processes and controls. Technology must be looked at as an enabler and not as a cost. An early investment in a robust ERP solution can help improve efficiency, reduce cost, provide visibility and confidence in data and most importantly, free leadership time from transactional activities to pursue strategic initiatives. Cloud-based ERP platforms have reduced the cost of ownership tremendously and can now be adopted by MSMEs rather easily. The capabilities of these cloud platforms are continuously evolving with the addition of business-specific templates, location taxation support, standard reporting, detailed analytics, etc.

As the scale of operations grows, customer segments and competitors also evolve. The data from an integrated ERP platform can provide intelligent insights for the leadership team to understand the strengths of the operations, find bottlenecks and leverage the broader partner/industry ecosystem better, with very specific asks. The data can further support predictive and prescriptive analytics by leveraging the latest AI/ML tools. 

Overall, there is a strong case for adopting an integrated ERP platform for continuous growth and an early adoption can help organisations in addressing newer opportunities with more objectivity and confidence.

Role of International Standard Setter - AOSSG!

During the period in 2007-08, many jurisdictions in the Asian-Oceanian region had adopted or converged with the International Financial Reporting Standards (IFRSs) while many others had announced convergence with the IFRSs with time-tables or roadmaps. In the context of increasingly globalised financial reporting standards, it was necessary for the Accounting Standard-Setters in the region to establish a platform to discuss problems, issues and share experiences in the convergence process and make contribution to a single set of high-quality
global accounting standards. Accordingly, Asian-Oceanian Standard-Setters Group (AOSSG) was established in 2009. The Institute of Chartered Accountants of India (ICAI) is a founder member of the Group.

In November 2009, during the first Annual Meeting of AOSSG held in Malaysia, the Memorandum of Association (MoA) was signed by 16 jurisdictional Accounting National Standard-Setters requested to be a part of the Group. Over the period of 10 years since the formation of the Group, more members joined hands and currently, the Group has 27 members i.e., jurisdictional National Standard-Setters contributing to the work of AOSSG. The AOSSG plays a significant role in increasing the region's adoption of IFRSs.

THE OBJECTIVES OF THE AOSSG ARE:

• Enhancing the standard-setting and financial reporting technical capabilities of national accounting standard setters in the region
• Contributing to the development and consistent application of IFRS Standards and addressing financial reporting issues of concern to the region

The activities of AOSSG are managed by Chair with the assistance of the Chair’s Advisory Committee (CAC). Currently, the CAC of AOSSG comprises of 10 member jurisdictions viz. Australia, China, Hong Kong, India, Japan, Korea, Malaysia, Pakistan, Singapore and Sri Lanka and is responsible for supporting the Chair and Vice-Chair in performing their functions.

Working Groups have been established to help manage AOSSG‘s contributions to the International Accounting Standards Board (IASB) . The Chair monitors progress/functions of the Working Groups and serves as a liaison with other organisations, governments, and regulators in the region and in the world for the purpose of learning other stakeholders‘ circumstances and advancing the interests of the AOSSG.

ICAI AND AOSSG

India is represented by the Institute of Chartered Accountants of India (ICAI), as a founder member of AOSSG. ICAI, through its nomination by the then Council, CA. (Dr.) S. B. Zaware, held the position of Vice-Chair, AOSSG for a period of 2 years 2017-2019, followed by Chairmanship of 2 years (2019-2021). ICAI continues to contribute to the activities of AOSSG as a member of Chair’s Advisory Committee (CAC).

IFRS IN BRIEF

The IFRS Foundation is a not-for-profit, public interest organisation established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards—IFRS Standards—and to promote and facilitate adoption of the standards.

IFRS Standards are developed by two standard-setting boards, the International Accounting Standards Board (IASB) and the newly created International Sustainability Standards Board (ISSB). The IASB sets IFRS Accounting Standards and the ISSB sets IFRS Sustainability Disclosure Standards.

IFRS Accounting Standards set out how a company prepares its financial statements. IFRS Sustainability Disclosure Standards set out how a company discloses information about sustainability-related factors that may help or hinder a company in creating value.

IFRS STANDARD-SETTING PROCESS

The IASB follow a thorough, transparent, and participatory due process while issuing an IFRS Standard or an IFRIC Interpretation. If the IASB decides to amend a Standard or issue a new one, they generally review the research, including comments on the discussion paper, and propose amendments or Standards to resolve issues identified through research and consultation. Proposals for a new Standard or an amendment to a Standard are published in an exposure draft for public consultation. To gather additional evidence, members of the IASB and IFRS Foundation technical staff consult with a range of stakeholders from all over the world. The IASB analyses feedback and refines proposals before the new Standard, or an amendment to a Standard, is issued.

HOW AOSSG HELPS IN IFRS STANDARD-SETTING PROCESS

AOSSG is a spokesman with IASB and IFRS Foundation for IFRSs on behalf of AO Jurisdictions and it plays a key role in promoting the adoption/ convergence with, IFRSs by jurisdictions in the region. This designates that the role of AOSSG is important in the overall mission of IFRS Foundation.

The International Financial Reporting Standards (IFRSs) are increasingly accepted in this region, and many Asia-Oceania jurisdictions have either adopted IFRSs or are considering adoption of IFRSs or making progress towards convergence with the IFRSs. The AOSSG was established to help:

a) coordinate the efforts of stakeholders in the Asia-Oceania region in global standard-setting;
b) maintain the momentum towards global standards; and
c) support the credibility and responsiveness of the IASB.

As a group of organisations with expert knowledge of standards and in-depth understanding of issues in the region, the AOSSG works towards achieving the defined objectives in coordination with its members by:

a) taking a leadership role in global accounting standard setting;
b) conducting proactive research and thought-leadership activities;
c) promoting regional initiatives regarding consistent application;
d) providing other relevant assistance to the IASB;
e) providing advice and consulting with member jurisdictions.

Conducting these activities helps in creating a beneficial cycle of:

(a) deepening ties between stakeholders in the region and the IASB;
(b) enhancing regional engagement in the international standard setting process; and
(c) encouraging the consistent application of IFRS Standards in the region

AOSSG is also contemplating to include the IFRS Sustainability Disclosure Standards in the AOSSG scope through a working group mechanism as a temporary measure.

ICAI’S EXPOSURE, EXPERIENCE, AND ACHIEVEMENTS AS AOSSG CHAIR

Recognizing the objectives of AOSSG and advancing the mission of ICAI in this age of globalisation, ICAI, as AOSSG Chair, undertook the following activities:

(1) Submitting Regional Views to the IASB and the IFRS Foundation

While commenting on IASB documents, AOSSG‘s views reflect the collective views AOSSG members without interfering with the authority of member standard-setters regarding whether and how to apply the standards proposed or published by the IASB. If AOSSG members holds differing views, those differing views are reflected within AOSSG comment letters. Individual member standard-setters may also choose to make separate
submissions from their jurisdiction that are consistent or otherwise with aspects of the AOSSG comments. The intention of the AOSSG is to enhance the input to the IASB from the AO region and not to prevent the IASB from receiving the variety of views that individual member standard-setters may hold.

During ICAI’s term as Chair, AOSSG has actively submitted comments to all significant IASB discussion papers, exposure drafts and other consultative documents. While submitting the comments to IASB on behalf of AOSSG, the WGs leaders collate the views of the AOSSG members, the Group submitted its comments on the IASB’s Exposure Draft including:

• IASB Exposure Draft General Presentation and Disclosures (ED/2019/7) in September 2020
• IASB Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment in December 2020
• IASB Request for Information Comprehensive Review of the IFRS for SMEs Standard

Complete details could be obtained at https://aossg.org/submissions-and-publications/submissions-to-iasb

(2) AOSSG’s participation in Accounting Standards Advisory Forum (ASAF)

The objective of ASAF is to provide an advisory forum in which members can constructively contribute towards the achievement of the IASB’s goal of developing globally accepted high-quality accounting standards .AOSSG has also been a nominated member of the ASAF and is represented by the Chair, AOSSG and Working Group
Leaders. During ICAI’s term as Chair, the Working Group leaders of AOSSG collated members’ comments for all the ASAF meetings and presented the regional view at ASAF meetings.

(3) AOSSG meetings and Education Sessions

With the outbreak of the Covid-19 pandemic, face-to-face meetings were not scheduled in 2020 and 2021. However, this did not stop the spirit of AOSSG, all AOSSG meetings (including CAC, Interim, WG and Annual meetings) and educational sessions were held virtually.

• During the 2021 AOSSG Annual Meeting in November, the ASBJ (Japan) as the working group leader of Business Groups and Assets in coordination with the IASB conducted an outreach session on Discussion Paper - Business Combinations—Disclosures, Goodwill and Impairment
• During the September 2021 AOSSG Interim meeting, upon Secretariat’s request, IASB, conducted two educational sessions for AOSSG members on:

          - Classification of Debt with Covenants as Current or Non-current

          - Supplier Finance Arrangements

(4) Research Activities

The WGs of AOSSG take proactive steps to undertake research and publish its findings. AOSSG Working Group was held in November 2020, wherein, ICAI presented findings on Preliminary Research on “Financial Ratios”. Preliminary research was conducted encompassing presentation of selected ratios across six AO jurisdictions viz: Australia, China, India, Sri Lanka, Malaysia and Japan. The purpose of presentation was to seek opinion of AOSSG members on the project and to provide inputs to IASB for
standardisation of financial ratios.

(5) Amendment and upgrade of AOSSG Formal Documents

In the interest of the Group, it was important to amend official documents of the AOSSG.
ICAI undertook the activity of revisiting all the formal AOSSG documents viz.

• MoU & Annexures to the MoU
• Vision Document
• Membership Due Process
• Working Group Modus operandi
• AOSSG Protocol for raising emerging issues
• AOSSG Protocol for responding to Technical Requests

These amendments were much needed and smoothly undertaken. The efforts of ICAI in this regard were much appreciated by the AOSSG members.

(6) Redesigning and Refurbishment of the AOSSG website

Post taking over as Chair, AOSSG, Dr. S. B. Zaware, with the objective of making the AOSSG website more beneficial, in consultation with the CAC meeting decided to takeover the task of redesigning and refurbishment of the website along with its regular maintenance for the Chair’s tenure.

The website was upgraded taking into consideration various factors such as clear site architecture and navigation, visual appeal, comprehensive content, and mobile compatibility. Further new features/tabs have been introduced on the AOSSG website, for instance, login facility for CAC members, details on the background & history of AOSSG, information on all the AOSSG meetings and events and photo gallery.

CONCLUSION

Our Hon’ble Prime Minister Shri Narendra Modi had said “We know that we will be more successful when we pursue our goals in partnership with the world”. We, at ICAI believe, this is complete synergy with our vision of becoming the world's premier accounting body and develop global professionals. In this regard, ICAI continues to liaison with standard-setters across the globe and considers it crucial to promote the nation’s interest in the international affairs. Apart from AOSSG, ICAI actively participates in the discussion meetings organised by
the World Standard-setters (WSS), International Forum of Accounting Standard Setters (IFASS), Emerging Economies Group (EEG) & other such forums and present its views and issues from time to time at these forums. These forums have also provided us valuable insights on experience of implementation of IFRS in various jurisdictions.

Data-driven & Future-ready Accounting Practices

Business digitalization is the use of digital technologies to change a business model and enhance the value. Recent surge in accessibility of data has led to rapid advancements in digital technologies, which are transforming economies, societies, and businesses. 

A digital revolution, which is still unfolding before our eyes, has changed the nature of accounting work as well. Automation and robotization of routine accounting processes, the introduction of business intelligence, and the application of data analytics are among the results of digitalization in the accounting function.

Leaders of accounting firms look at two aspects of the business when considering the future of accountancy firms - service delivery and practice management.

1. Service Delivery

It is critical to the success of accounting firms to deliver efficient services to their clients. For which they need a trained and well-managed workforce that provides these services.

Millennials and Gen-Z personnel are not very keen on performing redundant tasks such as preparing tax returns for the same clients or performing audit procedures year on year. This poses a challenge of recruiting and retaining the right talent in service delivery, especially for smaller and medium-sized accounting firms.

Increasing efficiency is the key to profitability for accounting firms. However, if the same people do not want to do the same job, management will be in conflict, on one hand expected to stay competitive and on the other hand foregoing efficiency.

Data analytics and automation can be the ideal solution for this. As an added advantage, the technical skills of accountants make working with descriptive analytics, predictive analytics, and prescriptive analytics easier.

Logic-based, repetitive tasks such as creating worksheets can be automated. In this way, employees are liberated from the monotony of repetitive work and can step-up their efficiency in interpretation of data, tax and regulatory law and application of accounting & auditing standards. 

Amidst the constant evolution of the business domain, tax laws and accounting standards continue to evolve as well. The accountants who enhance their efficiencies through data analytics will be better prepared for the future than their peers.

2. Practice Management

i. Efficiency optimization

Accounting firms, like many businesses, are riding the digitization wave to improve their day-to-day functioning and increase their efficiency. By deploying data analytics, which can perform linear and predefined tasks on huge data sets to capture information from different systems such as accounting, time and billing, CRM, scheduling, etc., huge amount of valuable working hours can be saved and utilized for more productive and value-added tasks. This dramatically improves the overall efficiency.

As an example, RPA (Robotic process automation) can be used as a service delivery tool to automate tasks such as filling out tax forms, conducting audit procedures, conducting transfer pricing economic analyses, etc., as well as preparing VAT or sales tax returns by collecting information and populating standardized forms on a monthly basis.

ii. Sector-specific support

By increasing the efficiency of information management across systems, firm management can better manage organic growth. Growth in accountancy practices, however, is often inorganic. As firms acquire other firms, they inherit and accumulate disparate information systems. In this scenario, digitization can make a huge difference. While the merged or acquired firms try to get on the same platform, work doesn't have to halt. Through digitization, separate offices and separate businesses can continue to operate using legacy processes, and still receive all of the information needed at the management level.

iii. Ease out deadline pressure

Financial processes in businesses have predetermined timelines, such as tax filing deadlines and financial statements submission deadlines. Accountancy firms, be it in audit, tax, or consulting, face the greater pressure of the calendar, with tight deadlines to compile and process information. This pressure can be alleviated by automating processes, as well as improving data quality and speeding up delivery to meet crucial deadlines. It can also reduce the cost of hiring seasonal workers who are added to the payroll to manage the load during peak seasons.

Clearly, accounting firms must adopt digital technologies to manage their operations and better serve their customers. The use of data and technology together with human judgment and business acumen seem to be the key to future success.

Accounting Standards for Resurgent New India

(This article has been co-authored by CA. Kali Charan Sharma)

Recent History:

The ICAI, in its endeavour to enable the Nation with high quality accounting standards comparable to the best in the world, decided in the year 2006 to converge with International Financial Reporting Standards (IFRS) issued by the IASB, which were being recognized as Global Financial Reporting Standards. This accounting reforms initiative of ICAI was endorsed by the Government of India with international commitment made by the then Hon’ble Prime Minister in 2009 at the G20 Summit.

In the year 2011, the core committee of MCA had requested ICAI to examine whether there should be one set or two sets of Accounting Standards and whether one set of Accounting Standards can be applied for all companies including one person companies and small companies.

The ICAI, after an in-depth examination and study, recommended that there should be two sets of Accounting Standards - one set comprising Ind AS for large, public interest companies and the other set containing simplified measurement principles with fewer disclosure for small companies. It was also mentioned that a second set of standards does not mean that the recognition and measurement principles would be significantly different from Ind AS in cases.

Against this backdrop, based on the broader theme - ‘Building Trust Enabling Sustainability’ of the ‘21st World Congress of Accountants’ to be held in November 2022, Taxsutra Greentick brings to you an incisive article-series titled ‘Compliance: A Collective Responsibility’ which emphasizes upon India’s redefined regulatory framework, viz. how different oversight bodies perform their regulatory roles in India w.r.t accounting, reporting and auditing; major non-compliances pin-pointed by them; expectations of investors/ stakeholders and the need for quality reporting.

Roadmap:

In 2020, the ICAI released an approach paper titled “Accounting standards for resurgent new India of 2020’s” regarding revision of existing accounting standards. The ICAI mentioned the following reasons to introduce new ASs in its approach paper:

• During the deliberations on the Ind AS Roadmap at MCA Core Group in 2010 and 2013-14 and subsequent discussions on draft Ind ASs, some members were of the view that there should be one set of standards applicable to all companies namely Ind AS. Some Regulators expressed the view that recognition and measurement principles should be by and large similar for all companies and some felt the need for simpler accounting standards for smaller companies. Therefore, ICAI was asked to study whether 'one set of Accounting Standards' can be applied to all companies including one person companies and small companies as defined in the Companies Act, 2013. The ICAI was requested to study the option of "second set of Accounting Standards' as to how it would be consistent with the first set of Accounting Standards so that at least the recognition and to a large extent the measurement principles are the same. The ICAI in its report on Impact Analysis of Indian Accounting Standards and One set of Standards vs. Two sets of Standards dated October 21, 2013 recommended 'two sets of Accountings Standards' and the second set of Accounting Standards may comprise the revised existing Accounting Standards for small and one person companies.

• Other factors that necessitated the need for the revision of the existing ASs:
  • Structure, Layout and Text of ASs lack consistency and uniformity
  • Concepts and Approaches are outdated
  • Language has potential for serious misapplication and misunderstanding about the ASs
  • Lack of comprehensive robust principles and inadequate guidance in certain areas

The approved approach paper of NACAS can be summarised in following 4 categories –

While NFRA, on 28 September 2021, returned the approach paper submitted by ICAI for further analysis of various other factors, ICAI is in discussions with NFRA to conclude on this matter. Until 2021, the ICAI had submitted 18 Revised Accounting Standards to the NFRA. Further, many more revised accounting standards have been exposed to public for comments.

Benefits of Second set of Accounting Standard:

1. Simplified measurement principles with fewer disclosures for smaller companies.
2. Standardisation of alternate accounting treatments - The Accounting Standards reduce to a reasonable extent or eliminate altogether confusing variations in the accounting treatment followed for the purpose of preparation of financial statements.
3. Requirements for additional disclosures - Standards may call for disclosure beyond that required by law.  
4. Comparability of financial statements – The standardisation of accounting procedure improves comparability of financial statements.
5. Reduction the scope of creative accounting – The creative accounting refers to twisting of accounting policies to produce financial statements favourable to a particular interested group.
6. Improving credibility of Accounting Data and quality of the financial reporting.
7. The appropriate balance between fair presentation and prudence should be maintained.

Approach for Disclosure requirements:

The disclosures requirements in various accounting standards should be reduced keeping in view the level of entities based on the followings:

• In respect of formulation of the standards for which existing Accounting Standards is currently available, the disclosure requirements should be broadly as per the existing Accounting Standards including exemptions/relaxations given to SMEs.
• The disclosure requirements which are primarily meant for investors may not be given since such disclosures would not be relevant for non-public interest entities.
• The disclosures requirements may also not exceed those given in IFRS for SMEs.  

Preparedness of Proposed Standard:

Revised Accounting Standards are applicable to entities to which Ind ASs are not applicable. Below table summarizes the categories of revised accounting standards as mentioned in the Approach Paper of the ICAI:

Are we ready?

There is an urgent need to revised the existing accounting standards. Some of the concepts and approaches mentioned in the existing accounting standards are outdated and do not provide guidance regarding many of the transactions relevant in the current economic conditions. Also, updating the recognition and measurement principles in line with the Ind ASs would make financial reporting more logical for all stakeholders including the students of financial reporting. However, are we ready?

The Financial Reporting Review Board (FRRB) of the ICAI publishes a publication titled ‘Study on Compliance of financial reporting requirements’ containing instances of non-compliances with the reporting requirements that have been noticed by the Board during the course of review of the general purpose financial statements of enterprises. The Board also publishes a similar publication on Ind AS. One can clearly observe significant proportion of non-compliances from those publications.

There is a need for upskilling the reporting team of enterprises and also the team of auditing professionals. Until these teams are provided proper training and guidance on the revised Standards, instances of non-compliances would only shoot up.

Evolution of Accounting & Auditing Standards and its Future!

When we look at the evolution of standards, broadly, there are three types of standards which the accounting profession should talk about - accounting standards, auditing standards, and naturally the quality control standards, which are considered as a part of auditing standards. If you look at the past, there used to be national standards, international accounting standards, and US-GAAP. Over a period of time, it was found that the international standards and US-GAAP were going in different directions. So, it was felt appropriate to start with IFRS (International Financial Reporting Standards). Every country in the world which has got its own regulatory body would normally evolve its own standards, like we have done in India. These were accounting standards, and the auditing standards.

In India, it is the Institute of Chartered Accountants of India (ICAI) which is standard setting body and the Companies Act has adopted those standards, initially through NACAS (National Advisory Committee on Accounting Standards) and now NFRA (National Financial Reporting Authority). They have the authority to formulate the standards, but the basic standards come from the ICAI. ICAI is a member of the international bodies, and therefore, by and large, we adopt the international standards. As a country, long time back, we decided to adopt IFRS, but with suitable modifications. So, most of the IFRS have been adopted, converged into India, which are now called IND-AS, making them suitable to the local needs of the legal requirements.

The Accounting Standards have become a part of the Companies Act; even the auditing standards have become a part of the Companies Act. While the standards are set, the drafts are issued, various components of the society give their response, those responses are considered, and then it becomes a standard, which is final. It is sent to the specific bodies, like NACAS earlier, now NFRA, and they will issue the standards. When we say evolution of standard, that is how they have evolved.

Ethics and Accounting Standards

By and large, all CA professionals carry a paper for their examination called ethics & value system. It is very nice to have such a paper, but one must consider it appropriate to have the ethics & value system in accounting itself. When we look at the accounting standard, there are two ways in which people analyze the standard.

