Presentation (PPT)

Accounting Education and Research as Infrastructure for a

Modernizing Economy Shyam Sunder

James L. Frank Professor of Accounting, Economics and Finance, Yale School of Management

New Haven, CT, USAAccounting Research Conference

Indian School of Business, HyderabadDecember 17-19, 2007

Shyam Sunder: Accounting as Infrastructure

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An Overview• Importance of infrastructure for modernization of Indian economy• Service infrastructure just as important as the physical• Accounting is a critical element of service infrastructure for

organizations and economy• Development, modernization and innovation of all parts:

– Financial reporting, management accounting, internal controls, government and not-for-profit accounting, governance, financial analysis, forensic and investigative, internal and external auditing, government financial management, program evaluation

• In academia, special and immediate attention to curriculum, research, and doctoral education

• Serious deficit in seed farms of knowledge in India (in all fields)• Indian accounting can become an example for others (just as the

software did) if accounting community so determines


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Better Infrastructure of Modernizing India’s Economy

• The awareness of the critical need to develop the physical infrastructure in India to support a modern economy is a recent and welcome development.

• No economy can survive, much less thrive, without provision of efficient transportation, communication, and utilities.


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But, That is Not Enough

• All the Seven Wonders of the Ancient World?– Great Pyramid of Giza– Hanging Gardens of Babylon– Temple of Artemis– Statue of Zeus at Olympia– Mausoleum of Maussollos– Colossus of Rhodes, and the – Lighthouse of Alexandria.

http://en.wikipedia.org/wiki/Great_Pyramid_of_Giza

http://en.wikipedia.org/wiki/Great_Pyramid_of_Giza

http://en.wikipedia.org/wiki/Hanging_Gardens_of_Babylon

http://en.wikipedia.org/wiki/Temple_of_Artemis

http://en.wikipedia.org/wiki/Statue_of_Zeus_at_Olympia

http://en.wikipedia.org/wiki/Mausoleum_of_Maussollos

http://en.wikipedia.org/wiki/Mausoleum_of_Maussollos

http://en.wikipedia.org/wiki/Lighthouse_of_Alexandria


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http://en.wikipedia.org/wiki/Image:SevenWondersOfTheWorld.jpg


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What is Missing?

• All these are physical constructions—tangible—things you can see and touch

• Was it Alexander’s physical strength and skill that made him so great? Or was it his skills of management?

• The tangible and visible nature of physical infrastructure obscures the role and criticality of equality important institutional, human skills, soft, and services infrastructure of society which is no less important


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Accounting is Part of Services Infrastructure

• Services infrastructure of which accounting—the profession, education and research—is an important part

• India has an ancient tradition of bookkeeping for merchants running proprietary businesses (bahee-khata)

• However, the broader forms of accounting to support efficient manufacturing and efficient capital markets may have lagged behind the western practices

• What can Indian accountants, educators, researchers and the government do to develop accounting in India so it becomes a leading innovator in the world in its own right?


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Elements of Accounting to Modernize the Indian Economy

• Management accounting• Financial reporting• Internal controls• Government and not-for-profit accounting• Corporate governance• Financial analysis• Forensic and investigative accounting, • Taxation• Internal auditing• External auditing• Government financial management and program evaluation• Curriculum• Research• Doctoral education


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Management Accounting

• When a proprietorship business grows into a multi-level managerial hierarchy, the simple bookkeeping system is no longer sufficient

• Bookkeeping must be expanded to include cost accounting, performance evaluation, compensation, transfer pricing etc. to run the organization efficiently

• Work with managers to observe and share their accounting innovations

• Field studies of improving operational efficiency• Examination of performance measurement and

compensation systems• Operational efficiency in services sector (banking,

software, government offices, etc.)


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Financial Reporting• With large capital needs, no single individual can own the enterprise, and

capital must be gathered from a large number of shareholders• To meet the needs of such enterprises, bookkeeping and managerial

accounting expanded into financial reporting—the most comprehensive form of accounting developed to serve the needs of organizations with publicly traded ownership shares

• Financial reporting has come to be dominated by written standards (e.g., FASB and IASB)

• Standards alone are not sufficient to ensure good financial reporting• Developing social norms of “true and fair” financial reporting in accounting

and business community—role of professors• Developing an open process for creating competitive standards to ensure

efficiency in financial reporting• Development of alternative methods of accounting, field testing, and

research on link to security markets• International participation and engagement


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Internal Controls

• Development of internal controls to ensure the preservation of organization’s resources

• Measurement of pilferage, wastage

• Cost effectiveness of internal controls

• Reporting mechanisms for internal controls violations (CEO, in-house counsel, board of directors)


