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Of being “True and Fair”
First published on the original blog ↗
When an audit firm undertakes audit of financial performance of a company, the seasoned partner attempts to make a judgement on how well the financial statement represents the financial health of the company and the financial integrity of the management. Some years ago he made this judgement not based on compliance to a set of rules and standards but also on a variety of factors which, based on his experience, helped him to make a true and fair judgement.
There have been many instances of compromises to the spirit of the audit and many unscrupulous managers and auditors connived to hide information and to defraud the shareholders and or the government. This kind of degeneration forced the profession to come up with more and more standards and rules. The pendulum swung the other way with auditors focussing primarily on compliance to rules. The management learned the trick of demonstrating technical compliance and auditors were happy to play along.
The perils attached to this are now getting evident and there is a serious discussion among the accounting professionals that there is a need to find a balance. A sensible balance of using both rules and principles to judge whether the statements are indeed ‘true and fair’ with focus shifting more to principles.
Similar swings have also been witnessed in a variety of areas which require checks and balances. We moved to rule based regulation and we are now swinging back to principle based regulation. As the UK Financial Services Authority has portrayed “Principle based regulation – focussing on the outcomes that matters”.
Even the perception regarding the role of company board is undergoing a change. Its primary role is not only to protect the interests of the absent shareholders, but also to act as a guide and a sounding board for setting the strategic direction of the company.
Such shifts in disciplining methods are not just in the governance models of corporate and regulators. We see it in educational institutions and even family lives. In earlier era the parenting role included strict discipline of rules, timetables and targets; there was friendship and authority. The schools also followed almost regimental structures. Then there has been shift where the role of the teacher and even that of the parents have become primarily advisory in nature. This shift is quite predominant in western cultures. The safeguards that were built to restrict parental abuse and cruel treatment by teachers are now being misused. We see similar ideas being propounded in India too.
The society in now paying the price and there is a great deal of concern on the falling standards of education and falling standards of discipline and value system. I found the thought expressed by Michael R LeGualt in his book ‘Think” relevant in this context. “It seems clear that in setting out to be mainly the child’s friend or self esteem coach a parent is surrendering his or her most important role in shaping child’s values and character-that of mentor, guide and authority”
Such pendulum swings remind us of the need for strengthening the values right from the childhood and the need for a balanced approach instead of carrying any solution or idea to its ridiculous extent. This will be possible only if we have regulators and legislatures who have the vision to build clean institutions and the courage to stand up for what they believe is right. This is often available only in ‘limited edition’. When we see such leadership, it is our role to support them.
“Character is doing the right thing when nobody's looking. There are too many people who think that the only thing that's right is to get by, and the only thing that's wrong is to get caught.” ~J.C. Watts
There have been many instances of compromises to the spirit of the audit and many unscrupulous managers and auditors connived to hide information and to defraud the shareholders and or the government. This kind of degeneration forced the profession to come up with more and more standards and rules. The pendulum swung the other way with auditors focussing primarily on compliance to rules. The management learned the trick of demonstrating technical compliance and auditors were happy to play along.
The perils attached to this are now getting evident and there is a serious discussion among the accounting professionals that there is a need to find a balance. A sensible balance of using both rules and principles to judge whether the statements are indeed ‘true and fair’ with focus shifting more to principles.
Similar swings have also been witnessed in a variety of areas which require checks and balances. We moved to rule based regulation and we are now swinging back to principle based regulation. As the UK Financial Services Authority has portrayed “Principle based regulation – focussing on the outcomes that matters”.
Even the perception regarding the role of company board is undergoing a change. Its primary role is not only to protect the interests of the absent shareholders, but also to act as a guide and a sounding board for setting the strategic direction of the company.
Such shifts in disciplining methods are not just in the governance models of corporate and regulators. We see it in educational institutions and even family lives. In earlier era the parenting role included strict discipline of rules, timetables and targets; there was friendship and authority. The schools also followed almost regimental structures. Then there has been shift where the role of the teacher and even that of the parents have become primarily advisory in nature. This shift is quite predominant in western cultures. The safeguards that were built to restrict parental abuse and cruel treatment by teachers are now being misused. We see similar ideas being propounded in India too.
The society in now paying the price and there is a great deal of concern on the falling standards of education and falling standards of discipline and value system. I found the thought expressed by Michael R LeGualt in his book ‘Think” relevant in this context. “It seems clear that in setting out to be mainly the child’s friend or self esteem coach a parent is surrendering his or her most important role in shaping child’s values and character-that of mentor, guide and authority”
Such pendulum swings remind us of the need for strengthening the values right from the childhood and the need for a balanced approach instead of carrying any solution or idea to its ridiculous extent. This will be possible only if we have regulators and legislatures who have the vision to build clean institutions and the courage to stand up for what they believe is right. This is often available only in ‘limited edition’. When we see such leadership, it is our role to support them.
“Character is doing the right thing when nobody's looking. There are too many people who think that the only thing that's right is to get by, and the only thing that's wrong is to get caught.” ~J.C. Watts