People find out what is allowed by the accounting standard, and people also find out what is strictly prohibited by the accounting standards. So something which is allowed and something which is prohibited is very clearly known. But there are a few other people who try and find out what is not specifically prohibited by the accounting standard, and that is what gives birth to what is known as “creative accounting”. I think it is the creative accounting which is the first cause of trouble for the accountancy profession in the world at large. Because the more and more creative accounting comes in, that gives rise to problems in the future. This is one area which entire accounting profession will have to be very careful about.

Off Balance Sheet items

The next item will be the off balance sheet items. When we look at the balance sheets, today there are various items which are on the balance sheet, but items like derivatives, embedded derivatives, commitments, right to agree to sell, right not to agree to sell, right to dispose of and many other kinds of rights and obligations which do not necessarily get converted into financial terms, would be the issues that one needs to look at.

Ownership of Standards

The sense of ownership about the standard is a major issue. Today, it appears that the Auditors are owning the standards. I think it is the Industry which has to own the standards, otherwise, it becomes the job of the audit profession across the world to ensure that the standards are complied with. The accounting profession has to ensure that the standards are actually implemented while preparing financial statements and the auditing profession has to see that they are actually implemented by doing the audit. So, the sense of ownership of the standard in India and across the world is very important, and we will have to make efforts to ensure that the industry bodies start owning those standards. Unless this happens, there are going to be troubles in the future.

Constant Changes in Standards

Especially after IFRS has come in, we find that naturally across the world there are issues which are pointed out. Those issues get looked at the highest level; appropriate changes are made, those changes come into IFRS and consequently into Ind-AS. One should welcome such improvements which take place in accounting standards. But, constant changes in accounting standards practically every year, makes some people to believe as if we are changing the goal post.

Accounting standard is something which takes time for the accountants, auditors to understand, implement and practice. For the society to understand the importance it takes a longer time. So there is a need for the accounting profession to keep in mind that we may have to keep the standards constant for a period of two or three years and then make changes at the appropriate time. If something was not right yesterday, just by making it right tomorrow, things are not going to change substantially. That will increase the belief in accounting standards in a much better way.

Accounting & Business Objectives – The Interplay

I think the purposes are different, the business objectives are different. Accounting measures the results of the business operations as they are communicated to the shareholders. And therefore, whenever people try and connect the business objectives with the accounting standards, there are bound to be different perceptions.  It has to be clearly understood that accounting is only a unit of measurement to understand, evaluate, record and disclose the results of the businesses as carried out by the business people.

Auditing Standards

When we look at the auditing standards things are slightly different. The measurement of implementation of auditing standard is quite difficult. In accounting, at least one can look at the disclosure results and find out that what is done is right or not. But in auditing, the ultimate result is an audit report, which normally is a standard report. So, by itself, whether standards have been implemented in reality or not is a question mark and that really is the challenge before the audit profession. This is where the documentation becomes important.

Documentation

The performance evaluation of auditors is certainly a question mark and everybody likes to comment on that. The most important thing is the service quality in the audit standards and its implementation and that would depend upon competence coupled with character. Competence alone is not sufficient unless the character is evident to support the competence. In this respect, documentation becomes very important.

Dealing with failures

Generally, as an accounting profession, whenever there are major failures world over or in our country, there is a big noise about standards not being sufficient. What we need to learn is how to deal with failures. Whenever there is a commercial failure, one must find out whether it was a failure of an accounting or auditing standard or was it a failure of an individual person, individual firm or a group of firms?

If we notice that the standards were appropriate, but it was a failure of the individual or firm, one need not talk about changes in accounting standards or the legal requirements but somehow over a period of time, all of us have been used to changes in laws the moment there is a major failure. This is a knee-jerk reaction because if the standards were not up to the mark, by now, the standards would have been substantially changed. Whereas you will find that, actually the standards more or less have remained same for a long period.

As an audit profession the world over, we should be able to distinguish between failure of a standard and failure of the actual implementer of the standard.

Expectations Gap:

There are 2 types of expectation gaps. One is what the society expects and what we promise, there is a gap & the next would be, what we promise and what we perform. I think the second expectation gap is dangerous because what we promise is given by the standards and that when compared to actual performance, if there is a gap, all of us need to improve upon that. But what the society expects and what we promise, if there are gaps in these two items, all over the world various accounting bodies must come forward to meet that gap effectively. We must start educating the society & the most common example is the fraud detection.

Whether detection of fraud is the job of an auditor and can he do it in the course of audit that is done on a quarterly basis, annual basis, etc.  is an area on which research would be more useful, especially to see if this was the objective of the auditing standards. Therefore, what effective steps will have to be taken by the auditors in changing the standards? How much time it will take for auditors to detect the fraud every time? And can they really do that?  This is a serious problem area for the profession at large in future.

Society Expectations

Automatically, the utility and visibility of the audit profession will depend upon the neatness, compactness and conciseness of the accounting and auditing standards as visualized by the society. Ultimately, this is a service profession. As long as we are good for the society at large, our retention in the society will be permanent. But if we are not found to be good for the society at large, things will be difficult for the audit profession and therefore all over the world we will have to ensure that audit as done today and as we expect to do tomorrow, should be useful to the society.

Where the society expects a change, how do we look at the change to happen? Are we equipped to do the change? And if not, what is it that we can do to make the change?

Standards for Small Audits

One needs to look at whether there is a need for having separate standards for small audits.If there is a need for a separate standard, then one will really have to come out with specific details on that.

Quality Control Standards:

The present quality control standard is so nicely drafted that sometimes one wonders that if everybody was doing that, where was the question of any problems in auditing. Which means that, such a nicely drafted standard will need some implementation guide for all people to follow, so that people exactly know what is to be done out of such standards and implementation will become a reality of life. I hope that is where we will lead by implementing the standards through the quality control standards.

Let us expect the World Congress of Accountants to deliberate on these important issues and come out with proper directions for the future.

Impact of Global Minimum Tax Regime

In October 2021, 137 countries out of 141 Organization of Economic Co-operation and Development (OECD) / G20 member countries agreed to implement a minimum 15% corporate tax rate for multinational entities (global turnover over Euro 750 million) as a part of two pillar approach of OECD’s ground-breaking taxing the digital economy framework. A global deal has been announced between 137 countries, including India, to ensure large MNEs pay a Global Minimum Tax (GMT) rate of 15% by the OECD. Since 2017, the G20 / OECD inclusive framework on Base Erosion and Profit Shifting (‘BEPS’) has been jointly developing a Two-Pillar Solution to address the tax challenges associated with digitalization. At present, the consenting governments are discussing implementation plans.

Why should there be a Global Minimum Tax?

• Digitalization

International tax rules must keep up with the times of the digital age. A number of new issues have arisen as a result of the digital revolution: scale without mass (firms growing without a physical presence), reliance on intangible assets, and the centralization of information. The use of both previously available and new technologies has enabled tax avoidance by shifting profits to low-tax jurisdictions. In order to attract foreign investment, countries are competing with each other on their tax rates. In countries with higher taxes, this results in loss of tax revenue and threatens government functions.

• Tax haven diversion

Drug patents, software, and intellectual property royalties have increasingly been migrating to tax havens to avoid paying higher taxes in their home countries. The GMT aims to stop this outflow of tax revenue in lower tax jurisdictions and aims to eliminate tax heavens. However, a carve-out allows countries to continue to offer Tax incentives to promote business activity with real substance (i.e., tangible assets and personnel).

• Resource mobilization

Global tax revenues will increase by $150 billion a year as a result of the minimum tax, according to the OECD.

• Global tax reforms

It is another positive step towards global taxation reform following the implementation of the BEPS. The term BEPS refers to tax avoidance strategies aimed at shifting profits to low or no tax jurisdictions through mismatches in tax rules.

• Common approach

The Pillar Two rules will have the status of a common approach: countries will not be required to adopt them, but if they choose to, implementation must be in a manner that is consistent with the model rules and IF guidance.

• Tax competition

On account of low or no tax jurisdictions, countries are facing harmful tax competition. Addressing such competition, coherence of international tax rules and ensure transparent tax environment is essential.

What is the proposed tax structure?

It is based on a two-pillar system that should improve current corporate taxation rules.

Reallocation of a residual profit to market jurisdictions (Pillar One)

The first pillar pertains to the implementation of new profit allocation rules applicable to the largest and most profitable MNEs (Multinational Enterprises) with worldwide revenues greater than Euro 20 billion and profitability greater than 10%. If implementation succeeds, this amount could also be reduced to Euro 10 billion in 7 years. The objective of this pillar is to redistribute excess profits of MNEs to jurisdictions where consumers or users reside, regardless of whether firms are physically present there. The redistribution amount is calculated by dividing residual profits by 25%. The result should be a more equitable distribution of profits and taxing rights among countries.

Global minimum tax (Pillar Two)

The Pillar Two proposes a global minimum tax to eliminate incentives for companies to shift profits based solely on tax outcomes. Competing countries may offer tax incentives or lower tax regimes to attract inward investment. Furthermore, multinationals who derive significant value and profit from intangibles may be able to move income and profit to these low-tax jurisdictions due to differences between domestic tax rules.

Illustration 1- Chart- Pillar 2- Estimated impact on corporate tax revenues

Gains in global tax revenues (% of CIT revenues)

Note: This estimate for Pillar One (amount A only) is based on an example in which residual profit is defined as profits above 10% of profit before tax to turnover, assuming a 25% reallocation of residual profile to market jurisdictions, excluding commodities and financial sectors. As an illustration, the Pillar Two estimates are based on a jurisdiction that blends a minimum tax rate of 15%.

*source-OECD

Tax policy implications of a global minimum tax

First, a global minimum tax will neutralize the low tax incentive, and second, it may effectively lead to tax revenues being exported to other countries.

A global minimum tax will inevitably increase pressure on countries with headline rates below the global minimum to increase their domestic rates, especially if not doing so will effectively export tax revenue. Assuming a global minimum tax rate of 15%, or slightly higher, some tax-based incentives and substance-based incentives will likely survive. It is possible, though, that non-tax platforms and taxes based on non-profits could shift competition over time.

There will, however, be inevitable changes in the methodology for taxing any global minimum tax rate. These changes will redefine what constitutes a legitimate tax base, a legitimate tax, and a legitimate tax rate.

Decoding Recent Developments in Sustainability Reporting in India

(with contributions from Mr. Nishit Jain)

2021: SEBI announced Business Responsibility & Sustainability Reporting (BRSR) requirements to the top 1,000 listed companies by market capitalisation. Voluntary for FY 21-22 and mandatory for FY 2022-2023.

80% of the top 100 companies for sustainability and CSR in 2021 incorporate Sustainable Development Goals (SDGs) in their responsible business actions. The list of top 100 companies for Sustainability and CSR in 2021, prepared by Futurescape, reveals that the top 25 companies also map their business goals with respect to SDGs.

There is an increasing acceptance of non-financial reporting in India considering the regulatory push on listed entities to report on BRSR and also the push from the investor community to mandate private companies (investees) to have sustainable business models, which in turn results in investees reporting on their compliance with this requirement.

The recent amendment inserts a Chapter X-A of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 dealing with the Social Stock Exchange (SSE)

2022: SEBI introduced Chapter X-A provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 which governs Not-for-Profit-Organisations that are seeking registration and raising funds through an SSE.

An SSE shall be accessible only to institutional investors and non-institutional investors. However, SEBI may permit other class(es) of investors, as it deems fit, for the purpose of accessing the SSE.

Every SSE shall constitute a Social Stock Exchange Governing Council to have oversight on its functioning. The composition and terms of reference for such Governing Councils shall be specified by the Board from time to time.

Recently introduced Chapter IX-A of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 on obligation of Social Enterprises.

A Profit Social Enterprise whose designated securities are listed on the Stock Exchange(s) shall comply with the disclosure requirements contained in these regulations with respect to issuers whose specified securities are listed on the main board or the SME exchange or the innovators growth platform, as the case may be.

Disclosures by a Not-for-Profit Organisation.

A Not-for-Profit Organisation registered on the SSE(s), including a Not-for-Profit Organisation whose designated securities are listed on the SSE(s), shall be required to make annual disclosures to the SSE(s) on matters specified by the Board, within 60 days from the end of the financial year or within such period as may be specified by the Board.

In addition to the disclosures referred to above, the SSE(s) may specify matters that shall be disclosed by the Not-for-Profit Organisation on an annual basis.

Intimations and disclosures by Social Enterprise of events or information to SSE(s) or Stock Exchange(s)

1. A Social Enterprise whose designated securities are listed on the SSE(s) or the Stock Exchange(s), as the case may be, shall frame a policy for determination of materiality, duly approved by its board or management, as the case may be, which shall be disclosed on the SSE(s) or the Stock Exchange(s).
2. The board and management of the Social Enterprise shall authorise one or more of its key managerial personnel to determine the materiality of an event or information and to make disclosures to the SSE(s) or the Stock Exchange(s), as the case may be, under this regulation and the contact details of such personnel shall also be disclosed to the SSE(s) or the Stock Exchange(s).
3. A Social Enterprise whose designated securities are listed on the SSE(s) or the Stock Exchange(s), as the case may be, shall disclose to the SSE(s) or the Stock Exchange(s) where it is registered or has listed its specified securities, as the case may be, any event that may have a material impact on the planned achievement of outputs or outcomes.
4. The disclosure shall be made as soon as reasonably possible but not later than seven days or within such period as may be specified by the Board, from the occurrence of the event and shall comprise details of the event including the potential impact of the event and the steps being taken by the Social Enterprise to address the same.
5. The Social Enterprise shall provide updates on a regular basis along with relevant explanations in respect of the disclosures required till the time the concerned event remains material.
6. The Social Enterprise shall provide a specific and adequate reply to all queries raised by the SSE(s) or the Stock Exchange(s), as the case may be, with respect to any events or information.
7. The Social Enterprise may suo moto confirm or deny any reported event or information to SSE(s) or the Stock Exchange(s), as the case may be.
8. The Social Enterprise shall disclose on its website all such events or information which have been disclosed to the SSE(s) or the Stock Exchange(s), as the case may be, under this regulation.

Scorecard of Recent SEBI Amendments For Bettering Governance & Compliance

(with contributions from Mr. Aleem Lilani and Mr. Mayank Parekh)

India has evidenced amendments in various regulations recently to increase the transparency in functioning and enhance the quality of Financial Reporting.

Highlighted below are few of the recent regulatory changes from SEBI and their effects on the listed entities they regulate, in a step toward better governance and compliance.

• SEBI (Listing Obligations and Disclosure Requirements) Amendment, 2022, provides the requirement of at least one-third of the Board of Directors to comprise of independent directors with the chairperson being a non-executive director and at least half of the Board of Directors to comprise of independent directors where the listed entity does not have a regular non-executive chairperson. The definition of Related Party has undergone a change with effect from 01 April 2023, wherein any person or entity forming a part of the promoter or promoter group of the listed entity holding 10% or more in the listed entity either directly or on a beneficial interest basis shall become a related party. Earlier, the specified percentage prescribed was 20%.
• The materiality of Related Party Transaction (RPT): Previously, a transaction was considered material during a financial year if it exceeded 10% of the annual consolidated turnover of the listed entity as per the last audited financial statement of the listed entity, but with effect from 01 April 2023, an RPT would be considered as material if the transaction entered into individually or taken together with previous transactions during a financial year exceeds INR 10bn or 10% of the annual consolidated turnover of the listed entity as per the last audited financial statement of the listed entity, whichever is lower. Prior approval of the shareholder of a listed entity is needed for all material RPTs and subsequent material modifications of such transactions.
• Related Party Transactions: The amended definition of ‘Related Party’ would now include not only the transaction of a listed entity but also transactions of the subsidiary with the related party of a subsidiary company. This implies that the listed entity would have to meet the approval and disclosure requirements even with respect to RPTs of a subsidiary company, where the listed entity is not a party. Additionally, with effect from 01 April 2023, the definition deems certain categories of unrelated transactions also as RPT, i.e. the purpose and effect of such transactions is to benefit a related party of the listed entity or any of its subsidiaries.
• Amendments to SEBI (Alternative Investment Funds) Regulations 2022 (AIFs):
  • Category AIFs shall invest a maximum of up to 10% of the investable funds in an Investee Company directly or through investment in the units of other AIFs except for large value funds for accredited investors of Category III AIFs which may invest up to 20%.
  • However, for investment in listed equity of an Investee Company, Category III AIFs and large value funds for accredited investors, may calculate the investment limit of 10% and 20% respectively of either the investable funds or the net asset value of the scheme.
• Change in control of Sponsor and/or Manager of AIF involving Scheme of Arrangement under Companies Act, 2013:

As per SEBI, the following shall be applicable to all the Schemes which are filed with The National Company Law Tribunal (NCLT) on or after 01 April 2022:

1. The application seeking approval for the change in control of the Sponsor and/or Manager of the AIF (under the applicable AIF Regulations) shall be filed with SEBI prior to filing the same with the NCLT.
2. SEBI shall grant an in-principal approval upon being satisfied with the compliance of applicable regulatory requirements, the validity of which shall be 3 months from the date of issuance within which the relevant application shall be made to the NCLT.
3. Within 15 days from the date of the order of NCLT, the applicant shall submit the NCLT-approved application and its order along with other specified documents to SEBI for final approval.

• SEBI (Issue and Listing of Non-Convertible Securities) (Amendment) Regulations, 2022 states the conditions for Issuing and Listing of Non-Convertible Securities:

1. General Obligations: The issuer has to consider higher security cover as per the terms of the Offer Document/Debenture Trust Deed which should be sufficient to discharge the principal amount and the interest thereon.
2. Creation of Charge: The charge created on secured debt securities shall be disclosed in the offer document as well as the Debenture Trust Deed. The condition is applicable in case of public/private issues and listing of debt securities.
3. Issue of Due Diligence Certificate: The Debenture Trustee must furnish a separate Due Diligence Certificate for each of the secured and unsecured debt securities, to the board and stock exchange(s), at a prescribed time and format. The condition is applicable in case of Public/Private issue of debt securities and private placement of non-convertible redeemable preference shares.
4. Disclosure: An issuer seeking to issue its debt securities is required to include the details of credit rating along with the latest press release (not older than a  year) of the credit rating agency validating the rating as on the issue and listing date.

Audits and Auditors in the USA - From the Eyes of Indian Companies

Requirement for audited financial statements in the USA

The simple purpose of a financial statement audit anywhere in the world is to add credibility to the reported financial position and performance of a business. In India, all private companies and public companies (Companies listed in stock exchanges) are mandatorily audited by a Chartered Accountant or firm of Chartered Accountants with Certificate of Practice (COP) from Institute of Chartered Accountants of India. In the USA, the Securities and Exchange Commission (SEC) requires that all entities that are publicly held must file annual reports with it that are audited. This also means that the Companies that are not public will not require mandatory audit.

However there are many instances in which audited financial statements are required even for non- public company such as: certain bank financing requirements, vendor, customer requirements, United States Citizenship and Immigration Services (USCIS), Corporate governance requirements or in case of subsidiary of public listed company of India  to meet stock exchange requirements , for filing annual performance reports (APR) with Reserve Bank of India or any of regulatory requirements depending on the  state business licensing requirements.

Audit services in the USA

In the USA, audit services are provided by Certified Public Accountants (CPAs) or firm of Certified Public Accountants who are licensed by respective state board of accountancy.

Applicable Accounting Standards in the USA

The financial statements are prepared according to the US generally accepted accounting principles (US GAAP). There are differences in accounting standards in the US as against the accounting standards applicable in India. Therefore, the reported financial results and position of the Company could vary under the US GAAP as against the Indian GAAP. These will need to be analyzed on case-to-case basis.

Alternatives other than audits

CPAs can provide review and compilation services, which may be suitable to some financial statement users as an alternative to audited financial statements. A review provides limited assurance, based mainly on analytical procedures and inquiries, that the CPA is not aware of any material modifications necessary for the financial statements to conform to US GAAP. It does not involve obtaining an understanding of the company’s internal controls or any testing of the underlying information. Reviewed financial statements include the identical disclosures as audited financial statements. In a compilation, the CPA assists management only in presenting financial information in financial statement format, without any assurance as to its reliability.

Selection of CPA firm

CPA firm selection for audit should be based on the reputation in the financial society, qualification, staffing and the industry experience. Further matters of consideration could be knowledge of US GAAP and Indian GAAP considering that at your corporate level you need to consolidate the financial statements of your US business. Another matter that may be important is that your records are maintained at your back office in India, in these cases a firm with presence in US and in India could be required.

ICAI – A Knowledge Based National Standard Setter

(with contributions from Mayank Jain and Vikram Rawat)

The ICAI is a statutory body established under the Chartered Accountants Act, 1949 for the regulation of the profession of Chartered Accountants in India. It is also the second-largest accounting body in the world.

From the time the Institute was set up, it has been entrusted with the responsibility of establishing the Standards for the guidance of the Members. Standards and guidance are set and issued by ICAI to bring in uniformity of accounting, industry practices, customs and practices. It is in the interest of the stakeholders and the society that the Standards are set, and the standardisation is therein brought.

What is a Standard? If we want the answer from an economic and professional perspective, a Standard is a document that sets out the requirement and explains the requirement to the users so that the stakeholder’s expectation is met. It is a bridge between the user and the stakeholder.

Since 1949, the responsibility of setting up Standards has been with the ICAI. Over a period as the landscape and economy underwent change, ICAI adapted and is trying to meet the ever-increasing demands of various stakeholders like investors, the Government, taxation authorities and various users of financial information. ICAI has formulated and issued Standards on various aspects like Accounting Standards, Auditing Standards, Quality Standards, Guidance Notes, Technical Guides, Standards on Internal Auditing and Standards on Valuation.