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Government and Not-for-profit Accounting

• Choosing accounting approaches according to the economic characteristics of the product– Private goods (clothes, cars, electricity)– Public goods (sanitation, courts, police)

• Municipal, state and union governments

• Standards and norms for the sector


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Corporate Governance

• A great deal of good governance depends on good accounting (both in corporations as well as in other sectors of the economy)

• Audit committees and their effectiveness• Public roles: vigilance and monitoring by small

shareholders• Role of the press in good corporate governance• Convincing management of their fiduciary role

and responsibility• Managing and reporting executive compensation


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Financial Analysis

• Huge growth industry for India: analytical service exports

• Using financial reports and other sources of information to make investment decisions– Brokerage– Investment banking– Mutual and hedge funds– Bankruptcy analysis and vulture funds

• Educating accounting and business students in financial analysis


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Forensic and Investigative Accounting

• Analysis of financial reports and other information to:– Detect financial malfeasance– Investigate fraud– Gather evidence for prosecution and defence– Corruption

• Educating students in detection techniques and statistical analysis


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Taxation

• Efficiency of revenue collection (cost-benefit analysis)

• Efficiency of audit decisions in taxation

• Economic analysis of consequences of taxation

• Alternative means of revenue collection (VAT vs. sales tax, etc.)


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Internal auditing

• Role and extent of internal auditing

• Reporting relationships of internal auditors (executives, board, etc.)

• Divide of work between internal and external auditing


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External auditing

• Hiring, managing and firing of external auditors

• Cost and pricing of external auditing

• Organization of market for auditing

• Auditor liability analysis and consequences

• Competition and independence

• Audit quality: definition and measurement


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Government financial management and program evaluation

• Improving financial management in government sector

• Evaluation of government programs for effectiveness and efficiency

• Budgeting techniques

• Comparative analyses of government financial management within country and internationally


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Curriculum

• Dynamic development of curriculum• Curricular development support and incentives• University rules and regulations: rigidity versus

flexibility• Balance of theory and practice in curriculum• Case, books, and problem development• Publication of curriculum oriented academic

journals• Financial support and testing of curriculum


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Teach Students to Think?

• Present them with various scenarios and transactions (cases)

• Ask them how they think each such case should be accounted for so as to achieve “true and fair” financial reports

• Consider and discuss the merits and weaknesses of each proposed method to help students develop their own refined judgment about how to prepare true and fair financial reports

• Help them develop a sense of professional norms of what is right and what is wrong

• Have our students leave the class with ability to back up their judgments with economic, financial, organizational and legal reasoning


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Or, Teach the Rules?

• Open the rule books• Teach the rules of financial reporting and

auditing• Teach them how to conform to rules so they

would not get into “troule”• One right answer to each question (to be found

in the rulebooks)• Avoid professional judgment at all costs• There are plenty of textbooks which do just that;

they compete on the basis of which edition has the latest rules issued by the authority


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Who Will be Attracted to these Two Types of Accounting Classes?

• The first kind of accounting class will be attractive to those who like to think for themselves, sharpen their judgment, are willing to exert the effort to explore and understand the economic, financial, organizational and legal consequences of what they do, and apply judgment to difficult circumstances

• The second kind of class will be attractive to those who view accounting as a trade in which rote memorization of rules is the primary necessary skill

• Look at the street image of accounting and accountants and ask: what kind of people do we think we are attracting to accounting classes, and why?

• Should we the educators look at ourselves for leadership?


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Quality and Number of Accounting PhD Programs

• Shortage of high caliber students willing to PhD is a problem across disciplines and countries

• Economically, it is a public good problem that requires public financing; it is expensive and does not confer direct benefits on universities who educate PhDs

• In accounting the problem is especially acute• Opportunity costs of accountants are relatively high• What kind of person is attracted to teach each of the two

kinds of accounting classes?• The street image of accounting as a trade discourages

talented students from thinking of accounting as a subject of scholarly pursuit


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Levels of Knowledge

• India exhibits a great deal of confidence in its technological capabilities today

• Confidence is a big plus, but misplaced confidence is catastrophic

• Understanding the distinction among various levels of knowledge is important


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Knowledge and Status

• Consider five levels of knowledge about a car– The owner– The driver– The mechanic– The manufacturer (engineer)– The Designer– The inventor

• To a poor and illiterate villager, a person riding in the back seat of his car is “advanced”

• But owning a car requires little knowledge• What is the link between level of knowledge and social

status in various societies?