Knowledge is the key, specially to carry out such a large task to set the Standards and implement them. ICAI has a very systematic approach towards the formulation of Standards. It has set up various boards and Standing Committees and Non-standing Committees like Accounting Standards Board, Auditing and Assurance Standards Board, Company Law and Corporate Governance Committee, Committee on Direct Taxes, Committee on Indirect Taxes, etc. The Committees/Boards have eminent personalities and subject matter experts, it also has Special Invitees who are well-versed in the topic. The Standard setting process is a continuous one and involves continuous identification and evaluation of the emerging requirements of the stakeholders.  The needs are continuously evaluated, and emerging topics are picked up and discussed in the meetings. The need for Standardisation in practices and identification of areas/scenarios which were earlier not covered under any other Standard are evaluated. Various meetings are held, inputs are considered, and an Exposure Draft is formulated which is then made available to the members/stakeholders for comments. All such comments are considered and then the final Standard emerges. This entire process is thoroughly followed. On a periodic basis, the existing Standards are re-evaluated to identify areas of improvement and emerging issues/trends. If there is a requirement that is identified, the said process is followed for revisions to be carried out to the existing Standards.

ICAI is a member of IFAC. There is a continuous interaction with Global Standard setters. The Global Boards evaluate the needs of the various stakeholders, follow the process and then set up the Standards. Certain matters of international importance are discussed for adoption at the local level. The Global Standards are evaluated, and the requirements are then locally assessed along with the interplay those Standards may have with the other laws and regulations in India. Tweaks/carve-outs are discussed and deliberated upon by the experts, and after considering the comments by the stakeholders on the Exposure Drafts, new Standards are formulated. 

ICAI is a trusted Standard setter. Whenever the Law makers promulgate any new law/section/carry out amendments that have an impact on the practitioners, the members/practitioners always look up to ICAI for issuance of relevant guidance. It may be guidance ranging from an audit of CSR to Clause 30C of the Form 3CD, ICAI comes up with the relevant things on time to help and support the professionals. When the Companies Act was overhauled and the new Companies Act 2013 was brought into existence repealing the 1956 act, the powers of formulating the Accounting Standards including Ind-AS were the responsibility of the Ministry of Corporate Affairs. The Ministry of Corporate Affairs has announced the recognition and adoption of Ind-AS under the supervision and control of the Accounting Standards Board (ASB) of ICAI and in consultation with the National Advisory Committee on Accounting Standards (NACAS). The ICAI is actively engaged in providing guidance to members and discharging its responsibility of ensuring the successful and proper implementation of Indian Accounting Standards in the spirit in which they were formulated. The implementation of Ind-AS has been driven by the tireless efforts of the ICAI. This has enabled the stakeholders to high quality globally accepted financial reporting framework which is at par with global Standards. Further the Standards of Auditing u/s 143(10) of the Companies Act, 2013 are the ones that are formulated by ICAI from time to time. ICAI through its council members and committee members are in continuous consultation with various ministry and regulators and provide relevant, timely and appropriate inputs.

At times there are specific issues that are being dealt with in certain industries/sectors. There is specific guidance available to cater to such issues. There are committees formulated that look into industry-specific issues. After due discussion/deliberation on the requisite issue, technical guide/implementation guide/FAQs are issued to cater to the requirements.

To help understand certain Standards in a better and more detailed manner, ICAI issues educational material as well. These are aimed at detailing the requirements and enabling an understanding of the subject matter by the users. This also helps as enablers/training material. Further, various scenarios arise over a period, which are not covered by the Accounting Standards/Guidance notes/Existing technical literature. ICAI has in place an Expert advisory council wherein such scenarios are evaluated by experts and guidance is issued. Further, the compilation of such opinions is made available in the public domain so that it is widely used. There are more than XLI volumes of such Expert Advisory Committee Opinions issued. For ease of understanding, FAQs are also issued to help better understand certain emerging issues.

Taxation is an important area of practice/profession and a critical area for companies. Anything more is less in this area as various interpretations/case laws emerge/evolve daily. The Direct Taxes Committee (DTC) and GST & Indirect Taxes Committee play an important role where the endeavour is to continuously engage in matters involving direct and taxes. It makes representations to the Government, Central Board of Direct Taxes, Goods & Service Tax authorities and at other appropriate forums from time to time on various legislative amendments and issues concerning taxation. These committees also strive to continuously disseminate knowledge to keep the users abreast of the latest developments.

The responsibility of setting up Standards will not be complete without an appropriate plan of implementation in place. When any new Standard is to be brought into effect, user awareness is created through various modes like speaking on the new topic at sessions, websites, media bytes, etc. Once awareness is created, it sets a platform on which new Standards can be launched. The effective date of the Standards generally is prospective in nature and provides adequate time for the users to understand the requirements, assess the needs and ensure implementation which is a methodical approach to implementation. Once the pronouncement of the new Standard is done, ICAI takes efforts to ensure implementation is done effectively. There is a huge responsibility to create awareness and educate the users and stakeholders. This is fulfilled through various seminars/webinars/e-learnings/recordings/publications/FAQs, etc. ICAI through its committees mandate training sessions/implementation sessions at various regions through the regional offices & CPE Committee so that the requisite awareness is created and all the members/practitioners implement/understand appropriately and in the right spirit. Further, outreach programs and trainer programmes are conducted to enable faculties to impart the sessions. After the implementation, monitoring is also done of the various areas through various reviews of ICAI like peer review, quality review, etc.

The Chartered Accountancy profession irrespective of the field has grown in leaps and bounds over time. Global borders have shrunk, and the world has become a smaller place. A person sitting in one part of the world can work for/deal with matters concerning professional importance in any other part of the world. To ensure seamless working, better understanding and consistency in approach, it is necessary that there are certain standard procedures and that the understanding is appropriate. ICAI being a National Standard Setter for India and being a member of IFAC is always striving towards setting up the Standards in a manner that the users can stand up to the expectations of the stakeholders. ICAI has been relentlessly engaged in the initiatives with utmost diligence and has made an effective contribution toward enabling professionals to meet the expectation of the stakeholders. The objective is to create and use available platforms to understand, represent and resolve the concerns of the stakeholders. In many ways, these are contributions towards Nation Building.

Over the years India has shown considerable improvement on most parameters required to improve business confidence. This includes the removal of trade barriers, implementation of e-governance, push for a digital economy, infrastructure development, regulatory reforms in the field of business and commerce and policy for alliance building. These are gradually influencing global interests towards India.

The opening of most sectors for foreign participation through Foreign Direct Investment (FDI) is one of the significant milestones India has achieved resulting in significant long-term capital inflow. Sectors like technology, defence, transport & logistics, finance & insurance, agriculture, healthcare, energy, civil aviation and infrastructure are seeing unprecedented activity and growth fuelled by these reforms and resulting in significant foreign currency reserves. This is in turn resulting in investments into social infrastructure, upliftment of people, improvement of civil infrastructure and social security for people.

Post Covid-19, India is immerging as a significant business partner for other countries. This is also becoming possible due to a proven and functional democracy along with a stable government. India also has a significant local market and provides businesses with a large consumer base.

India now has significant opportunities in the field of manufacturing & supply chain, information technology, outsourcing, medical & healthcare, infrastructure and energy sectors. It is also immerging as the main alternative to China. Overall, the current times showcase a very positive environment for India.

In the recent past, we have seen significant investments in India by large accounting firms in their global shared services centres and this contuses to expand yearly. All large outsourcing companies have their largest centres in India and are now opening centres beyond tier-one cities. This expansion is providing immense opportunities in the field of accounting, finance, IT, supply chain management, customer servicing and other related areas.

To meet the increased demand in supply chain and logistics, considerable progress is happening in the transport and logistics industry along with significant investments made in the warehousing industry.

The renewable power sector is growing rapidly. Many global funds in the Indian private sector are investing capital in this sector. This is also resulting in activities around land acquisition. This sector is also exposed to significant ongoing M&A activity. The growth in these sectors is also providing opportunities in power infrastructure, component manufacturing and increasing opportunities for maintenance services.

The road and rail networks are growing at an unprecedented rate. Significant development activities are being carried out by the Government in the field of rural infrastructure development, water & sanitation, healthcare, and social security. This is resulting in increased economic activity across the country. Smaller towns and cities are also rapidly growing and now provide immense opportunities for people in the region.  

Once an importer, India is now not only self-sufficient in food production but is also exporting the same. The agriculture sector is moving towards major mechanisation. Farm equipment demand has gone up multifold. India is now one of the largest tractor-manufacturing countries. The farm machinery manufacturing sector has become a significant employment generator. This is resulting in multiple opportunities for the agri-machinery sector, the fertilizer industry, along with transport and logistics. Growth in agriculture is directly resulting in rural growth and increased economic activity across the country. This also requires significant private-sector involvement.

The increase in disposable income in the rural area is providing an extra thrust to the automobile, consumer durables, FMCG and education sectors. Due to this increased demand, the players in these industries are looking for capacity enhancement and there is an immense opportunity for new entrants in the fields of farm equipment, irrigation systems and distribution networks. This will further open job opportunities beyond large cities including job creation for people in rural and semi-urban areas.

The real estate and construction sector continues to be a significant employment generator for both organised and unorganised labour. A significant amount of construction activities are going on across the country. While other countries are witnessing a slump in their housing markets, India continues to register significant growth year-on-year. The rapid growth in this sector is providing a boost to businesses in construction materials and other related areas. The sector also requires significant investments which in turn provides impetus to the financial sector.

India has one of the well-matured securities markets and stock indexes are at an all-time high. The stock market is also considered a barometer of the economy. Over the last two years, stock market participation has gone up many folds. We have been witnessing increased IPO activities and this will further accelerate. International investors have a significant advantage in investing. With the advent of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), it will see faster growth including an increase in the size of individual investments. The robust market regulator framework is resulting in increased investors’ confidence.

The Indian start-up ecosystem is the third largest in the world and is expected to grow 20% year-on-year. The total start-up valuation has crossed INR 3lakh-crores and is rising rapidly. Currently, there are more than 80,000 start-ups registered and many more are at the ideation stage. India has more than 100 unicorns. The start-up ecosystem fills a lot of gaps in terms of areas where traditional business or social support systems were not used due to either their inherent restrictions or agility.

The Government also provided a much-needed boost through initiatives like ‘Start-up India’ and ‘Digital India’ along with policy and budgetary stimulus. The start-up system employs close to 2lakh people directly and generates significant indirect employment. According to public data start-ups in India have attracted more than INR 4000crore in the last year and more than INR 7000crore in the first quarter of the current year. The Government of India formed a fund of INR 10,000crore to increase capital availability as well as to catalyse private investments and thereby accelerate the growth of the Indian start-up ecosystem.

To conclude, in today’s world of uncertainty caused by the global economic recession and unfortunate geopolitical and demographic issues, India provides a unique opportunity to the world as a significant, stable, transparent and strong business destination. This is further fuelled by a strong domestic market and a significant multilingual young population. What comes out is that there is a huge opportunity for investment in the development of various sectors. Consumers worldwide would expect products or services to be delivered at lower costs coupled with the best quality irrespective of who manufactures or delivers and where is it manufactured. In the years to come, it will be consumers who will chart a course for investments and the business environment in India will be all set to deliver to global market requirements. With the presence of such a dynamic potential, India can become the land of opportunity and a premier destination for varied capital investment opportunities and employment.

FREE TRADE WAREHOUSING ZONE – STILL RELEVANT TO IMPROVE GLOBAL COMPETITIVENESS AMID FOCUS ON DESH

(with contributions from Abhishek Singhania).

A Free Trade Warehousing Zone (FTWZ) is conceptually a deemed foreign territory within the geography of the country for the purpose of tariff and trade wherein trading, warehousing and other activities such as packaging, labelling, re-sale, re-export, assembly, and transhipment can be carried out without the intervention of the Customs authorities. Only when the goods are moved to consumers within the country, then such goods become subject to Customs duties.

Key beneficiaries of FTWZs are:

• Foreign suppliers not having any entity in a specific country and intending to set up an international transit warehouse in that country.
• International traders wanting to keep seller’s and buyer’s information confidential.
• International airline companies wanting to store valuable spare parts for a long period without any obligation and timely retrieval.
• Importers of bulk commodities requiring the activity of re-packaging, re-labelling, etc., before clearance of goods to final consumers.

The objective of an FTWZ is to create a one-stop facility for EXIM operations and root out the inefficiencies associated with cross-border movement of goods. Usually, FTWZs are strategically located near major ports, provide excellent connectivity via rail, road, sea and air transport, and have world-class storage premises with advanced and robust material handling equipment.

An FTWZ comes with a host of benefits, including:

• Duty deferment: Customs duties and local taxes are deferred on storage of imported goods into the FTWZ until goods are cleared for home consumption, thereby freeing up working capital and interest cost requirement.
• Streamlined Customs clearance: FTWZs offers greater customs policy/regulatory flexibility as compared to other types of warehousing facilities, thereby reducing the time and cost associated with customs clearance, especially for businesses involved only in international trade.
• Value-added services: Value-added services like re-packaging, re-labelling, kitting, assembling of CKD and SKD kits, etc., can be easily carried out in the FTWZ, saving operational costs and time.
• Single-point storage facility: FTWZs provide storage facilities that meet each product category's specific requirement, thereby providing a single-point storage facility for companies to hub their operations.   
• World-class infrastructure: FTWZs provide world-class facilities for warehousing of various products like secured storage premise, water, power and communication and connectivity, one-stop clearance of export and import formality, etc., thus enabling an efficient operational environment for trade facilitation.
• Expansion of business: FTWZs provide a one-stop solution for all storage and trading needs, thereby helping companies to reach out to new markets without incurring the cost of setting up their facilities in foreign countries.
• Increased flexibility: Businesses operating in FTWZs can focus on core activities without worrying about customs clearance and other formalities, thereby providing greater flexibility for faster and more efficient delivery of the goods/ products.
• Foreign exchange transactions: FTWZs offer easy-to-access foreign currency conversion facilities, which makes trade and commercial transactions involving foreign exchange convenient.

Geographically, FTWZs exist worldwide, but most are concentrated on two continents. 48% of FTWZs are in Latin America and the Caribbean, while 42% are in Asia, owing to high trading activities in these regions. FTWZs have proven to be a great success in countries like Dubai, Singapore, and China, as many supply chain related issues have been resolved through these facilities. Companies in these countries are not only optimising their supply chain but also bringing efficiency to their whole trade through the FTWZs.

In India, the Special Economic Zone (SEZ) policy was formulated in the year 2000, and it was implemented through the Foreign Trade Policy. The Government of India then considered forming a policy to adopt FTWZs, considering the requirement of the same due to high trading activities. Accordingly, the FTWZ concept was introduced in the Foreign Trade Policy of 2004-2009. Further, SEZs received major impetus when the specific legislation was enacted to administer SEZs through the SEZ Act, 2005 and SEZ Rules, 2006. FTWZs had also become a part of this newly formed regulation and are regulated by the Special Economic Zones Act (2005) and Rules (2006) as well as the Ministry of Commerce and Industries.

FTWZs were introduced in India to leverage India’s strategic geographical location, attract foreign direct investments, develop infrastructure for the storage of goods, facilitate the import and export of goods without many Customs compliances, etc.

However, FTWZs in India have not been as successful as their counterparts in other countries due to various challenges such as:

• Unutilised FTWZ capacity
• Lesser acceptability due to the perception of storage cost being much higher than conventional warehousing
• Lack of knowledge across ministerial departments with respect to the FTWZ policy
• Lack of a consolidated policy providing for the FTWZ framework
• Lack of knowledge among Customs brokers regarding the movement of goods through FTWZs
• Non-linkage between the SEZ online portal and the ICEGATE portal with respect to FTWZ transactions  

India’s SEZ framework was challenged by the United States of America (USA) before the Dispute Settlement Body of the World Trade Organisation (WTO), which eventually ruled that India’s SEZ policy violated its rules as it gave direct tax benefits to net-foreign exchange positive entities (earned more forex than they spent) for five years. Accordingly, the Ministry of Commerce and Industry constituted the SEZ Policy review committee under the Chairmanship of Baba Kalyani, Chairman M/s. Bharat Forge to study the Special Economic Zone (SEZ) Policy of India and provide recommendations to revamp the entire scheme.

To redress the operational and compliance challenges and to redraw the SEZ and FTWZ framework in India, the Indian Government is formulating to introduce the ‘Development of Enterprises and Services Hubs (DESH) Bill, 2022’. Under the proposed scheme, existing FTWZs are expected to be transitioned into new hubs known as DESH, which shall be established by the Centre or a State or jointly by them. The New DESH scheme is expected to remove the bottlenecks around the erstwhile FTWZ scheme. The FTWZs are counting on the Government to implement the DESH bill at the earliest so that they can operate more flexibly and produce the desired results. Earlier, the DESH Bill, 2022, was planned to be taken up during the 9th Session of the 17th Lok Sabha, 2022 (Monsoon Session); however, the same was not introduced during the Monsoon Session. The Bill is now understood to have been finalised internally by the policymakers and is expected to be tabled during the winter session of the Parliament, or the ordinance route may be explored to operationalise this reform. To this effect, the ministry of commerce has also formed a working group for framing the rules under the proposed Bill, which will form the backbone of the implementation framework.

The last few years have witnessed some significant changes that are impelling FTWZs to be a popular scheme among industrialists in many countries. These include an increase in cross-border trade, growth in industrialisation, the desire of foreign players to enter new markets, etc.  FTWZs have a vast potential to boost the import and export trade across the globe, especially in India. FTWZs can bring efficiency to the whole supply chain, which in turn shall improve the ease of doing business and cut down manufacturing costs. Moreover, due to prevailing cash flow related problems on account of duty payment and its time of imposition related to stored cargo, FTWZs can act as a value-addition tool to mitigate such issues. However, the respective governments must formulate clear policies for FTWZs and provide them with the required proximity and connectivity to major ports and airports so that more traders across the globe explore the option and earn a larger pie of the international business and propel the country’s growth.

We understand that the Indian government is still mulling over the introduction of the DESH bill to replace SEZ Laws. The Government’s focus is also on manufacturing in India to make the country a manufacturing hub instead of promoting trading through India. However, FTWZs have always been a requirement due to the basic structure of India’s business and are required to be there in the framework with improved policy to ensure global competitiveness even if the legal framework will be changed from SEZ laws to the DESH bill.

Accountancy Profession -A Partner in Nation-Building

(with contributions from Aleem Lilani and Vikram Rawat)

The Accountancy Profession plays a pivotal role in a country’s overall growth, it tends to be the foundation for any country to enable it to accomplish the objective of economic growth. The Profession and its members actively participate and assist governments in policy formulation, implementation as well as monitoring. They are true implementors of various commercial and tax-related laws. Accountancy Professionals shoulder various responsibilities like providing assurance/services to requisite stakeholders like shareholders, regulators, government bodies and taxation authorities. Trust is established over time, and it would not be wrong to say that the Accountancy Profession and especially Chartered Accountants have earned well-deserved trust from various stakeholders. With such a heavy responsibility and attached authority, comes great risk.

In India, the Institute of Chartered Accountants of India (ICAI) is the prominent accounting body and the second-largest professional body of Chartered Accountants globally. ICAI is consistently working to ensure that high-quality services are rendered by its members in the field of Audit and Accountancy by introducing new standards, guidance, pronouncement and publication of journals and study material from time to time, which keeps its members up-to-date and encourages them to take advantage of emerging opportunities due to changes in business framework. The ICAI is continuously striving to be a Partner in nation-building.

Some important contributions to the Indian and global economy by the ICAI and its members are:

Implementation of the Accounting Framework

In India, Ind-AS (Indian Accounting standard) was introduced under the supervision and control of the Accounting Standards Board (ASB) of ICAI and in consultation with the National Financial Reporting Authority (NFRA). The Ind-AS was introduced to enable Indian companies to achieve a high-quality globally accepted financial reporting framework at par with global standards.

In case of the partnerships, LLPs, trusts and companies (those falling outside the ambit of Ind-AS) Accounting Standards are issued under the authority of the Council of the ICAI.

Pivotal Role in Drafting Commercial Laws and Contributing to the Exchequer

ICAI in India plays an eminent role in assisting in drafting/providing inputs/comments on commercial laws. The Direct Tax committee, GST & Indirect Tax committee and the committee of International Taxation of ICAI invite their members every year to share the issues faced in law and regulation for inclusion in the pre-budget memoranda which is submitted to the Ministry of Finance. One of the main objectives of this suggestion is to understand from its members the difficulties or anomalies they may have identified in the Law and Regulation during their practice.    

Due to in-depth knowledge and experience in the fields of taxation, financial reporting, capital budgeting, budget forecasting and financing, preparation of books of accounts, etc. Chartered Accountants are instrumental in shaping the Indian economy. In the current scenario, post the implementation of GST, the role of a Chartered Accountant has added importance. From the stage of contributing towards drafting of rules to provisions to the implementation of GST, the role and expertise of Chartered Accountants are put to the fullest use. Chartered Accountants are consistently assisting stakeholders in fulfilling various responsibilities like return filing and knowledge sharing with respect to the changes in law and regulation.

Trusted by Government and Regulators

There are several requirements concerning certifications/assurance required under various applicable laws for different types of entities across industries/sectors. The certifications span various fields ranging from net worth certifications, claim submissions, certification for compliance with rules & regulations/schemes, certifications for grant of subsidy/concession, certifications required under the Foreign Exchange Management Act like remittance certificates and certifications required by the RBI on certain compliances. The lawmakers' trust in the Accountants is shown as the requirements of such certifications are embedded in the laws and regulations/circulars/notifications.

Chartered Accountants also assist entities in tax-related compliances, which in turn ensures there are sufficient tax collections at the central and state level. Further, various government departments and regulators appoint/empanel Chartered Accountants as specialists/experts in conducting special audits/investigations.

Accountancy Professionals in the Industry

Every entity needs the services of an Accountant depending on the size, nature and complexity of their business model. Accountancy Professionals play an important role in policy/decision-making, managing the entity and contributing to the Government through the payment of taxes.

International Affiliations and Memberships

In this era of globalisation, the ICAI has collaborated with other countries' professional institutes. Such collaborations have helped create opportunities for Professional Accountants to ensure statutory compliances like laws related to Foreign Exchange Management Act, Indirect Tax i.e., GST and VAT, International Taxation, etc. The growing demand for Chartered Accountants in India has also helped in exporting their professional services globally, which has given well-known recognition to the professionals and in turn, has raised the forex reserves of the country.

India is one of the favoured investment destinations and global investors are looking for consistent and effective compliance with laws and regulations, Environmental, Social and Governance criteria, significant contributions by the practitioners in the fields of structuring of transactions, etc. Assistance in the incorporation of the companies and setting up of new business, ensuring compliance ensures ease of doing business in India and in turn contributes to the growth of the nation.

ICAI and its members have played a crucial role in ensuring compliance with laws. ICAI is continuously creating investor awareness and spreading knowledge with respect to various laws and regulations like Tax Deduction at Source (TDS), Equivalisation levy and TCS, etc. ICAI has adopted the revised Code of Ethics which was recently made effective for the sections on Non-Compliance with Laws and Regulations (NOCLAR).

Focused on Quality

The Accountancy Profession through the guidance and vision of ICAI is aimed at providing high-quality services to stakeholders. To ensure that the quality is benchmarked and maintained, various review mechanisms are set up, that focus on the quality of output and ensure compliance with laws and regulations. Quality is of utmost importance under all circumstances.

World Class Educator

The ICAI conducts a Chartered Accountancy Course for its students which consists of three levels of examinations and training modules which impart knowledge for maintaining the highest technical and ethical standards. Since 1949, the profession has grown leaps and bounds in terms of its members and student base. It has always been the intention of ICAI that the students who qualify for the examination should have skills for enduring and use for the nation’s growth. There are various post-graduation/specialisation courses that are offered as well by ICAI to its members.

Services during Pandemic

During the pandemic, the ICAI was persistently reaching out to the public sector, professionals, government institutions and authorities to address the issues which arose due to Covid-19. The pandemic had unfavourably affected the economic environment which in turn had a consequential impact on the results of financial statements and reporting.

Research on Emerging Topics

Over time, the Accountancy Profession has spread its wings wide. Numerous opportunities are available under the umbrella of accountancy. It is said, Change is the only constant in the present-day world. Considerable time, energy and resources are invested in researching emerging topics that are of national and global importance. The understanding of such topics is developed by formulating requisite guidance for the use of the stakeholders. Such research opens up new avenues of learning.

In a nutshell, Accountancy Professionals make an effective contribution to the Nation’s development, through instances like the implementation of GST, discussing and imparting education on various aspects of the Companies Act, Indian Accounting Standards (converged with IFRS) and the Insolvency Bankruptcy Code. In summary, “Chartered Accountants are not just the members of the Institute but are partners in nation-building.”

Future of Accounting

With ‘disruption’ as the new mantra, accounting and the accounting profession have undergone a substantial change. We’ve come a long way since accounting as a set of principles and accountancy as a profession was limited to considering regular, relatively non-complex transactions with a primary focus only on ensuring accurate record keeping.

The ever-changing economic environment, technology disruptions, the advent of new regulations, the general shift in working patterns and even topics previously not considered within the purview of traditional accounting such as climate change, have resulted in new demands on the accounting profession. These changes however have also opened a plethora of new opportunities and now there is a shift in the perception of the role of an accounting professional from being a mere record keeper to a value creator and a business partner.

The changing role of the accountant

The accounting profession is dynamically changing. CFOs, traditionally professionally qualified accountants, are increasingly getting involved in helping businesses navigate their transformation journeys. From accountants to providers of business insight, CFOs are expected to have a strategic outlook and a deep understanding of business.

A survey1 by McKinsey & Co highlighted the fact that finance leaders are deeply involved in determining whether businesses adapt to significant changes in how work gets done. The CFOs who responded to the survey cited increased oversight on areas such as digital, investor relations, post-merger integration and board engagement, all of which can be considered areas that were generally not areas of a traditional CFO’s focus. Interestingly, in this survey, it was noted that the share of finance leaders who said they are responsible for their companies’ digital activities, more than tripled during the period 2016 to 2021.

With businesses going global and transactions becoming more complex, accountants are thus expected to have new competencies and a changed mindset to meet evolving business challenges. In addition to technical and analytical skills what will also be important in a globalised workplace are collaborative functioning, interpersonal skills and cultural sensitivity.

Use of technology and accounting automation

Advances in technology are changing the way the process of accounting is managed. Cloud computing, robotic process automation, blockchain technology, etc. are reducing voluminous, repetitive and time-consuming tasks. The Covid-19 pandemic served as an impetus for companies to accelerate the adoption of digital technologies and virtual collaboration platforms.

The use of cloud technology enables instant access to resources and data, through the use of dashboards that are continually updated and allow for real-time decision-making, using current data instead of relying only on historical information. Data analytics and the use of ‘Big Data’ can help identify future trends and co-relationships which otherwise could be missed.

ERPs such as Oracle and SAP are also available on the cloud, with significant updates being pushed from the cloud instead of taking time for on-premise installation. The cloud setup makes for an agile work environment that is faster to respond to business needs.

Robotic Process Automation (RPA) can be employed to automate routine tasks in key accounting processes. For instance, in accounts payable, routine tasks such as vendor verification, purchase order entry, three-way matching, parking entries for vendor payment, etc. can be automated. Similarly, in the accounts receivable process, customer data setup, extraction of information for invoice preparation, invoice generation, mailing invoices, follow-ups, etc. can be automated.

Intercompany reconciliations, travel and expenses management and payroll are amongst the other proven use cases where deploying automation can free up the bandwidth of the accounting teams to design more effective monitoring and intermittent intervention mechanisms, thereby enabling greater focus on analysis rather than routine transaction processing.

Blockchain is another emerging technology, which is a computer recording system that allows for distributed ledgers to record transactions, securely and transparently in a tamper-proof manner. It enables continuous updates and real-time verification.

Remote working has received significant attention due to the Covid-19 pandemic. Hybrid working is now a new reality. Technology has acted as an enabler to make remote working a possibility. Routine accounting and audits were conducted remotely using technology collaboration platforms. Applications such as MS Teams, Google chat and Zoom have entered the common lexicon.

The ‘2021 BDO Middle Market CFO Outlook Survey’ of 600 middle market CFOs in the US, conducted by BDO US LLP noted that 50% of the CFOs surveyed were planning to pursue digital transformation in 2021, 59% said that they will increase IT spending in 2021 and 27% said that investing in technology and infrastructure is their top business priority.

As companies continue to focus on resilience, data-driven decision-making and analysis will be critical to their ability to plan with precision, mitigating risk and enhancing profitability. Thus, it would be reasonable to suggest that one of the things that the future of accounting is inextricably linked to is the growth in digitisation and further advancement of technology.

Global accounting principles and new horizons

The body of knowledge represented by accounting principles in recent years has been substantially added to, with new standards and application guidance being issued by global accountancy bodies.

Complex guidance for topics such as consolidations, business combinations, financial instruments, revenues and leases has introduced new measurement and recognition criteria and detailed disclosure requirements. Contracts that were traditionally not leasing contracts have to be evaluated for lease arrangements, preference shares hitherto considered as part of an entity’s equity now need to be evaluated for classification as equity or debt. The change in revenue standards impacts the timing of revenue recognition and even postpones the point of recognition in industries such as real estate. Entities that were previously considered as subsidiaries, after evaluation of guidance under the consolidation standards, may now be required to be accounted for as equity accounted investees, thus wiping off significant toplines in consolidated financial statements. Many such implications which do not require contracts, proposed transactions, M&A deals, tax planning, etc. are now required to be evaluated closely through an accounting lens to minimise unexpected accounting impacts.

All G20 jurisdictions which include major economies such as the European Union, Australia, USA and India amongst others have made a public commitment supporting a single set of high-quality global accounting standards. Recent projects that the Boards – International Accounting Standard Board and the US Financial Accounting Standards Board, worked on concurrently were the standards on revenue and leases, with guidance for these two important topics being harmonised to a large extent. A study by the International Financial Reporting Standards (IFRS) Foundation2, updated in July 2022, covering 167 jurisdictions across the world, notes that 159 out of 167 that were covered, commit to IFRS Accounting Standards and 146 of those jurisdictions require IFRS Accounting Standards already for all or most domestic publicly accountable entities (listed companies and financial institutions) in their capital markets.

This convergence greatly facilitates a common accounting standard across the globe and therefore any future changes or amendments to accounting principles don’t just affect a company locally but across a majority of the jurisdictions where it operates. This will continue in the immediate future and require companies to align their accounting practices and teams across the globe.

Since a single standard is being followed, the focus of centralised accounting and finance teams is already on driving high-quality accounting standards compliance across all major components and outsourcing some of the routine finance function activities such as transaction processing is already a reality.

With growing environmental awareness, the impact that businesses are having on the environment and related climate disclosures represent the next big change on the horizon.

At COP 26, the IFRS Foundation announced that it will work with jurisdictions globally to deliver a ‘comprehensive global baseline’ of sustainability disclosures for the capital markets, through the establishment of the International Sustainability Standards Board (ISSB). In March 2022, the ISSB launched a consultation on its first two proposed standards — one on climate and one on general sustainability-related disclosures. The Exposure Draft IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (General Requirements Exposure Draft) proposes overall requirements for an entity to disclose sustainability-related financial information about its significant sustainability-related risks and opportunities. In March 2021, FASB issued a Staff Educational Paper on the intersection of environmental, social and governance matters with financial accounting standards.

Further guidance will continue to evolve in this area.

In all, whether from the perspective of the demands that are being placed on the accounting professional or the new age of digitisation which is changing the way that work is being done, to new reporting and disclosure requirements on topics such as climate change, these are exciting times to be living in and whilst we can try to glimpse into what the future holds, there is much still to come which will continue to create new opportunities and present new challenges for today’s global accountant.

1. https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/mastering-change-the-new-cfo-mandate

2. https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/#analysis-of-the-167-profiles

ICAI -A World-Class Educator

The Institute of Chartered Accountants of India (ICAI) is the second largest accounting body in the world in terms of the number of members and students and holds a vision to be the world’s leading accounting body and developer of trusted and independent professionals with world-class competencies in accounting and related services. ICAI is a member of the International Federation of Accountants (IFAC), South Asian Federation of Accountants (SAFA) and Confederation of Asian and Pacific Accountants (CAPA) and International Innovation Network (IIN).

ICAI has developed a new age curriculum structure for student courses which is relevant to meet the needs of India as well as the global industry and profession. Assessment tests are conducted by the Institute at the end of the 1st and 2nd years of the Articleship period, with the intention to provide an opportunity for candidates to self-evaluate their practical knowledge acquired in various fields. It imparts training on evolving technologies including data analytics, etc. through the ICAI infrastructure. Its mix of practical and theoretical aspects distinguishes its professionals to contribute significantly to the academic research related to accountancy and business.

Through numerous seminars, study circle meetings, and conferences, the Institute assists its members in updating knowledge and creating new opportunities for practice. The Digital Learning Hub, UDIN, Digital Competency Maturity Model, Self Service Portal, and Financial Literacy Drive are just a few of the initiatives that the ICAI has launched to help the nation's digital economy. Due to the rising number of accounting, financial and loan irregularities, there is a pressing need for forensic accounting and investigation professionals in India to conduct their assignments in a manner that is based on a thorough qualitative and prudent set of Standards, as well as to collect evidence that may be subject to high-level scrutiny in a court of law. The ICAI has released detailed Forensic Accounting and Investigation Standards (FAIS) for its members and other stakeholders.

The career opportunities for post-qualification members range from Internal Auditor, Tax Auditor, Forensic Auditor, Statutory Auditor to Share Valuer, Financial Reporter, Management and Corporate Consultancy, Tax Advisor (both international tax and domestic tax), Management Accountant, Cost Accountant and the list is endless.

It has a course curriculum which provides a global competitive edge to its members and also evaluates and encourages citizens of other countries to pursue the course by creating recognition and career opportunities worldwide.

Chartered Accountants have comprehensive knowledge of finance, taxation laws, auditing, and commercial laws which enables them to offer advice, assurance and information that shapes business-critical decisions. Chartered Accountancy courses offered by the ICAI open the door to a myriad of professional opportunities. The options are virtually limitless and they may be tailored to match an individual’s interests, standards, and earnings. The ICAI has so far been successful in tapping some of the most lucrative employment opportunities for its members.

Australia faces a shortage of professionals for performing tasks in auditing and advisory roles. This calls for a blooming demand for professionals like Chartered Accountants. 

ICAI has maintained good relations with other professional accounting bodies worldwide. It has entered into Mutual Recognition Agreement (MRA) with the Institute in Malaysia, Ireland, Nepal, South Africa and Australia and Memorandum of Understanding with the Institutes of Chartered Accountants of England & Wales, Canada, Russia, Kenya, Bahrain, Tanzania, Oman etc. to recognise the qualification, training of each other and admit the members in good standing by prescribing a bridging mechanism.

The ICAI has achieved global recognition over the years for maintaining the highest standards in technical, ethical areas and for sustaining stringent examination and complying with international education standards issued by the IFAC. Indian Chartered Accountants are, therefore, recognised and appreciated worldwide for their knowledge, expertise, acumen and work ethics.

The University Grant Commission (UGC) has granted the academic equivalence to the Chartered Accountancy qualification with the Post Graduate degree. As a result, Chartered Accountant members can now pursue a PhD in all the Indian universities. This will not only assist CAs in pursuing higher education, but it will also make it easier for Indian CAs to move around the world.

Over a period of time the ICAI has achieved recognition as a premier accounting body not only in the country but also globally, for maintaining highest standards in technical, ethical areas and for sustaining stringent examination and education standards. Since 1949, the profession has grown leaps and bounds in terms of members and student base.

The Institute also outlines its code of ethics for working chartered accountants in terms of fees to be charged, its no-advertising policy, etc., and imposes the heaviest punishment to protect the profession's interests.

The Institute has taken the initiative to adapt its teaching programme to a shifting corporate landscape. The fact that ICAI has mandated ongoing professional development for its members can be appreciated; in a world that is changing so quickly.

One of the most important sectors of the continuously increasing economy is accounting. Chartered Accountants are in high demand not only in conventional industries like manufacturing, banking, and financial services, but also in newer industries like IT, ITS, telecom, risk and assurance services, infrastructure, and retail. Considering the integrated globalised environment, the profession of chartered accounting has grown to be one of great significance.

To sum up, the future of the accountancy profession is promising. Accountants can indeed play a greater role in the economic development of not only our country but also have the capabilities to contribute to the world as well.

‘Leading Sustainability: How Do We Build a Profession That Is Ready from a South African industry perspective?’

The theme of the 2022 World Congress of Accountants Conference, ‘Building Trust, Enabling Sustainability’, is a highly topical one challenging our profession to reflect on our role as protectors of public interest and active contributors to ensuring sustainable economies for now and the future.

The panel discussion that I was part of posed a critical question regarding how we build an accounting profession that is both ready and capable to lead a global Sustainability agenda. Naturally, education plays a vital role in adequately preparing today’s Accounting professional to remain at the forefront of emerging sustainability-related services that translate into both revenue growth as well as broader societal impact.

We should, as a point of departure, reflect on how we as Accounting industry leaders consider the context in which the Sustainability imperative occurs. Do we see our role and responsibilities towards Sustainability through a narrow lens focusing only on discharging our ‘technical’ responsibilities?

Or, do we adopt a broader view of Sustainability? One that regards Sustainability as a critical social compact in which Businesses – both ours and those of our Clients – have as equal a moral, ethical obligation as would any other profession to work towards a healthier, more equitable and future-proof world.

What then are the most important skills that our profession need as they move swiftly and confidently into providing sustainability-related services? 

Continuing Professional Development (CPD) coupled with a lifelong learning philosophy is a non-negotiable. Without this, our profession will struggle to understand organisations from a holistic point of view; and bring the necessary integrated thinking and reporting to bear on an increasingly complex operating environment.  An operating environment that is in a state of flux and impacted by ongoing shifts and developments in the political, economic and climate spheres. The Triple Bottom Line approach – which is certainly not new to many of us – supports integrated thinking and therefore integrated reporting and is a direct response to these shifts and developments. Its relevance remains intact.

At BDO South Africa, for example, we evaluate our performance in terms of how well we are creating overall, holistic Client value. This approach is fully aligned  with BDO’s global purpose of ‘People helping people achieve their dreams’. Put another way, it’s an approach that’s an integral part of our DNA. Another key way we incorporate Sustainability in our way of working is conducting consistent and meaningful measurement and reporting with regard to Sustainability. In 2021, we issued our first Sustainability Report delivering clear and transparent progress indicators to Stakeholders on our performance within the ESG framework. As the saying goes, ‘what gets measured, gets done’.

The consequences that face the Accounting professional who elects to forego pursuing the necessary knowledge on Sustainability are stark and significant. Remain competitive or lose market share to others who are knowledgeable. Remain relevant as a Subject Matter Expert (SME) or run the risk of becoming dispensable to Clients and Stakeholders alike.

The mistake none of us can afford to make is to allow Clients to run ahead of us in building critical knowledge and technical competencies around Sustainability. Should this happen. what tangible value are we then capable of providing to them?

In contrast, when we become champions of the Sustainability agenda and expert practitioners in this field we enable multiplier and mutual benefits across not only our Accounting firms but across our Clients and our industry as well.

These include creating visible and impactful career opportunities and trajectories - particularly at a graduate and junior professional level – that would not have existed a few short years ago. We make a meaningful impact on the access by women to the profession. And, to their unfettered advancement as Accounting professionals. Benefits such as these do not only pertain to South Africa or to the African continent. Just as Sustainability is a global imperative so too are the challenges to be addresses and the benefits that flow when we take the agenda to heart personally and professionally.

But, does the responsibility to get on top of the Sustainability agenda lie only with the Accounting industry? Are Clients demonstrating the same degree of commitment and active response to its imperatives and demands? Certainly, in a South African Client environment we do see a consistent increase in the adoption of integrated reporting principles and processes. And, attendant to this are greater levels of Compliance with the Codes of Good Practice on Governance.

But, we not there yet. As with most changes to a status quo often it is only when the relevant regulatory environment and market forces combine to drive the required shifts in behaviour and practice that the intended consequences of such change can be unlocked.

What does this mean? Too often the combination of a very clear commercial imperative and a material consequence of non-compliance succeeds in having the Sustainability agenda become an integral part of the Business agenda.

Narrow, and often uninformed perceptions of high costs associated with adopting these changes in policies and processes are another key impediment to a faster, wider embrace of Sustainability by Business.

The example of correcting the historic economic imbalances created by Apartheid in South Africa bear mentioning here. To promote and ensure access by Black business to the formal economy a transformative policy of ‘Black Economic Empowerment’ was introduced many years ago. While there have been a number of iterations of this policy over the years it has only found notable success and impact where legislative and sectoral regulatory environments adopted a ‘carrot and stick’ approach.

And, perhaps it is this that puts in place a more balanced approach to the Risk-Reward decision model in Business. Tangible financial benefit being the carrot and potentially negative financial impact being the stick.

Finally, the question that Business leaders and management need to introspect on is whether employing only a financial Risk-Reward approach to the issue of Sustainability adds or detracts from an organisation’s reputation as a good Corporate citizen with an unassailable ‘licence to operate’.

To conclude, I regard the following broad recommendations as being useful to the professional accountant starting their journey into Sustainability.

First, a back-to-basics approach always helps. Make sure you understand the operating context in which you work.

Acquaint yourself fully with what the intent, imperatives and benefits – both from a business and social perspective – entail. And, what meeting or missing the associated targets in your business and sector (such as carbon emissions) have as consequences from a risk management and mitigation point of view.

Then, consider whether actively participating in the Sustainabilty agenda enhances or diminishes your relevance or competitiveness.

Finally, remain conscious of your role and obligation as an Accounting professional to contribute to a Business ecosystem that thrives and not just survives. And, in that, we ensure that Business is an active contributor to a sustainable world.

For all in it.

Enhancing the Start-up Eco System

(This article has been co-authored by Akhilesh Pandey, Partner & Leader Financial Due Diligence, BDO India with contributions from Alok Shah)

The start-up ecosystem is an environment encompassing networks of resources to establish, encourage, nurture and accelerate entrepreneurship. Key ingredients of a successful ecosystem include access to equity/debt finance, access to markets and distribution channels, availability of human capital, institutional support such as infrastructure and associations, accommodative policies and entrepreneurial culture. All these focussed in the right direction, will provide the necessary impetus to innovation and creativity and motivate founders to take risks while also imbibing tolerance for risk and failure in the start-up fraternity.

The Government of India has always taken measures to promote the start-up ecosystem in the country by granting regulatory and fiscal benefits to them. Here’s an overview of the start-up ecosystem in India:

• Key start-ups statistics – The Economic survey for 2021-2022 declared India as the third largest start-up ecosystem in the world, after the US and China. According to a press release dated 20 July 2022 by the Ministry of Commerce and Industry, as of 30 June 2022, the total number of start-ups increased from 471 in 2016 to 72,993 and has generated a total of 767,754 jobs. As reported on the Start-up India Website as on 16 November 2022, of the total 234,021 start-ups in India, 82,908 are DPIIT-recognised start-ups and have a total of 598,682 stakeholders in the start-up India hub. As of 7 September 2022, India is home to 107 unicorns with a total valuation of USD 340.79bn and out of the total number of unicorns, 44 unicorns with a total valuation of USD 93bn were born in 2021 and 21 unicorns with a total valuation of USD 26.99bn were born in 2022[1]. As per ‘The State of Indian Start-up Ecosystem’ by Inc42, as on 30 June 22 the total funding raised by start-ups between 2014 and the first half of 2022 stood at USD 131bn.
• Demographic splits and sector pies – 3 Indian cities viz. Bengaluru, Delhi and Mumbai made it to the list of top 40 start-up ecosystems in the world, according to the Global Start-up Ecosystem Report of 2022 by Start-up Genome[2]. According to the report ‘The State of Indian Start-up Ecosystem' by Inc42, as on 30 June 22 going by funding amounts, Chennai, Pune, Hyderabad, Jaipur and Ahmedabad follow the top 3 Indian cities mentioned earlier as top start-up hubs in India. This also highlights that start-ups are no longer a big city phenomenon but have mushroomed to other locations as well. Further, according to the said report, the top 3 sectors in terms of funding amount from 2014 to 30 June 2022 include e-commerce, fintech and consumer services followed by other emerging sectors including enterprise-tech, ed-tech, media & entertainment, transport tech, health-tech, travel, logistics.
• Failures - Start-up India initiatives, inter-alia include pro-bono offerings, through 23 partnered organisations, such as cloud services, legal support, financial services, etc. which are utilised by 4,500+ start-ups[3]. Despite the initiatives, recent studies indicate 90% failure rates among founders mainly on account of the inability to accurately gauge the market and lack of preparedness to deal with fluctuating market conditions[4]. Lack of preparedness can be in terms of product market fit, resource constraints, tech availability, finance and legal understanding or other operational problems. To mitigate this and to enable the scale of the start-ups further, it is important to preserve as well as enhance the start-up ecosystem in India.

Strengthening the Start-Up Ecosystem

The ecosystem creates an environment where the new start-ups can explore and exploit the required resources by co-operating with other participants in the ecosystem. While, as a country we have built a good start-up ecosystem, preserving and strengthening the ecosystem is the need of the hour to reduce the failure rates. This will enable matching and effective collaboration of the budding start-ups with required resource pools. This will facilitate sectoral funding opportunities, proof of concept testing amongst the right peers, exploring innovative marketing ideas and source advice from industry veterans and like-minded peers leading to effective knowledge transfers and mentoring. Connecting with these will, in turn, lead to positioning the start-up within the environment, promoting healthy competition with peers and reducing investor losses. While a lot of work is being done on strengthening the start-up ecosystem in the country, we have highlighted below a few thoughts which will assist in further enhancing the ecosystem.

• Networking and finding the right funding partners – Raising funds during the nascent phase is one of the most crucial aspects to facilitate the growth of a start-up. In this process, partnering with early-stage investors having the capabilities and resources to help the start-ups grow post-investment, plays a pivotal role in the overall growth of the start-ups. Partnering with the right investor would fuel the growth of the start-ups by mentoring them, helping them develop relationships with relevant strategic partners including distribution channels, logistics, technology, marketing, consultants and employees that may be required as the start-up grows. Apart from the actual funds that the financial investor brings, the other areas where they can add value are equally important while choosing the right partner. To evaluate and connect with investors, the founders should always keep an eye on various VC conferences, start-up conclaves and other events that are organised and attended by the investors they would love to partner with. Interactions with fellow start-up entrepreneurs who have already received funding and understanding their real-life experiences are equally important.
• Strengthening financial reporting systems, MIS and internal controls – The founders and leaders of the start-ups focus on growth in revenues and market share of the company. However, along with growing the business, implementing adequate internal controls ensures minimum disruption from finance, admin, HR or regulatory issues. Key measures in the process of strengthening internal controls include the implementation of software to track and manage the finance function and KPIs, implementation of payroll software/outsourcing of HR and payroll function, ensuring compliance to all regulatory requirements, preparing manuals and policies for relevant internal functions, reviewing and updating these policies on a regular basis, etc. Further, start-ups should regularly monitor and maintain robust documentation for key metrics supporting their intrinsic value. Depending upon the business, the metrics may include monthly unique visitors, customer conversion rate, average order value, monthly active users, average revenue per user, revenue run rate, re-order rate, contribution margin per order or customer, CAC, etc. Even though loss-making, these metrices help to understand how the start-up has been functioning and its potential to generate revenues in the future.
• Regulatory environment – Over the last few years, the Government has made various changes to the regulations to give impetus to the start-up environment – the latest being changes to the overseas investment regulations. The changes include taxation aspects such as relaxation on angel tax, tax holiday period, deferment of tax on ESOP, etc. as well as regulatory aspects such as permitting raising of overseas funds in the form of convertible notes, relaxation of certain requirements/provisions under Company law, increasing turnover criteria for start-ups, permitting ESOPs for start-up promoters/directors, etc. While a lot has been done, the Government could consider taking some more steps to provide clarity and flexibility to the start-up world e.g., permitting start-ups to invest in other securities such as the acquisition of shares of another target/liquid assets such as mutual funds without affecting the tax benefits, reducing compliance burden such as changing monthly withholding requirements to quarterly or half-yearly or yearly, etc.
• Constant acclimatisation – The success of a start-up has usually been time-bound and to continue the upward journey, there is a constant need to continue innovating, accepting and adapting to the market requirements, regulatory changes and technological developments. There have been numerous examples of failures of start-ups due to a lack of constant acclimatisation. Sectors such as ed-tech and gaming got a huge push during the Pandemic, however, their growth plateaued once mobility restrictions were lifted. To survive and grow in such situations, start-ups need to be agile and constantly innovating to face the evolving market situations.
• Attract human resources and the right talent pool – Attracting and retaining the right talent pool and allocation of funds towards this pool is an important ingredient to the long-term success of a start-up. Considering the failure rates and inherent risks of start-ups, working in a start-up is not a popular choice for experienced professionals. Instead, the majority of experienced professionals desire to join big corporations for securing job security and boost careers while working with such large and well-established organisations. Besides this, start-ups fail to compete with the compensation scales, work environment and infrastructure facilities that large firms can provide. Freshers who may join start-ups may not be adequately skilled or have practical on-the-job experience. However, such young-driven resources are capable of constant acclimatisation and can help fuel the growth of start-ups with mentorship from experts in their respective domains. The aforesaid mix of young staff on payroll and experienced external consultants on a need basis can help optimise the payroll cost of start-ups during the early stages. During the growth stages, the hiring of employees should be carefully planned and evaluated to avoid sustainability issues. Further, to match up with the big houses, where start-ups are on low funds, ESOPs can be a differentiator in the packages offered. This will also drive the same grit and passion among the team to make the founder's idea a reality.  
• Managing marketing spend- Ideas could be great on paper, but the unit economics may not work well when implementation kicks off. Marketing plays an important role to promote and increase the presence and market share of start-ups, however, the costs associated with marketing activities have been on a rising trend. Marketing has become one of the top expenses of majority of the start-ups. Majority of the cash-burning start-ups have the maximum cash burn on account of marketing expenses. While marketing is an extremely important activity for any start-up to grow, optimising the marketing activity by using innovative marketing and experimenting on a smaller scale to understand the response and economic viability of a marketing activity is extremely important. In this regard, it is important to track certain KPIs such as customer acquisition cost (CAC), lifetime value of a customer (LTV), customer retention ratios, etc.
• Global factors: Recent global events such as border-related tensions, sanctions on Russia, global slowdown, rising interest rates, exchange rate fluctuations in the wake of rupee depreciation, crude oil prices and inflation, speculated impending recession and tightening monetary conditions may result in market uncertainty and exacerbate supply chain complexities as well. This may affect the funding opportunities and marketing of products globally. The Government of India’s regulatory policies at home to mitigate these global factors should consider the impact on start-ups not only at the formulation stage but also monitor their effects to check whether desired outcomes are achieved. Start-ups may also pause and reassess their strategies during such turbulent times.
• Importance of digital technologies – Digital technologies have disrupted the ways of doing business in present times. Growth in various social media platforms, digital marketing techniques, the introduction of 3D printing, robotics, blockchain technology and a plethora of innovations have changed the way businesses were managed earlier. Appropriate implementation of relevant technologies is an important aspect for the survival and growth of start-ups that also helps start-ups to position themselves on a digital platform that has an immense reach and diverse marketing effects. Further, creating attractive content on such platforms has proven to be a key marketing gimmick for expanding the business.
• Integrity, ethical leadership and trust – Internal and external trust in leaders is developed through ethically run business operations. Admitting mistakes and chalking out a recovery plan during turbulent times, assuming and not shifting responsibilities, undertaking required steps, delivering promises and leading by example are some of the traits that can be imbibed among the founders and leaders. Employee engagement may also be fostered with such trust in the ever-changing work environment, especially within early-stage start-ups.

Start-ups thrive and scale up when they receive support and the right assistance within the ecosystem they are a part of. Initiatives from public and private sectors such as augmenting incubators and accelerators, developing infrastructure, fast-tracking policy implementation, liberalisation, etc. are the need of the hour. Specific measures towards critical guidance and mentorship coupled with easier access and sharing of resources will provide the necessary impetus to the start-up ecosystem and help in the growth of the start-up and entrepreneurial culture in the country.

Recent developments in the tax landscape in India

(This article has been co-authored by Kartik Solanki, Partner, Indirect Tax, BDO India with contributions from Jagat Mehta)

A tax law that keeps up with the changing times is a need for every developing economy. After India embarked on liberalising its economy in the early 1990s, it was only a matter of time before the need for a robust tax law, to keep pace with newer developments was felt. In 1991, the Indian Government set up a high-powered committee under the chairmanship of Dr Raja J Chelliah (‘Raja Chelliah Committee’) to reform direct and indirect taxes prevailing in India. The Committee over the next three years released a slew of reports on reforms that needed to be carried out in the direct and indirect tax laws of the country. The changes that were carried out in that decade required an update and to that end in 2002, another committee was formed under the chairmanship of Vijay Kelkar (‘Vijay Kelkar Committee’) to further give impetus to India’s direct tax reforms.

Over the years, India has witnessed massive reforms in both direct as well as indirect taxes and this is an ongoing feature. Changes to tax laws are made giving due consideration to the economic needs while keeping an eye on the fiscal situation of the Government finances.  In recent years, the aim of the incumbent Government is best summarised in the words “Minimum Government and Maximum Governance.” Key changes to the tax system that promotes this are being seen. The Government has undertaken several reforms to achieve this goal and simplify the tax structure. Some major tax reforms undertaken recently are discussed below:

• General Anti Avoidance Rule introduced

With an objective to curb tax evasion, India introduced the General Anti-Avoidance Regulations (GAAR) in 2012 which came into effect in April 2017. GAAR provisions have been encoded to override other provisions of the Indian Income-tax law. GAAR is triggered if a transaction is regarded as an Impermissible Avoidance Arrangement. Once a transaction is regarded as an Impermissible Avoidance Agreement, the law empowers the tax authorities to deny any tax/treaty benefit, disregard or recharacterise the entire or part of the transaction, reallocate income/expenses, disregard structures, recharacterise instruments, etc. To curb misuse of the entrusted powers, the regulations prescribe an approval mechanism (including that by a panel) before invoking GAAR. The transactions executed before 1 April 2017 are kept outside the purview of GAAR. Further, a minimum threshold of INR 30mn of tax benefit has been prescribed for invoking GAAR. An Amended Tax Audit Report now requires the Tax Auditor to report transactions qualifying as Impermissible Avoidance Agreements and quantify the effect.

• Equalisation Levy

India is at the forefront of the adoption of digital technologies and that brings its own set of challenges on how India would tax the ever-increasing digital economy. As the traditional approach of taxation is unable to tax profits generated by non-resident digital companies, OECD had come out with BEPS Action 1 – Digital Economy. In 2016, India took a cue from BEPS Action 1 and introduced Equalisation Levy (EL) on certain advertising revenue (EL 1.0). The scope of this levy was widened by the Finance Act 2020 (commonly referred to as EL 2.0). As per the enlarged scope, consideration received by a non-resident e-commerce operator (operator) from an e-commerce supply of goods or service (or both) on its account or for facilitation of such supply of goods or service (or both) to specified persons will attract EL. While both these ELs are in operation currently, the applicability would be reevaluated once BEPS Pillar-related changes are implemented.

• Significant Economic Presence (SEP)

Currently, business income of a non-resident is taxed in the source country only if the non-resident has a Permanent Establishment (PE) in that country. Transactions in a digital economy have led to a situation wherein a non-resident can undertake substantial business activities in another country without having any PE in that country. This led to a loss of revenue by the source country. OECD in its BEPS Action Plan had suggested implementing taxation based on SEP. Taking a cue from it, India introduced SEP in its domestic laws. The threshold for SEP was recently notified. In case of transaction of goods and services, including the provision of download of data or software in India, SEP is attracted if either of the following conditions is satisfied:

• • Transaction in respect of goods and services carried out by a non-resident with an Indian resident exceeds INR 20mn
  • Systematic and continuous soliciting of business activities or engaging in interaction with more than 3,00,000 users in India

• Introduction of Goods and Services Tax

One of the biggest tax reforms in the Country was the introduction of the Goods and Services Tax (GST), consolidating multiple indirect taxes levied by the Central as well as by State governments. This resulted in a common set of legal provisions and the removal of tax arbitrage, as opposed to the multitude of legal provisions and compliances and multiple tax rates on the same products depending on the location. While it has been now five years since the introduction of GST, the process to further finetune the GST administration and law is ongoing, to realise the full potential of GST. The recent reforms in GST include:

• • E-invoicing – The introduction of e-invoicing provisions, in a phased manner, commencing from the large taxpayers, resulted in the authentication of invoices and a reduction in unethical practices apart from reduction in compliance efforts due to auto-population of data from e-invoices to other places. Such improved use of technology for compliance and administration is leading to the formalisation of the economy and resulting in accurate growth data of the economy being captured.

• • Concept of credit matching – At the time of the introduction of GST, the claim of the input tax credit was envisaged to be made only based on supplies declared by the vendors. These provisions could not be operationalised initially due to various issues. However, the system issues have now been ironed out and the law has been amended to allow the claim of credit only based on the declaration of supplies by the vendors. Credit matching used in conjunction with e-invoicing is becoming an important tool to plug tax evasion and the data generated from this is also useful to identify any leakages in corporate tax.

• • GST Rate rationalisation – Presently, GST has a four-slab rate structure, 5%, 12%, 18% and 28%. A separate lower rate of tax is applied for the gems and jewellery sector. To simplify the tax structure, a Group of Ministers (GoM) is formed to assess the GST rates and recommend measures for correction of inverted tax structure, the removal of exemptions for ensuring the continuation of the credit chain and review the current rate slab structure to recommend the rationalisation measures including merging tax slabs to reduce the number of slabs, leading to simpler rate structures. Some of the recommendations of the GoM for the correction of inverted rate structure etc., have already been implemented and the process continues.

• Measures to support domestic manufacturing

The increase in domestic manufacturing activity has been a focus area for the Government. To encourage the same, in the Budget for 2022-23, the Government announced the gradual phasing out of Customs duty exemptions on capital goods for sectors such as textile, petroleum etc., while reducing the Customs duty on various parts of capital goods to encourage domestic manufacturing of capital goods. The Government also phased out the Customs duty concession available under the project import scheme, under which the capital goods to set up projects could be imported at a concessional rate of Customs duty to promote domestic manufacturing of capital goods.

In addition, the Government has introduced PLI schemes to promote manufacturing in key sectors to spur development. While this is not strictly a tax measure, this is an indication of the focus of the Government.

• Advance Pricing Agreements

India introduced the APA programme in 2012 and this has become a widely used tool for multinationals grappling with transfer pricing litigation to achieve certainty. In the decade of the existence of this programme, more than 1,000 applications have been filed and over 300 settled. Countries like the USA, UK, Japan, Singapore and Australia have closed bilateral APAs which has helped India raise its global ranking in the ease of doing business.

• Faceless Assessment and Appeal

In 2020, the scheme of “Faceless Assessment” was introduced to minimise the interface between the Income Tax Department and the taxpayer. Subsequently, the First Appellate Authority for Income Tax was also brought within the ambit through Faceless Appeal. With this, the human interface between the Tax Authorities and Taxpayers is almost eliminated barring a few carveouts. In the faceless regime, the notices are being issued electronically and the responses are also required to be submitted electronically. Further, the selection of cases for scrutiny is largely risk based and driven by data analytics. Thus, the new way of conducting audits by the tax departments spurred a need for taxpayers to adopt technology tools (such as tax litigation tools, tax management tools etc.) that would help them manage taxes efficiently.

Similarly, a concept of faceless assessments of bill of entries has been introduced in Customs, where the bill of entry identified for scrutiny is assigned to an assessing officer physically located at a location other than the port of import. For various procedural activities, such as acceptance of bonds or to carry out verifications as referred by the faceless assessment group, Turant Suvidha Kendras have been set up at various ports. The advantages of faceless assessment of bills of entry are uniformity in assessment, reduction in the assessment time and a reduced interface between the importers and Customs officers.

• Tax dispute settlement schemes

Taxpayers have long complained of being subject to long-drawn litigations. This is not just stressful for the taxpayer but also consumes valuable resources of the tax department. To reduce the cases pending before different authorities (i.e., from First Appellate Authority to Supreme Court) in March 2020 a Direct Tax Vivad se Vishwas Act, 2020 was introduced. Under this scheme, a taxpayer was given a one-time opportunity to approach the tax authority and settle its pending litigation by payment of requisite taxes. Taxpayers opting for this Scheme were safeguarded from the levy of penalties. 

Similarly, in 2019, the Government introduced the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019, to settle disputes under the Central Excise and Service Tax laws, wherein the taxpayers were given an option to settle pending litigation by paying full/part of the tax demand and balance amount of tax if any and entire amount of interest and penalty was waived off.

These and other reforms undertaken recently give a glimpse of what’s in store on the tax reform agenda. To attract investments in India and to achieve the Country’s aim to be a global leader, tax reforms are unavoidable and through its actions, the Government has highlighted its commitment to the reforms. It would be interesting to see further reforms by the Government in the current economic environment.

How Fintech is reshaping the financial services ecosystem in India

When it comes to some of the most significant changes in our daily lives, financial technology or FinTech – is prominent with the likes of social media, the smartphone and e-commerce. In just a few short years, FinTech has transformed how we manage our money, make payments and even borrow funds. Getting a mortgage or applying for a loan is more manageable than ever before and has given us new ways to invest our money.

National events like demonetisation and the implementation of Goods & Services Tax have contributed a larger share in India’s shift from a cash-based economy to a digital one.

During the Covid-19 pandemic, banks, insurance and other financial institutions (FIs) have accelerated the adoption of e-KYC and video KYC for online, remote and faster onboarding and verification of customers and online settlement of claims.

The Government’s policies, initiatives by regulators, payments infrastructure, market practices and swift increase of digital payments across various retail and merchant segments and India’s rapid adoption of digital/online payments also heavily contributed to the growth of the country’s FinTech market and this is consequently reshaping the financial services ecosystem.

The Unique Identification Authority of India (UIDAI) was launched in 2009 which led to the foundation of the FinTech ecosystem. This included services such as the Unified Payments Interface (UPI), Aadhar, e-KYC, e-Sign, Bharat Bill Payment System (BBPS) and DigiLocker as public infra.

The Government of India announced 75 digital banking units (DBUs). The Reserve Bank of India (RBI) has also issued a circular on DBUs in April 2022. The DBUs will likely push for the Government’s agenda on financial inclusion.

Let’s look at the following FinTech products/services which have emerged as a necessity in day to day lives of the common man, business houses, government organisations, etc.

UPI

Unified Payments Interface (UPI) is an instant real-time payment system developed by the National Payments Corporation of India (NPCI). The interface facilitates inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions. It is used on mobile devices to instantly transfer funds between two bank accounts. It runs as an open-source application programming interface (API) on top of Immediate Payment Service (IMPS) and is regulated by the RBI.

As of September 2022, there were 358 banks available on the platform with a monthly volume of 6.7bn transactions amounting to INR 11.16lakh-crore (USD 140bn). Around 777 million Indian consumers shopped across the border in 2021. To ensure ease of payment, NPCI International Payments Limited (NIPL) signed a memorandum of understanding (MoU) with UK-based PPRO Financial on 17 November 2021 to expand the acceptance of UPI into foreign markets.

Digilocker

DigiLocker is a flagship initiative of the Ministry of Electronics & IT (MeitY) under the Digital India program. DigiLocker aims at the ‘Digital Empowerment’ of the citizen by providing access to authentic digital documents to the citizen’s digital document wallet. The issued documents in the DigiLocker system are deemed to be at par with original physical documents as per Rule 9A of the Information Technology (Preservation and Retention of Information by Intermediaries Providing Digital Locker Facilities) Rules, 2016.

CBDC

The RBI has recently issued a concept note on Central Bank Digital Currency (CBDC). CBDC is a digital form of currency notes issued by a central bank. While most central banks across the globe are exploring the issuance of CBDC, the key motivations for its issuance are specific to each country’s unique requirements. This is referred to as e-₹ (digital Rupee). The e-₹ will provide an additional option to the currently available forms of money. It is substantially not different from banknotes, but being digital it is likely to be easier, faster and cheaper. It also has all the transactional benefits of other forms of digital money.

Neobanking

In India, digital banking is a banking service that is offered online by established banks, whereas neobanking is offered by FinTechs who are in partnership with licensed banks.

Neobanks are FinTech firms that function like banks and operate digitally – a collection of financial apps and services. Every transaction is done online and is entirely safe, customised and more convenient in several aspects compared to traditional banks.

The primary purpose of neobanking in the economy is to provide cutting-edge financial services and facilities through FinTech and Artificial Intelligence (AI) at a lower cost.

Although not directly regulated by the RBI, neobanks in India have banking partners such as ICICI, HDFC and other banks which are registered with RBI.

Neobanking is breaking all the stereotypical red tape of banking through a technologically advanced digital system. They provide all the advanced financial services round the clock, quickly and at lower costs.

So, basically, it all comes down to convenience. India and the rest of the world are fast adapting to a digital lifestyle, and neobanks fit right into this lifestyle. Being able to bank without leaving your home or office makes it super convenient for our fast-paced life.

Digital Lending

Digital Lending is a remote and automated lending process, majorly by use of seamless digital technologies in customer acquisition, credit assessment, loan approval, disbursement, recovery and associated customer service.

In the digital lending space, we have global examples of Person-to-Person (P2P), Person-to-Business (P2B), Business-to-Person (B2P) and Business-to-Business (B2B) lending models.

OCEN

Open Credit Enablement Networks (OCEN) function by consolidating and automating the different manual processes involved in a lending value chain, such as the screening of loan-worthy customers and the onboarding of new borrowers, thus decreasing their total operating costs and increasing their effectiveness.

OCEN is a protocol that allows platforms and markets called Loan Service Providers (LSPs) to link to banks and non-bank lenders in order to digitise the origination, underwriting and servicing process of loans. In this context, OCEN has emerged as a novel lending paradigm and a protocol infrastructure that would help in the facilitation of interoperability between LSPs like FinTechs and E-commerce players and traditional lenders like banks and Non-Bank Financial Companies (NBFCs). The next big opportunity for FinTech through this open credit network is for lenders to be willing to interact with LSPs based on a new lending protocol infrastructure.

NUEs

The Covid-19 Pandemic has had a major impact on the adoption and growth of digital payments across the globe. India demonstrates a robust digital payments landscape and has become a case study across several developed economies and major central banks. In order to further boost the digital payments ecosystem in India, the RBI released a framework in August 2020 for setting up pan-India umbrella entity/entities focussing on retail payment systems.

WealthTech and Innovation in InsurTech

WealthTechs can be defined as platforms offering products and solutions which enable digitisation of the traditional value chain of the personal financial management and/or investment journey. WealthTech players capitalise on technologies such as AI and analytics to digitise, innovate and transform traditional products and services such as acquiring, onboarding, advisory, investment, and monitoring and servicing the customer.

The Indian InsurTech landscape comprises business models such as digital native insurers, policy discovery and delivery aggregators, claims enablement and management and infrastructure providers. In recent years, some exciting value propositions have been observed in the InsurTech landscape, such as pure-play digital insurance, telematics enablers, embedded insurance propositions and technology infrastructure in the insurance domain.

In summary, FinTechs are changing the financial landscape and the whole financial ecosystem. Regulators are actively encouraging innovation, new distribution models and the launch of innovative products. FinTech is helping in increasing access to financial services, making them more affordable, transforming the way we interact with financial institutions, changing the way financial institutions operate and bringing in more transparency and trust in financial services transactions.

UNDERSTANDING THE CAPITAL MARKET FOR WEALTH CREATION

Talk to a wealth advisor and their top investment recommendations for wealth creation would be mutual funds and equity stocks. No brownie points for guessing that the returns on these investments are linked to the performance of the Capital Markets. That’s why the tagline by Mutual Funds in India - investment in mutual funds are subject to market risks….

It is therefore of paramount importance to understand the behaviour of a Capital Market, be it in India or overseas. 

What is a Capital Market?

A Capital Market is a market which enables exchanging/trading of shares, debentures, debt instruments and bonds and such trading would primarily be with a longer gestation period. The Money Market is a similar concept with a short-term investment period, together, both of them form a Financial Market. Capital Market enables the deployment of idle capital to be appropriately invested for the economic growth of a country.

Capital Markets and Economic Growth

Capital Markets and economic growth are interconnected.  The Capital market aims to help businesses tap into diverse sources of capital, whereby capital is used appropriately for the growth of a business and in turn gives a boost to economic growth. Many businesses raise money through IPOs to fund expansion plans leading to job opportunities and stimulating business supplies, production and delivery, leading to 360-degree economic growth. Not only it helps in attaining economic growth, but it also aids in achieving optimum diversification. Capital markets mobilise additional savings into the economy, making more capital available to companies, which may then, in turn, create jobs, facilitate real-wage growth and create wealth for investors.

A robust Capital Market can contribute to the development of a mature financial eco-system with players such as banks and financial institutions, private equity and venture capital willing to fund key sectors such as infrastructure, housing, start-ups and so on. 

Sound economic policies and a stable macroeconomic environment also contribute significantly to the rise of Capital Markets.  A case in point here is India.  The Asset Under Management (AUM) of the Indian Mutual Fund Industry has grown from INR 7.68tn as on 31 October 2012 to INR 39.50tn as on 31 October 2022, more than a 5-fold increase in 10 years. So is the case with Foreign Direct Investments (FDI). India is one of the largest recipients of FDI globally, ranking in the top 5 destinations.

Despite all the attractive numbers and figures mentioned above, according to the World Bank, an estimated USD 8-10tn annual investment is still required for developing countries to achieve the Sustainable Development Goals by 2030. Considering the investment required, there is a greater need to develop and strengthen capital markets, as they can help to mobilise private financing.

Indian Capital Market vs the Rest of the World

The Indian Capital Market has matured significantly over the past few decades, both in terms of market penetration and adoption of best global practices. However, the fact remains that the Indian Capital Market is still dependent on global funds, though the proportion may have reduced due to large domestic institutional funds contributing in a big way.

India’s premium to other markets is higher than it has ever been. India is 15% more expensive than the US on a price-to-earnings (P/E) basis – the most expensive developed market, and almost twice as expensive as Taiwan – the second most expensive emerging market after India.

As indicated earlier, the Indian Mutual Fund industry’s net AUM reached an all-time high of INR 39.50tn in October 2022. Mutual fund folios of retail investors also stood at a staggering INR 10.89tn, while the monthly contribution of systematic investment plans (SIP), used mainly by retail investors, stood at INR 12,693.45 crore, also an all-time high.  However, India’s Mutual Fund AUM to GDP ratio stands at only 16%, compared to the global average of 74%.

While India is taking all efforts to become the 3rd largest economy globally (currently ranking 5th), global headwinds could have an impact on the Capital Market and its goal, in the short term. 

Risk and Rewards of Capital Market

Irrespective of all the benefits we see of the Capital Market, there is an equivalent amount of risk associated with the same. Changes in the local and global macroeconomic scenario could trigger a  halt in returns/fund flows and if not managed well could take a toll on the overall Capital Market leading to de-growth in extreme situations, a recent one being faced during the pandemic and war in Ukraine. Accordingly, an examination of the risks involved in the Capital Market investment is one of the prime aspects before investing.

Wealth Creation & You

Wealth creation is a journey. One must be patient and at the same time, vigilant of the events globally. Capital Markets are very sensitive to such events and display great volatility.  It is imperative to identify quality stocks that have better shock absorbers and help in building wealth.

The importance of wealth creation and the importance of Capital Markets can be summed up by a statement made by legendary investor Warren Buffet – “If you don’t find a way to make money while you sleep, you will have to work till you die”.

Enhancing Trust and Confidence in Sustainability Information

(with contributions from Pankaj Bhauwala)

Sustainability has become a key agenda not just for C-suite executives but also amongst various stakeholders including foreign investors, credit rating agencies, regulators, audit committees and start-up companies seeking VC funding. While ESG may appear to be another three-letter acronym, it is finding its fair share of weightage in today’s corporate discussions. Sustainability as a concept has been around for a while and numerous corporates and large entities have been reporting on this area proactively as part of their annual reports and some from a CSR reporting perspective as well. While this this has been a trend in the past and until recent days a voluntary reporting/disclosure, it seems to be moving to a more mandatory reporting by law/regulation. For example, in India, SEBI has mandated a certain class of companies to mandatorily report on business responsibility and sustainability from the current year onwards.

Almost all aspects of a business and its operations have a financial correlation and thereby there is a strong ability to link any decision or action with financial attributes and assess possible impact.  However, there are many aspects that are not as direct, such as tax transparency/ disclosures, diversity, employee well-being, and many of these are areas of interest to governments, regulators, investors, etc.

For instance, an entity in the FMCG business moving from non-recyclable (plastic) to recyclable (paper-based) packaging has a positive impact on sustainability and this can be reasonably quantified from a financial aspect, for example, what would be the incremental cost of making the shift to recyclable packaging. However, it is challenging to quantify the impact of non-monetary items, for instance, efforts made by an organisation on initiatives relating to employee wellbeing (Example: Additional leave granted, flexibility of hours/work from home, etc.) or gender diversity policies and initiatives.

Now more than ever  before, stakeholders, are using the information around ESG to make decisions. Be it investing in companies with certain principles/values aligned with ESG elements, partnering for business initiatives based on shared vision or policies, public and consumer decision-making and perception linked to actions around sustainability and often evaluation of employment opportunities by candidates are influenced by such parameters.

In recent times, because stakeholders are taking important investment decisions basis these attributes, there is a strong need for credibility and validity of the information that is reported by the organisations. While an alternate view can always be considered that these matters are non-financial and are supplementary to the entity and the management has a significant level of discretion in terms of how and what is being disclosed, it is imperative that these attributes carry a level of authenticity and substance, especially on aspects where quantification is not practical and also has some level of standardisation and benchmarking that will assist in comparability.

Moving forward, auditors and largely assurance professionals will be expected to play an important role in building trust and enhancing credibility in sustainability reporting. One could argue that financial information is already in the scope of a financial auditor and the sustainability information will primarily then remain to be the non-financial aspect which is not directly vetted by the auditor as this is not in his domain of expertise, but it would be more nuanced than that. The auditor of the entity would naturally carry a significant level of understanding and knowledge of the organisation’s systems, processes and activities, this would provide him with the added advantage of carrying out a holistic review of other related aspects including those that are non-financial in nature.

International standards for corporate reporting on sustainability are rapidly developing. New standards for assuring sustainability reporting won't be far behind. Globally, the IFRS foundation set up the International Sustainability Standards Board (ISSB) last year, and released Exposure Drafts for sustainability and climate-related disclosures. Like, with financial reporting, external assurance is going to play a key role in contributing to reporting reliability. The IAASB has also provided comments and feedback for these Exposure Drafts. In India, the ICAI also released Exposure Drafts relating to standards on sustainability assurance engagements. The IAASB is hoping to have proposed new sustainability assurance standards ready for public comment during the second half of 2023. Moving at this speed is possible in part because the current International Standards on Assurance Engagements (ISAEs) together with the non-authoritative sustainability assurance guidance, provide a robust starting point.

Several countries are now framing laws that are focused on areas that enable and complement sustainability initiatives, such as reducing net emissions and dependency on fossil fuels, electric vehicles and new-age mobility adoption. They are also providing various incentives, subsidies and tax benefits to companies investing in these areas that will be linked to investment/production-based targets and benchmarks, which will require vetting and validation. The European Parliament on 10 November 2022, adopted the Corporate Sustainability Reporting Directive (CSRD) which sets the stage for a dramatic overhaul and expansion of corporate sustainability reporting in the EU to be implemented from 2024. Robust assurance standards that offer a consistent approach across geographies now would be the need of the hour.

ESG investing has also gained a significant amount of traction, billions of dollars have been earmarked and funding has been raised, which will focus on incorporating ESG in the investment. Fund managers will measure not just the rate of return but also the impact on ESG. The concept of ‘Greenwashing’ is also common today, this is when organisations present themselves to be sustainable on their business/practices, however, they are misleading or falsely representing information. Many corporate houses from large fashion brands to consumer goods companies have been accused of greenwashing.

Because of the existence of a significant number of non-financial parameters which are used to measure and report sustainability goals and benchmarks, there will be a greater need for auditors to enable themselves with the right skill set and subject matter expertise regarding evaluating and also assessing the sustainability parameters and milestones. There is also a significant demand anticipated for experienced professionals in the domain of sustainability reporting.

Regulators have emphasised the need for comprehensive and reliable guidelines for reporting sustainability information; the IAASB has been at the forefront of it. While the current assurance reporting standards along with the non-authoritative guidance are a good starting point, the IAASB has been holding discussions with stakeholders to understand various aspects of this domain to plan the way forward. The global body has committed to leading the effort to create new ‘sustainability bespoke’ assurance standards. As disclosed, the IAASB is now in the process of identifying a specific approach to building these standards that will have a significant impact on establishing high-quality assurance to support reliable sustainability reporting. There has been a higher pace/traction on discussions on the domain of sustainability reporting recently, especially post the Covid-19 pandemic, with many businesses revisiting their business models and supply chains and looking at long-term value and growth. It has taken professionals back to the drawing board in terms of what they can do differently and how to embed sustainability into their fundamental core drivers within an organisation.

As the awareness and adoption increases, there will be various considerations that will impact this, as has been in the case with the financial reporting standards. The IAASB Chair recently rightly commented in a news article, “The reliability and quality of sustainability reporting and supporting investors' and regulators' trust in the sustainability information hinge on the effectiveness of the external reporting supply chain".

Hence, a significant level of refinement and evolution is expected around reporting, and both - regulators and organisations will mature towards optimising the quality and quantum of reporting to enhance trust in sustainability information.

ICAI- Robust Regulatory Framework

The ICAI is an autonomous regulatory authority of the Accounting Profession in India, which was enacted by the Chartered Accountants Act,1949. The ICAI is more focused on safeguarding the public interest and achieving independence, integrity and excellence in the Accounting and Audit profession.

The framework of governance, standard setting and disciplinary mechanism prescribed through a strong public interest oversight mechanism inherent in the ICAI structure through 8 Members of the Central Council (Apex body) of ICAI are nominated by the Government of India. Similarly, each Disciplinary Committee has two Government nominees, and each Board of Discipline has one Government nominee, and the Chairman of the Appellate Authority of Disciplinary mechanism is a retired Judge of the High Court being nominated by the Central Government.

Being a statutory body regulating the profession of Chartered Accountancy in India, the ICAI has had a long and glorious history in its 71 years of its existence as the second-largest Institute in the world. The ICAI has delivered to the world, excellent Chartered Accountants (CA) professionals apart from setting benchmarks in the quality of financial reporting not only in India but across the globe. The ICAI not only performs its statutory duties as a regulator of the profession in India by formulating Accounting Standards in keeping pace with changing economic scenario but has also enforced the ethical values as outlined in the Code of Ethics and proactively takes action against its erring members, found guilty of professional misconduct through its well-defined disciplinary mechanism as provided under the Chartered Accountants Act, 1949 and the Rules framed there.

During 2018-19, to curb the malpractice of certifications by non-CAs who impersonated themselves as certified CAs, the ICAI came out with an innovative framework of UDIN. It is an 18-digit system-generated unique number for every practising member for documents certified/attested by a certified accountant/CA.

The concept of UDIN is a unique approach of ICAI amongst professional bodies and is instituted to enable its members to benefit through:

1. Transparency and digital reference
2. One-time proof for the documents.
3. No backdating of the document is allowed and helps curb forgery
4. Documents are viewed by the regulator, member, and stakeholder
5. Restricts duplication and misuse of documents
6. Entities that deal with important documents like Government authorities, Financial Institutions and other users of documents can check with the UDIN verification.

As a responsible professional body, the ICAI issues Guidance Notes from time to time and based on relevant circumstances, which are primarily designed to guide its members on matters which may arise due to differences of opinion in their professional work, and on which standardised assistance is required. Guidance Notes are recommendatory. A member should ordinarily follow recommendations in a Guidance Note relating to an auditing matter except where he is satisfied that in the circumstances of the case, it may not be necessary to do so. Similarly, while discharging its attest functions, a member should examine whether the recommendations in a Guidance Note relating to an accounting matter have been followed or not. If the same has not been followed, keeping in view the circumstances of the case, the members should consider a disclosure in his report necessary. 

The ICAI has always been striving for excellence in terms of standards of professional services rendered by its members. To enable its members to maintain the requisite professional competence and thus ensure high-quality standards in the professional services that they render, the ICAI has identified Continuing Professional Education (CPE) as a major area of focus for the members.

Through its CPE Committee, the institute has been providing continued knowledge-sharing sessions on technical topics to its members through seminars, lectures, workshops, technical literature, e-learning, web-based training etc.

The Council has decided to initially start with mandatory 2 Structured CPE hours each on topics of “Standards on Auditing” and “Code of Ethics” (a total 4 Structured CPE Hours) during every calendar year (applicable from Calendar Year 2020 onwards), online/virtually only for the categories of members who are required to complete minimum 20 Structured CPE Hours in a calendar year (COP Holder). This may be completed at any time during the year online/virtually. The challenge to keep the Members updated is huge in this fast-changing environment. Despite leaps in technological advances, the place of a well-researched book in knowledge dissemination is privileged

The Council of ICAI is empowered to discharge the provisions of the Act and regulate and maintain the standards of the profession. In pursuance of this, the ICAI has established the Ethical Standards Board to function as a standard-setting body. The Ethical Standards Board develops and issues ethical standards and other pronouncements for Chartered Accountants. It works towards evolving a dynamic and contemporary Code of Ethics and ethical behaviour for members while retaining the long-cherished ideals of ‘excellence, independence, integrity’ as also to protect the dignity and interests of the members”. Professional ethics is a very specialised subject and suitable guidance must be provided to the Members so that they are duly aware of the requirements applicable to them, and they can address the expectations of all stakeholders.

The objective of the Ethical Standards Board is to set up ethical standards for CAs to converge with the international best practices on ethics, subject to local laws, thereby enhancing the quality and consistency of services provided by CAs and strengthening the public confidence in the profession.

The ICAI, being a full-fledged member of the International Federation of Accountants (IFAC), is expected, inter alia, to actively promote the International Accounting Standards Board’s (IASB) pronouncements in the country to facilitate global harmonisation of accounting standards. While formulating the Accounting Standards, the ASB will take into consideration the applicable laws, customs, usages and business environment prevailing in India. Accordingly, while formulating the Accounting Standards, the ASB will give due consideration to International Accounting Standards (IASs) issued by the International Accounting Standards Committee (predecessor body to IASB) or International Financial Reporting Standards (IFRSs) issued by the IASB, as the case may be, and try to integrate them, to the extent possible, in the light of the conditions and practices prevailing in India. The Accounting Standards are issued under the authority of the Council of the ICAI. The ASB has also been entrusted with the responsibility of propagating the Accounting Standards and of persuading the concerned parties to adopt them in the preparation and presentation of financial statements. The ASB will provide interpretations and guidance on issues arising from Accounting Standards. The ASB will also review the Accounting Standards at periodical intervals and, if necessary, revise the same.

The ICAI through Peer Review ensures that in carrying out the assurance service assignments, the members of the Institute (a) comply with Technical, Professional and Ethical Standards as applicable including other regulatory requirements thereto and (b) have in place proper systems including documentation thereof, to amply demonstrate the quality of the assurance services.

As a part of achieving public interest and the overall ICAI ethos of being a partner in nation-building, the FRRB (the Financial Reporting and Review Board) supports the Government and other regulatory bodies. In case FRRB finds any material or significant non-compliance affecting the true and fair view of the financial statements (selected as Suo motto or as a special case), it refers the case to concerned regulators, i.e., MCA, RBI, IRDA, CAG, Director (Discipline) ICAI. Thus, it is acting as an agency for all concerned regulators that endeavour to improve transparency in financial reporting. ICAI’s alliance with regulators like MCA, ECI, C&AG and IRDA would continue to be instrumental in improving the financial reporting practices in India. Considering it as an effective mechanism, various regulators (viz. MCA, SEBI, C&AG, ECI) refer financial statements for review to FRRB.

Given all the proactive steps taken by the ICAI, its commitment to contributing to public interest with the sole mandate of independence, integrity and excellence will continue to strive forward.

The Professional Accountant - Ethics and Public Interest

The last two decades have showcased an infelicitous number of corporate outrages and collapses that have had sensational effects on the broader economic and social ecosystem, which ultimately had severe impacts on the social balance and the welfare of the people that resulted in immense losses for investors. 

The most critical and fundamental pillars of the stakeholder community's trust and confidence in companies are indeed accounting and corporate reporting, as well as audit and assurance to which they are subject. As reckoned, accounting and corporate reporting are two key elements that support the decision-making of all interested parties by analysing their financial health, quality, and sustainability. These scandals and downfalls have been an increasing, insidious, and destructive loss of trust and confidence, which are vital for the smooth performance of the economic system as a whole. To overcome this crisis, professional accountants (and accounting firms) need to constantly work to protect and build or rather rebuilt trust.     

Hence, it is the need of the hour to pursue an urgent process of changing business cultures towards more ethical, value-based, and sustainable models, preventing negative impacts on the integrity of the economic system and the social balance.   

Spotlight on Corporate Culture

It has been observed recently that the call for companies to adopt ethical behaviours has increased radically. The swift and widespread growth of sustainability goals, framed by the United Nations Sustainable Development Goals (SDG), has been promoting this movement. In this era, we are living in an age of transparency and the public is becoming more aware of the high (short and long-term) costs of wrongdoings in the corporate sector, for the individual citizen, and the entire system.

While professional accountants play a critical role in changing the corporate culture, it is the Institute of Chartered Accountants of India (ICAI) that has the responsibility to not only set the standards in India but also to regulate the profession of accountancy to ensure that the standards prescribed are followed by its members. The Code of Ethics has always been at the forefront of ethics standards setting for professional accountants. The ICAI code of ethics that was revised in 2019 has contributed definitively by setting up a standard approach focused on the conduct, behaviour, and culture of accountants (and of the companies) to those goals on reliability, transparency, reporting as per the stringent ethics, independence, and quality criteria. This revised Code of ICAI is broadly based on the 2018 edition of the Code of Ethics as issued by International Ethics Standards Board for Accountants (IESBA) and was formulated as per the requirements in India.  

Ethics as a Foundation in the Accounting world

Ethics require accounting professionals to comply with the laws and regulations that govern their jurisdictions and their bodies of work. Avoiding actions that could negatively affect the reputation of the profession is a reasonable commitment that business partners and others should expect.

However, ethics is primarily the choice of an individual, and subjective in nature, even though there are some irrefutable ethical principles, intrinsic to the basic organisation of companies, the economy, and society. The inherent subjectivity of ethical values, therefore, requires the guidelines of healthy ethics standards by which all professional accountants must abide as it is.

There is a concerning reputational risk looming over the firms. As a matter of fact, companies and organisations must ensure that the preparation and assurance of corporate reporting are performed according to the strongest ethical principles, reflecting adherence to universal values. The relevance of ethics in the profession is the main connection to the public interest.

The Code of Ethics (ICAI)

The Code of Ethics clearly states as under about the accountancy profession:  

      “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. A professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employing organization. Therefore, the Code contains requirements and application material to enable professional accountants to meet their responsibility to act in the public interest.”

The fundamental principles defined in the Code provide a coherent basis for accountants’ professional judgment and performance and form a robust framework against which professional accountants may and should make decisions. It is of course not just the day-to-day decisions of accountants in terms of the way they perform their work but also about more subtle and exceptional decisions related to balancing professional duties, ethically.  

Being Agile and Vigilant

The revised 2019 Code of Ethics retains the fundamental ethical principles from the earlier code. It, however, covers refreshed approach and contains certain new/ substantially modified requirements. ICAI has converged with the latest edition of the IESBA Code of Ethics, as per the membership requirements of IFAC. By its nature, ICAI constantly governs and works towards including the changes as per the changing world.  

Some of the 2019 additions include certain additional terms such as Public Interest Entity, stronger independence provisions concerning the long association of personnel with audit clients, addressing a breach of the requirements of the Code, a section dealing with management responsibilities, fees, Independence requirements for assurance engagements, Non-Compliance of Laws, and Regulations (NOCLAR) and so on.

The new revisions underline the common baseline of ethical principles for accountants in the exercise of the profession and follow a deep and thorough analysis of the importance of improving the framework.

Advancement Towards: Technology, Sustainability, Tax Planning

Apart from the above, IESBA is also leading advanced projects in a variety of segments, looking for those areas where ethics and innovation may generate, translate and impart trust.

Technology -The IESBA Board, in their September meeting, discussed the way forward towards the Technology Working Group’s final draft report that comprises its research work on the various enhancement on the technology front and their repercussions on professional accountants from an ethical standpoint. Developing technological innovations across the financial sector (e.g., Cognitive technology, blockchain, crypto-assets, cybersecurity) are transforming the financial reporting environment substantially. However, great opportunities are accompanied by new risks and responsibilities in preparing and assuring financial information, namely on the ethical dimension of the work. Meanwhile, the report also provides a  summary of the technology model that includes key insights and recommendations for the IESBA, which will be taken up further as part of the Strategical Development Work Plan 2024-2027.

Sustainability is another key area of transformation in the accountancy profession which has been in the limelight in recent years. Stakeholders have been progressively concentrating on information that provides a better grasp of a company’s long-term value creation and facilitates them to allocate capital to businesses recognised as more sustainable. Financial markets have seen fast-tracked growth in the revelation of sustainability knowledge and an increasing call for assurance to be provided. Considering these, information is leveraged to accelerate decisions used in capital allocations, it is meant to be as reliant as the existing financial information which will also eventually help build public trust.

With regards to guidelines relating to sustainability reporting, the IESBA Board has been focussing on advancement towards providing timely responses to the market needs from an Ethics & Independence standpoint. IESBA members also given due consideration to the International Organization of Securities Commissions’ (IOSCO) statement which called for “…high-quality, global assurance and ethics (including independence) standards that are profession-agnostic and can support limited, and ultimately, reasonable assurance of sustainability-related information.”

Another key area of focus is ‘Tax Planning & Related Services’. The swift shift in focus here is owing to the increased public attention over the recent years, especially in the light of disclosures of tax avoidance cases linked to suspected or unethical tax planning services, with sturdy adverse effects on the status of professional accountants and in the faith of the community in businesses. Meanwhile, it is also well noted that companies also have growing expectations to pursue more sustainable business models. Thus, tax planning has been in the public eye of the stakeholders with reference to the impact of businesses on the environment and the citizens. Furthermore, there is both a greater understanding among stakeholders as well as a swing in assessments regarding what it means for a professional accountant to act in the public interest. What may have been considered inventive and competent tax planning previously may now be perceived differently.

IESBA has carefully considered the following changes and the implications that may arise as a by-product. Given the background, the key focus area will be to utilize the role of IESBA as an ethics standard setter to re-establish faith. With the same objective, IESBA is working on formulating a new ethics standard in the tax planning exercise that guides professional accountants. The proposed revisions include two proposed new sections to the Code, focusing on tax planning and related services for professional accountants in service and professional accountants in public practice. The revised draft of the proposed Sections is likely to be discussed in the November-December,2022 meeting of the IESBA Board.

To conclude, it is critical to reinstate assurance and faith in corporate reporting, which intends to provide stakeholders with reliable information in full clarity on the companies’ financial and sustainability performance. Eventually, ethics is the profession’s shield of protection against reputation and a symbol of public trust that it has gained with timely interventions, stringent policies and procedures.

Technology, Innovation & Entrepreneurship

We are truly living in the technology age. The pace of technological change has never been faster. From adopting messenger RNA technologies for Covid-19 vaccines to harvesting solar energy in newer ways to using reusable rockets in space launches, the list of recent innovations is long. Every breakthrough innovation accelerates further innovation. For example, an ability to reuse space launch vehicles has allowed SpaceX to launch many more missions and has helped the formation of Starlink, the satellite internet constellation which is now providing internet connectivity in multiple countries where local businesses are leveraging the power of the internet to drive further economic activities.

Another simple example to illustrate innovation supporting further innovation is the ‘Maps’ application on our mobile phones. The first GPS (Global Positioning System) satellite was launched in 1978 and the service was limited to military/ government use. Mass adoption of GPS happened with the launch of Google’s turn-by-turn Navigation in 2009 which needed high mobile data speeds (3G/4G mobile networks) and smartphone devices to run an integrated application. Post the mass adoption, the pace of change has been very fast with new features like traffic details, street views, search near me etc. being added over a short period.

With the technology innovation, industry boundaries are blurring and innovations in one industry are impacting incumbents in another industry rather easily. A message doing rounds on WhatsApp about UPI (Unified Payments Interface) killing the toffee business as the need for small change (which toffees were used for) has gone down with the adoption of digital payments. While the real impact on the toffee business is being debated and can be attributed to a few other factors, this is a prime example of how innovation in one industry (in this case Payments) is affecting others (Toffee). Ride-sharing mobile applications (UBER/OLA) have changed the transportation industry, OTT (Over The Top) entertainment/online gaming has impacted businesses like HMV/Blockbuster or Amazon affecting the publishing industry and the list goes on.

Innovative technologies are impacting everyday life. We are seeing launches of new technology-based services daily. In a 2021 McKinsey global survey on new business buildings, business leaders predicted that by 2026, half of their revenues will come from products, services or businesses that haven’t yet been created. This makes continuous innovation the most critical part of the organisation’s strategy to sustain the current competitive advantage. Businesses need to continuously look out for new ideas and have robust evaluation frameworks in place to validate and be agile to quickly test and adopt/reject these ideas.

Entrepreneurship plays a pivotal role in scaling innovation and enabling mass adoption. Entrepreneurs are the backbone of all growing economies. India has been a land of entrepreneurs and currently has the third-largest number of Unicorns in the world. From the days of Mr JRD Tata and Mr Dhirubhai Ambani, India has placed great importance on entrepreneurship but recent shows like SharkTank India, The Inventor Challenge etc. have helped develop a much larger acceptance for entrepreneurship across society.

With the advancement in digital technologies, entrepreneurship has become a lot more democratised. “Kidpreneur” is a real word with a lot of our young people starting new businesses. A plethora of educational resources and Do-It-Yourself (DIY) platforms are available at the fingertips to rising entrepreneurs to make their businesses a success.

The start-up ecosystem in India is growing fast. With over 100 start-up accelerators/incubators across the country and government support with the #start-up India initiative, entrepreneurs have a lot of opportunities, knowledge, and experience available. With the availability of a broader ecosystem, entrepreneurs can focus on scaling the core business while subscribing to/outsourcing business support services.

• Scale core business: Scale or Perish has never been more visible in the start-up ecosystem. Entrepreneurs need to be on a continuous lookout for growth opportunities to scale the business:
  • Collaborate with incumbents: FinTechs collaborating with Banks, OTTs collaborating with production houses and HealthTechs collaborating with hospitals/pharma companies are a few examples to achieve the critical mass.
  • Be open to inorganic growth: While the return on investment may not be as high as organic growth but a strategic capability/scale acquisition can boost overall operations.
  • Leverage Digital: From building a recognisable brand with the help of social media (e.g., Facebook, Linkedin, Twitter, Instagram etc.) to adopting low code/no code platforms for faster concept to realisation cycles to automating various operational processes for better customer service, digital technologies can help the business scale faster.
• Subscribe / Outsource non-core services: With the rise of Business Process as a service (BPaaS) or Anything as a service (XaaS), entrepreneurs can get all non-core services from specialised providers at a fraction of a cost. Be it remote infrastructure to support work from anywhere or specialised accounting software or secretarial services for compliance, getting support from an industry provider will save a lot of distraction and cost

The Government has been promoting entrepreneurship and can support the start-up ecosystem further by reducing regulatory barriers, encouraging entrepreneurship via education and building the required infrastructure.

• Policy simplification: Government policies need to continuously evolve to align with current technology and consumer behaviour. While the Government has introduced single window clearances and removed a lot of regulatory hurdles, regulatory compliances are still a maze for small businesses and need an overhaul to ensure entrepreneurs can focus on core business activities.
• Education: The Government can help build a culture of innovation by including entrepreneurship in the early education system of the country.
• Build Infrastructure: Start-ups thrive in an ecosystem. Larger cities in the country have better infrastructure and hence a better ecosystem for start-ups. The Government needs to build broader infrastructure like connectivity (physical/virtual), electricity, water, security and health beyond the metros for India’s entrepreneurship potential to be realised.

Building a new business is difficult. Add the pace of technology change, regulatory barriers and market uncertainties and it becomes all the more difficult for businesses to sustain and scale. A strong partnership among our entrepreneurs, industry incumbents, start-up accelerators and government is required for our start-up eco-system to thrive and for our entrepreneurs to be successful.

Do we really live in a connected world? An insight into a possible future of how connectivity can change the lives of professional accountants and businesses globally

(with contribution from Aleem Lilani)

History is evidence that it was a ‘need’ that brought people together and defined the marketplace. Digitisation and connectivity have redefined the marketplace and the impact goes much beyond. It has changed the way we interact, the way we communicate and in fact, it may also change our idea of a ‘need’ itself.

Today, we are more connected or rather ‘virtually connected’ than ever before. But are we connected in the true sense of our understanding, thoughts, relationships and our expectations from each other? We may need to reflect here.

Through the nineties, we swiftly moved from telegrams to post/telephone. The ability to print and post documents was the birth of mobility in accounting. But cost remained a necessary impediment. Free or negligent costs of email, FTP (now cloud space) was the fuel to rocketing the profession of accounting and business management across global boundaries. Connectivity had begun disrupting the accounting profession as well and so, we were no longer confined to the traditional marketplace.

Connectivity has always reshaped the dynamics of human society. This includes our behaviour, learning, working, transacting and even relationships. Covid-19 only ushered in the inevitable and made us pre-test our readiness for a digitally connected world. Suddenly, we were locked out of our offices with limited access to food and work and forced to find solutions in the digital space. Thankfully, the basic infrastructure to support the profession was out there. We may have faced a few roadblocks but the need to survive always wins and we found a way around - We connected, glaring into our screens and speaking into microphones.

When we think of connectivity, yes in the sensory sense we are all connected through our e-mails, conference calls and chat groups. We can account and audit remotely from any part of the world. Over the last few years, we got done what was needed to survive. But are we connected enough to now flourish as a profession and serve the new world economy? We are digitally connected, no doubt but in the changing marketplace, the expectations are different.

For instance, if we speak about the role of the auditor, every stakeholder expects the auditor to uncover every contentious matter. Auditors are being held responsible for business failures and often under scrutiny, even when we know that the Promoters/Board of Directors are directly/ indirectly responsible.

There are still limited standards and guidance on responsibilities for business fraud but expectations from auditing professionals to enquire, investigate and deliver are limitless. Whilst we still reiterate the idiom “Auditor is a watchdog, not a bloodhound” at every significant event, the expectations of regulators, governments, financial institutions and investors are ever-increasing.

The auditing profession is under tremendous pressure more so in this digitally connected world. This is a gap in real connection that needs to be bridged. The capacity, scope and capabilities of the professional accountant need to be considered before setting expectations. 

Every country, government, regulator, business and professional accountant needs to ask themselves, ‘Are we understanding the expectations of the new world?’

The Indian government is taking steps toward complete transparency and verifiability. The introduction of the Good & Service Tax (GST), E-way bill, etc. are steps in integrating the buyer and seller accounts. The Government also has plans to introduce its own cryptocurrency. Multiple GAAPs are integrating and will ultimately speak the single language of IFRS (International Financial Reporting Standards). Stakeholders are already pushing for Integrated Reporting of the business and investors/potential investors want to evaluate Environmental, Social and Governance (ESG) criteria. New technologies are entering the business and accounting space. These include cloud computing, big data, artificial intelligence (AI), Internet of Things (IoT) and blockchain technology.

Businesses need one global system which will address capital and liquidity management, centralise collection and payment (including cryptocurrencies), inventory management and logistics, investments and fund arrangements (regardless of borders) and at the same time be competent enough to handle local tax laws and data requirements across tax jurisdictions and multiple regulators.

Is the profession understanding the need to bring synergies in working with cross-lingual and multi-cultural professionals? Are our educational institutions training professionals to operate, account and report in multiple jurisdictions? Are we as professionals thinking of integrating accounting systems, bridging multiple GAAPs and addressing global risks for our clients?

The major concern of businesses today is the ability of its accounting information systems to support international business integration, multiple accounting standards and multiple languages, more so in the digital framework. This is where our profession needs to step up to the job. We need to invest in people to build capabilities. We must appreciate that without building the digital competencies of our teams, we cannot harness the power of digitisation.

The share of the digital economy in economic growth is ever-increasing. In the future, professionals with the above capacity and capabilities would be truly global players with no borders and would occupy key positions in the business and professional space.

The adoption of technology in accounting and how it is impacting the accountancy profession globally

(with contributions from Nishant Dalvi)

The pandemic augmented the implementation of newer technologies. Industries have witnessed a wider adoption of cloud-based accounting software, along with interest in automation and artificial intelligence. With the digital revolution, the use of software to achieve traditional accounting tasks has already brought better efficiency, accuracy, and compliance to these processes over the years. But new-age technologies have helped us reimagine accounting operations.

AUTOMATION IN ACCOUNTING

Reduces Human Intervention and Error:

Modern solutions require minimal human intervention and complete tasks without errors. Data accuracy is critical to financing operations and automated accounting has helped reduce the possibility of errors and provide better accuracy. New technologies are ever more able to emulate human activity, taking on repetitive tasks more quickly and accurately than people can. It has helped automate mundane clerical tasks, thus helping enterprises to save on costs. Automation can process more records in lesser time and at a lower cost and hence investing in a large accounting team to complete transactions is a thing of the past.

Role of RPA in Accounting Automation:

Technologies like RPA (Robotic Process Automation) have already gained interest from accounting firms, particularly for taxation, advisory and assurance services. The primary focus of RPA in accounting is to enable organisations to reduce time-consuming manual processes. RPA can help automate repetitive tasks, for instance, copy-pasting information, a significant portion of tax activities such as the calculation of book-tax differences and the preparation of tax returns, has been successfully automated by RPA software robots. For accountants, RPA signifies the opportunity to improve audit quality and indeed, RPA is already exhibiting its ability to improve business processes and services offered by accounting firms.

SIGNIFICANCE OF REAL-TIME REPORTING:

Reduction of time and efforts in keeping accounts in sync:

Another area where technology has elevated the accounting function is the enablement of real-time reporting. Real-time reporting saves time by removing a step in the accounting process.  Earlier, accounting transactions were supposed to be posted to the general ledger manually.

Elimination of major time-consuming activity of posting transactions:

Depending on the size of the organisation and the daily number of transactions that take place, posting these transactions could take a while. With the implementation of real-time reporting, this step is eliminated. Transactions are simultaneously posted as they are entered. This simultaneous posting is also a benefit at the end of a period. This has also helped the management to make business decisions at any point in time based on the near-accurate representation of financial information.

Up-to-date timely reporting and analysis:

The income statement or profit and loss are key areas where management will notice the advantages of real-time accounting. With a single click, they will be able to see how their organisation has been performing and what is the overall profitability like. This not only gains advantages on the income statement but also on the balance sheet. Accountants can have accurate stock valuations without having to deal with opening and closing stock journals. Each time the company buys new goods, and the stock is received, the inventory and stock levels are automatically accounted for. This enables the accountant to know how much is left outstanding on goods received but not invoiced, or how much is paid for but yet to be received. This is also what the management can view in their balance sheets at a glance. This is where real-time reporting and data analysis combine to give insightful inputs. The leadership can also compare their current performance vis-à-vis their past. This enables the leadership to make choices that will drive their business in the right direction.

DATA ANALYTICS IN ACCOUNTING

Benefits of digitalisation for using data analytics in accounting:

Since most organisations have gone digital, companies today have access to more data than ever before. This can be capitalised to draw business intelligence using data analytics. Data analytics can help a company evaluate its performance, mitigate risks, understand behaviours, find opportunities, etc. A skilled accountant can use analytics to move companies from using static representative samples in their decision-making to a continuous data-monitoring model which provides a holistic view and empowers them to make more accurate and timely decisions.

Advanced new-age analytical solutions:

Technologies like Python & R have enabled the capabilities of data analytics to the next level. These technologies can do more and open new doors for accountants performing financial modelling using Excel/VBA. These can perform multiple scenarios efficiently using a few simple codes, except it is not limited by how much data you can see on your screen. Analytics has aided in identifying the patterns and metrics that would help in strategic decision-making and drawing suitable conclusions. Furthermore, corporations can exploit these valuable insights to make improvements in several areas such as improving internal processes, identifying risks, monitoring business performance, etc. Auditors too can now process larger amounts of accounting data in a variety of formats simultaneously.

The utilisation of visualisation tools for better business intelligence:

Data analysis is enhanced by using visualisation software that offers accountants and their clients unique views of the data that supports their decisions. Then tools like Tableau and Power BI combine business intelligence and data visualisation in a way where it helps organisations to understand their real strengths and weaknesses, make insightful decisions and also predict how a function will progress in the near future.

FUTURE OF ACCOUNTING WITH AI and ML

As we move towards a world where accounting solutions are enabled with powerful computing capabilities, AI (Artificial Intelligence) and ML (Machine Learning) have found use cases across almost all activities performed by humans.

Embracing AI & ML in control and audit:

There is a high capability for ML to deliver enhanced analyses to auditors and controllers. Within the controllership function, ML may be applied to aid with the categorisation of transactions. Inductive logic could be applied to the source data of historical transactions to help predict the classification of further transactions as they get recorded. For auditors, instead of sampling data, they can feed a company’s entire ledger through automated evaluation.

ML can help achieve a variety of analyses, designed by humans, and then provide lists of exceptions for the auditor to assess. ML comes into play as the auditor confirms the exception or invalidates that exception and the machine learns to ‘look’ at the auditor’s conclusions and tries to identify additional data points about the positives or negatives to apply to additional exceptions it identifies. In this way, it learns to better identify exceptions.

Changing nature of the accounting profession:

With these latest technologies, it is evident that we will see a rapid transformation in the accounting profession and that it will be focused more on productivity optimisation enabled through newer technologies. Technologies like AI and blockchain are not only making continuous accounting a reality but are also freeing accountants to pursue other more logically invigorating tasks.

The effect of new-age technologies on the future role of accountants

The future accountant will no longer be burdened with task-oriented processes. Instead, thanks to the ever-evolving accounting technology, the role of the accountant is changing to that of a business advisor.  This shift from the modern accountant to a business advisor will require new skill sets, including professional scepticism, judgment and critical thinking and also hands-on experience in working on new-age technologies; and these skills will remain a high priority for accounting professionals.

Cyber Threats to Financial Sectors

Since 2020 until date, the hike observed in the cyber-oriented threats to financial institutions has been 238%. The average data breach cost in 2021 was almost USD 5.72mn. These numbers are worrying for those in the financial sector, and there’s a high chance of falling victim to a costly cyber-attack. With novel techniques, cracked tools, and services such as RaaS (Ransomware as a Service), attacks are becoming increasingly complex. The recent trend in financial crimes by cybercriminals suggests that they spend weeks to months within the organisation’s environment before executing their goals. Recently, reports linked to Account Balance inflation attacks surfaced where cybercriminals could inflate bank balances of inactive customers and perform multiple transactions of amounts below the values that raise alarms. In another instance, the NBFC sector observed frauds where policyholders received expired links to legitimate payment portals sent by unknown contact numbers. When the customers complained about link expiration, they were sent Wallet QR codes to transfer the money. The financial industry was runner-up just below the healthcare industry to be the most hit in COVID times despite having fancy protection solutions.

Threats to the Financial Sector

I recall an instance where a financial institution was hit with ransomware, which affected 52 of its critical systems and the centralised antivirus server. There are many other such instances where attacks were carried out against financial sectors leveraging techniques like Phishing, DDOS, Web/ Network Related Vulnerabilities, Ransomware, Supply Chain Attacks, Bank Drops, SIM Swapping and many more.

Highlighted below are a few of the techniques and suggestive solutions to defend against them:

• Phishing: We all know what Phishing is, but we need to know how to spot and report it. Phishing is still the most relevant attack on financial institutions. It is much easy to execute when compared to the other attack vectors. For example, on 23 December 2021, 790 customers of Singaporean bank OCBC were targeted in a phishing attack causing a loss of USD 13.7mn. As soon as the victims clicked on the link provided and submitted their credentials, attackers gained access to their bank accounts and drained them of all their funds.  

In another instance, on 1 April 2022, the popular state-sponsored group ‘Lazarus’ was found using backdoored decentralised finance apps to deliver malware in their phishing campaigns. The malware was a full-featured backdoor containing sufficient capabilities to control the compromised victim.

Cybercriminals are using every trick out of their hats such as registering Punnycode-based domains that look legitimate. For example, if we register the website ‘xn—bd-occ.com’, it will decode to BDΌ.com in the user’s browser as shown below:

However, the O in BDO is not an ‘O’ but a Greek Capital Letter Omicron with an acute accent. It can easily fool the eyes of any user who might think he is browsing an actual domain and end up losing his credentials and getting his system compromised. While Phishing has been a root cause of many sophisticated attacks worldwide, a hardcore defence against phishing has been multi-factor authentication. However, we also recently saw some advanced campaigns asking for multi-factor codes after putting in the login details, adding another forward leap for cybercriminals. It has proven to be highly effective. Think about it as the cybercriminal sitting right between you and the legitimate site. As soon as you log in to the phishing site, the cybercriminal records the login information and opens the requested original website on his device. Next, the fake phishing page asks you for the multifactor code, which was generated and mailed to you by the service from the connection that the cybercriminal initiated and which you might think has been caused because you are logging in to the service. You input the code on the cybercriminal’s phishing page, and the cybercriminal uses it to log in to the service. Hence, not only will multi-factor alone solve phishing problems, but rigorous and periodic phishing simulations will also help. Try opting for quarterly phishing simulation exercises.

• Web / Network-Based Vulnerabilities: There are vulnerabilities in every software, operating system and device. Every patch Tuesday (the second Tuesday of every month), technology giants like Microsoft and Adobe release patches for their applications and software. While penning down this article, there have been 1126 vulnerabilities identified in Microsoft products in the last year. 89 of them are critical and 26 of them are publicly disclosed. That’s enough to worry about if you are not fond of updating your software frequently. Vulnerability scanners are a good choice for finding known vulnerabilities, and they will do an excellent job till they are regularly updated with new signatures. However, what if you are the next victim of a zero-day attack? Some misconception about vulnerability assessment and penetration testing is that it will find you all the vulnerabilities, which isn’t the case, especially in terms of software. In a recent event, a 19-year-old bug in WinRAR was exploited by cybercriminals to install malware. Hence, to decrease such risks, you should consider source code reviews of your software, get a Black Box Fuzzing test done and look forward to frameworks such as Microsoft’s Secure SDL (Security Development Lifecycle) for in-house developed applications. Additionally, always keep all third-party software updated.
• Ransomware: We witnessed the havoc created by the WannaCry/Petya/Not Petya family of ransomware globally. While a decent endpoint detection and response solution can help you defend your organisation against Ransomware, the concept of Least Privilege (No person or system should be authorised to do anything it doesn’t need to do) and backups are essential. But even more important is the ability to restore from a backup. The easiest-to-follow solution in case of a ransomware infection is to reformat the drives and repair the systems from the backup. Unfortunately, only a handful of companies have good backups or can restore from a backup. Additionally, backup on physical drives should be disconnected when a backup isn’t in progress. Always test the backups to ensure that you can successfully restore the systems. If you have a backup but can’t restore it, you might only pretend to have a backup. The backup device must be offline and connected only when a backup is in progress. Otherwise, the ransomware attack can encrypt your backup.
• Bank Drops: Cybercriminals usually store stolen money in shell accounts opened in various banks using the stolen customer information. ‘Fullz’ is a term criminals use to describe sets of stolen personal information that can be used to impersonate someone or use their bank cards. Simply put, fullz are stolen identities or stolen credit card information. The word comes from the word ‘full’ in the sense of ‘full data’ or ‘full credentials’. It encompasses all the information a fraudster needs to impersonate someone to defraud a company, steal directly from the victim, or conduct illegal activity that will be attributed to the victim if caught.  Fullz can be acquired in several ways, including:
• • Phishing and Spear Phishing
  • Bought on the dark web from other criminals, usually in bulk
  • Sourced from data breaches
  • Rented out from ID mules/providers
  • Card Skimming
  • Covert takeover of a personal email or other accounts.
  • Physical theft of PII documents and Cards

A fullz data contain the following:

• • The victim’s full name
  • The victim’s address
  • The victim’s date of birth
  • The victim’s social security number (ID number, passport number, etc.)
  • Other data, e.g., the victim’s email address (and sometimes their password) 
  • Credit card data such as cardholder’s name
  • Billing address
  • CVV code
  • Credit card number
  • Expiry (and issue date where applicable)

• Supply Chain Attacks: Supply chain attacks involve a breach of an organisation through its third-party vendors. The vendors could be anyone from SOC to IT services. Since the third-party vendor of an organisation may not take cyber security as a top priority, compromising a third-party vendor is usually much more effortless. Often third-party vendors store data for many of their clients. A single cybersecurity attack on a vendor could influence hundreds of companies. Financial sectors rely on many vendors, so it is recommended that financial entities implement a Zero Trust Architecture with Privileged Access Management.
• Distributed Denial-of-Service (DDoS) attacks: The financial sector is one of the recipients of the highest number of DDoS attacks. During a DDoS attack, a target's server is overwhelmed with multiple fake connection requests while exhausting the server’s capability to respond and forcing it offline. The DDoS attack is a relevant threat to financial services because the attack surface is huge and comprises banking, IT, infrastructure, customer accounts, payment portals and gateways, etc. This makes the impact of DDoS attacks penetrate deeper into financial entities. Typically, cybercriminals use DDOS attacks in two different ways:
  • Launching other cyberattacks while security teams are distracted by a DDoS attack.
  • Cybercriminals could offer to stop the DDoS attack if a ransom is paid, a strategy with a likelihood of success given the strict SLA agreements among financial institutions.

Protection of Financial Services in the Cyber Space

Cyberattackers often reuse the same attack patterns because of the common security issues among various financial entities. The controls listed below could address many types of exposures that facilitate data breaches and monetary losses in the financial services sector:

• Multi-Factor Authentication (MFA): An MFA policy will make it very difficult for threat actors to compromise privileged credentials. But as discussed, awareness and defence in depth will combine perfectly with MFA.
• Firewall and end point detection and response solutions: A regularly updated firewall and EDR combination can oppose various types of attacks
• Opt for Red Team exercises more often: A Red team exercise will simulate a real-world attack while focusing on how to breach into the organisation so that it can be defended better. Do not stop red team activities after the testers achieve the initial foothold. Allow deconfliction and de-chaining.
• Rope in source code reviews before vulnerability assessments
• Understand the relevance of certain Logs and increase retention period
• Always log database queries regardless of the source it is coming from
• Review the reachability of critical VLAN segments
• Regularly perform dark web monitoring and leaked credential scans
• Always enforce a firm password policy

Championing an Integrated Mindset to Drive Sustainable Value Creation

(with inputs from Abirami Bagyanathan and Vagisha Anand)

In a resource-constrained world with growing populations and exceeding planetary boundaries, businesses are required to operate in an environment dominated by not only conventional business risks, but environmental and social risks, climate change and carbon regulations, additionally geo-political risks also have a significant bearing. Many existing business models are based on creating, delivering and capturing economic value with little to no attention to environmental and social value. However, over the last few decades, as the understanding has gradually increased on the linkages between ESG parameters and their impacts on business sustainability, businesses have started to realise the need for sustainable value creation.

Sustainable value creation encompasses the entire value chain of business interlinking all processes and considering all involved players in the system; it directs us towards the net value creation considering all relevant sustainability aspects with due weightage to ESG parameters into the framework of estimation. While evaluating the economic growth of the organisation is of prime consideration, a sustainable value creation model does not discount the wealth and value that is created or negatively impacted for the involved stakeholders, and even those who are at the far reaches of the stakeholder map but are impacted by the business in some shape.

A systems thinking approach is imperative for sustainable value creation. It is critical to understand the interlinkages and play between the several tangible and intangible facets of business and how it connects with the net value creation (positive or negative). One of the frameworks that can facilitate this mapping is the value creation model under the Integrated Reporting Framework introducing the capital accounting concept under the 6 capitals – financial, human, natural, social, manufactured and intellectual capitals. The framework enables the identification of specific KPIs on inputs under the capitals and the impact and value created at the end of the pipe.  So, the most critical enabler of developing a sustainable value creation model turns out to be the development of a seamless, integrated thought process. Envisaging the complete value chain through a systems thinking approach that translates into action towards value creation is the key. Integrated thinking has supported the design and execution of strategies underpinning value creation for both investors and other key stakeholders.

Summarily Integrated thinking is about connecting performance with purpose. It involves identifying, executing, and monitoring business decisions and strategies for long-term value creation. The implementation levels cascade from the leadership ownership and design to embedding principles in the business operations and finally applying tools, practices and processes to implement and monitor.

The vision at the top guided by the principles above leads to the mapping of the value creation model for the business value chain.

The values of a business can get mapped under

• Value captured — The current value proposition
• Value destroyed — Negative value outcomes of the current model
• Value missed — Value currently lost or inadequately captured by the current model
• Value opportunities — New opportunities for additional value creation

The systems thinking approach enables us to map the above across the life cycle of the businesses touching upon all stakeholders. The impact of value creation on businesses, stakeholders and shareholders is multidimensional and complementary. Thus, with a long-term vision in mind, mature companies, tend to tick all boxes and have a resounding impact under the overarching sustainability umbrella and focus on generating measurable positive value along its value chain.[1]

Going by the value creation model of IIRC (International Integrated Reporting Council), the value created is through a transformation from one form to the other in the input-output model of business. There is a dynamic flow among the capitals such that a financial capital may transition into a non-financial capital depending on the capital movement with fluctuations in the rate and complexity of this movement. For instance, when an organisation invests in its human capital through employee training, the related training costs reduce its financial capital. The effect is that financial capital is translated into human capital. A trade-off here could be compromising employee working hours for gaining a new skill but a skilled employee’s contributions to the business far outweigh the financial costs incurred. The interactions and interdependencies among capitals in a system are far more complex and result in multiple feedback loops. Consideration of all capital conversions and trade-offs made is essential in estimating the overall value.

Integrated thinking can present several challenges and may take significant time and effort to develop. It requires a convergence of a multidisciplinary cross-functional group of people in the organisation with different expertise, professional backgrounds and perspectives across the board, top management and broadly throughout the management and workforce. Senior management, with the support of the CFO, can facilitate integrated thinking by connecting different parts of an organisation and relevant processes and systems, to deliver effective and integrated decision-making, internal reporting and external reporting processes.[2]

Above all, the leadership along with the CFO/Finance Function needs to spearhead the integrated perspective towards developing a sustainable value creation model. As the finance function embraces and takes action to restructure its activities to support integrated thinking and the principles of integrated reporting, its actions in reaching out to improve planning and management can send a powerful message to the organisation. A proactive, thoughtful and supportive move toward integrated thinking by the leadership is a critical step in bringing about integrated thinking more widely across the organisation.2 Nonetheless it needs to be understood and imbibed by all the business functions as well – be it the supply chain, HR, operations, strategy or any other which would be playing a key role in translating a vision to action. Achieving a detailed roadmap for an effective value creation model requires an integrated mindset to be internalised in every business function, including frequent engagement with stakeholder groups.

The action needs to start with internal capacity building followed by developing a robust strategy. The right expertise needs to be pooled to create a sustainable value-creation model through an intense process of stakeholder consultation both internal and external.  Putting a framework in place with measurable indicators puts it on track; and then the action remains on a periodic review, assessment and updating based on changes in the business landscape and moving up the maturity curve making the model reach out to maximise value for stakeholders.

Public Sector Priorities: Trust, Sustainability and Accountability

Public sector governance is about providing services that are accountable based on an earned, transparent and sustained trust. Public trust is crucial to sustainment. When citizens feel mistrustful, they withdraw their commitment to the common good and look out for themselves instead of supporting society. This interrupts the core principles of ‘public service’ and erodes the vitality at a systemic level which leads to social deterioration. An alliance between fulfilling the public mandate and reverence is key to a sustainable governed society.

In the public sector, for any project to establish its needs and priorities, deliver outcomes and resolve problems costs a great deal of time and money. Hence, a shared understanding of what needs to be done is essential. Considering this, the privacy and security challenges we currently face also need to be acknowledged as we are at risk of demoralising our citizens/businesses, especially when the government aspires towards delivering more open government services in the future.

Although providing better education, healthcare facilities, infrastructures, business environment, social protection, etc. remains at the forefront of any government agenda, winning public trust, accountability, transparency and sustainability remain the key priorities for the government and public sector anywhere. Accountability is the key foundation pillar of trust in the government and it lies at the heart of a healthy democracy. Lack of good accountability poses several risks for the resources meant for public welfare that could be wasted through inefficiency/poor management of public money. It may also lead to a loss of trust and faith in citizens and businesses in the government.

The accounts and audit office of any country plays a significant role in ensuring the accountability and transparency of the government through conducting timely audits including performance audits of various government programmes, financial audits of the ministries and states, etc. and making the relevant latest reports available for public view so that performance of various schemes' accountability of Central Government/State Government/Local Bodies is known.

Broadly, factors that affect public trust and government accountability on a larger scale are:

• Service Delivery and Grievance Redressal: Availability of various Government to Citizen (G2C), Government to Business (G2B) services and timely redressal of various complaints/feedback and suggestions is a crucial factor in determining trust levels in government and public sector organisations. The level of trust in the government varies with the socioeconomic status of people, the benefits they receive from government schemes and their individual experiences. Quite often, it is observed that the population with lower socioeconomic status or the ones who had a positive experience or have received benefits from government schemes are more likely to demonstrate higher trust in the government than the population with higher socioeconomic status or who might have not received adequate support or might not have availed services/benefits from government schemes. It is therefore important for the government to look at all such aspects to arrive at a fine balance to win the trust across all levels of the population.
• Awareness: In the past few years, the availability and mass usage of social media and digital marketing platforms has increased awareness levels of citizens and businesses more than earlier. Central and State governments are taking several measures to create awareness about various schemes and programmes. While the use of digital marketing channels is still limited, in comparison to the actual beneficiary population, it is still important to keep devising new and innovative methods to increase awareness about the programs and schemes well in time. When people feel like they understand what their government is doing and why, they are more likely to trust it. Right awareness also builds trust by making it easier for people to hold their government accountable for its actions and also creates a sense of shared responsibility for the well-being of society by making it clear that everyone has a role to play in making sure that our government works for everyone.
• Right to Information and Open Data: The Right to information is an effective tool that helps increase the levels of performance of government officers and citizens’ trust in the respective institution. While the Right to Information Act (RTI Act) has given the means to obtain information, it may be prudent to look at using open data initiatives increasingly which increases trust and further strengthens the relationship between the citizens and government. Furthermore, suitable measures may be required while executing open data and transparency initiatives leading to accountability such as the right information being available in the right way and at the right time.
• Citizen participation: Citizen’s voice and accountability in decision-making by the government can help create an inclusive society that empowers all levels of populations and groups to participate in the policy-making, implementation, monitoring and evaluation so that they can hold their government accountable. While online platforms help in increasing civic engagement, an integrated approach to online and offline citizen participation strategy is useful in achieving inclusive citizen engagement.

Key initiatives that may further help the government in prioritising trust and accountability while keeping inclusive socioeconomic growth at the centre of the overall agenda:

• Digital Government – The digitalisation of government processes and records provides an effective way to streamline the systems and make them standard-based to deliver services seamlessly, thereby leading to faceless governance. The use of digital technologies brings more transparency as manual intervention is reduced or eliminated and respective audit trails are maintained thus proving better accountability. Further, the use of emerging technologies such as blockchain, artificial intelligence, machine learning, data analytics, etc. has strengthened the speed of data processing and accuracy of assessments of data available. Such digital transformation initiatives by the government gather critical information about the citizen which may impact their privacy and therefore, the government must implement suitable data management policies that are aligned with global norms for data protection, the right to use personal data, etc.
• Sustainable Development - As we all know the resources on earth are limited and unreasonable use of such natural resources may impact the overall global scenario in times to come and may have adverse impacts, climate change being one of those. Sustainable Development aims at creating a balance between economic, social and environmental needs. During the recently held conference of parties at UNFCCC, India submitted its net-zero strategy to the United Nations and has re-emphasised that India’s development goals are aligned with the sustainable development goals. Ensuring the adoption of international standards and defining suitable policies & programmes to suit the business environment in India would be necessary for a balanced approach to achieve sustainable development for the country.
• Continuous Improvement in Reforms and Policies - Addressing issues of service delivery and improving communication and information flow by adopting smart and innovative methodologies that are based on continuous improvement concepts will not only lead to improved trust, governance and accountability but also improve overall efficiencies and outcomes. For example, implementing better fiscal management systems, project management and monitoring mechanisms will help avoid any leakages/cost overruns/time overruns. As another example, implementing the citizen charter effectively and devising an appropriate monitoring mechanism to understand citizen grievances and address them timely and effectively will improve the overall public trust in the government.

The public sector in India currently contributes to about a quarter of the Gross Domestic Product (GDP) of the country. The Government of India has taken several initiatives for industrial growth, attracting foreign investment by formulating policy frameworks and their implementation to achieve the overall socioeconomic development of the country. While inclusive and sustainable development remains the key philosophy of the Central Government of India, trust, accountability and sustainability towards various stakeholders and resources including businesses and citizens shall have special attention and would remain to be key priority areas.

Round up of the World Congress of Accountants 2022

(This article has been co-authored by Mayank Jain, Director - Audit & Assurance, M S K A & Associates – A Member Firm of BDO International)

This year as India celebrates its 75th Anniversary of Independence via the “Azadi ka Amrit Mahotsav” initiative, the Institute of Chartered Accountants of India added another feather to the cap of the India story by hosting for the first time The World Congress of Accountants 2022, that was attended by stalwarts from the accountancy profession from more than 120 countries.

Themed around ‘Building Trust Enabling Sustainability’, the Congress was successful in highlighting the urgent need for the world to adopt sustainability standards that reflect high-quality disclosures, ethics, comparability, transparency, consistency and relevance. Smt. Nirmala Sitharaman, our Honourable Union Minister of Finance and Shri. Om Birla - Speaker of the Lok Sabha graced the opening ceremony by emphasising India’s message of “Vasudhaiva Kutumbakam- The World Is One Family”.  Today’s emerging issues are not just one country’s issues anymore, they are impacting every corner of the world and need to be tackled together by adopting a sustainable lifestyle i.e., One Earth, One Family and One Future.

The event brought together 6000 participants physically and over 3000 virtually to address the urgent need to come together as a profession as we move towards addressing sustainability issues and building a sustainable ecosystem.

The WCOA-22 has been a grand success in highlighting India’s growth story so far and the exciting future that awaits. Respectful dignitaries including Suresh Prabhu, Former Union Minister and Piyush Goyal Hon’ble Union Minister of Commerce & Industry, Consumer Affairs, Food & Public Distribution and Textiles, Government of India spoke on India’s pivotal role in the start-up ecosystem and its contribution to the global economy. One could not agree more - It is not just India's decade It's India’s century.

Mr Gautam Adani, Chairman of the Adani Group beautifully summarised his vision for India, saying “If there ever were a time to be Indian, be in India, and associate with India – it is Now”. With the fast pace of social reforms, in the not-too-distant future, India is expected to add a trillion dollars to the economy every 12 to 18 months. It is estimated that our nation’s demographic division, the pace of entrepreneurship, digitalisation and green energy transition will make India the world’s third-largest economy by 2030 and second-largest by 2050. 

The Congress also reiterated the immense contribution of the ICAI from being a national standard setter by establishing new and sustainable standards for businesses and society to a world-class educator by readying students for the future.

The future of professional accountants is indeed very exciting. The avenues for professional accountants are growing with rapid changes in technology, the emergence of cryptocurrency, social stock exchange and digitisation. By building and investing in technology and a sustainable ecosystem, we can expect the accountancy profession to prove to be the most trusted partner to achieve sustainable goals that work for larger public interests, markets and economies.