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Dujiangyan Irrigation System (Fish Mouth)

• In 256 BC, Li Bing, the governor of Shu province (now Sichuan) of Qin kingdom and his son Er Lang built a great irrigation project on Min river that irrigated the entire basin in which the modern city of Chengdu is located. The irrigation system led to flourishing of a great civilization in the valley over the past two millennia. This marvel of engineering is simplicity itself, and works well to this day.


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Sketch

Map

& Introduction to

Dujiangyan

Weir

Index

A: Fish Mouth. B: Outer River Dike (Jingang Dike). C: Inner River Dike (Jingang Dike). D: Inner River.

E: Outer River. F: Mingjiang River. G: Feishayan (Drainage Dam). H: Renzi Dyke.

I: Bottle Mouth. J: Lidui Park. K: Baizhang Dyke (Dike). L: Erwang Temple.

Sketch

Map

& Introduction to

Dujiangyan

Weir

Index

A: Fish Mouth. B: Outer River Dike (Jingang Dike). C: Inner River Dike (Jingang Dike). D: Inner River.

E: Outer River. F: Mingjiang River. G: Feishayan (Drainage Dam). H: Renzi Dyke.

I: Bottle Mouth. J: Lidui Park. K: Baizhang Dyke (Dike). L: Erwang Temple.

Sketch of Dujiangyan Weir


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Dujiangyan Weir


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What Do You See Today

• The irrigation system itself

• Erwang Temple to celebrate and pray

• And a statue—of those who built the engineering marvel

• To this day the project attracts thousands of visitors every day and inspires the young to reach for innovation because that society respects and remembers


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Global Competition

• Global competition will not allow India to sustain this strategy for long

• Many countries around the world are preparing their educational systems and grooming large number of talented young with high quality education and promoting research to attract the “brain” industries

• Research means original work—discoveries, inventions, writing or design that has never been done before

• I would not be surprised if the “brain” industries move to these countries if they do not find labor of sufficient quality and in sufficient quantity to fill their needs

• The same global competition that benefits India today could prove to be its undoing


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An Inconvenient Truth

• An inconvenient truth: India lags in innovation, is falling further behind—a largely unrecognized crisis

• Research and scholarship lies at the narrow top of the educational pyramid– 20 million children in schools/year– 10 million in high school/year– 4 million in college/per year

• Only 16,000 PhDs/per year


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Harvesting the Crop Planted Long Ago

• India’s rapid economic growth today is the result of the investments made in education during the past fifty years

• Today, most of the system is focused on educating bachelor’s degree holders to meet the current demand

• Few of the top students in India are attracted to careers of scholarship

• With its inability to attract even the top one percent of each year’s class into PhD programs, the quality of instruction and scholarship in Indian higher education is in a steep decline


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Planting the Seeds

• India is enjoying the fruit of the trees planted long ago• Is not planting enough new trees• Unless India invests heavily into research scholarship

and doctoral education today (as US, Europe and China do), it will soon see a steep decline in the quality of education with serious consequences for its economy

• There is early evidence that this decline has already begun

• The technology boom may lose steam as Indian firms move their operations to other countries where they can find well-educated employees in large numbers


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Sharply Rising Salaries Suggest Shortages

India Has Highest Salary Hikes in Asia By THE ASSOCIATED PRESSFiled at 5:41 a.m. ET, December 1, 2006• NEW DELHI (AP) -- Salaries in India rose faster than

any other major country in Asia this year, even as companies across the region remain under pressure to retain talent and spend more to compensate employees, a global resource company has said.

• An annual survey by Hewitt Associates revealed that salaries in India rose an average of 13.8 percent in 2006, with midlevel technical employees and supervisors getting the biggest hikes, the company said in a statement Thursday.


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Real Pay

• Senior managers in Mumbai and São Paulo are better paid than their counterparts in New York or London, once the cost of living is taken into account, according to Hay Group, a human-resources firm. The calculations include the cost of rent, which is punishingly high in some financial centres. Sweden's heavy taxes leave top managers in Stockholm worse off, in real terms, than their peers in Shanghai or Budapest.

• Aug 10th 2006 From The Economist print edition


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39Shyam Sunder: Accounting as Infrastructure

World University Rankings Population

(millions) Top 20 Top 50 Top 100 Top 200

China 1,321 1 2 2 6 Hong Kong 7 0 2 3 4 India 1,169 0 0 2* 3** Japan 128 1 2 3 11 Other Asia 1,250 1 1 3 9 Sub-total 3,875 3 7 13 33 Australia 21 1 6 7 13 Canada 33 0 3 3 7 New Zealand

4 0 1 2 2

U.K. 61 4 8 16 30 U.S. 303 11 22 33 55 Total 6,396 20 50 100 200 Source: from the survey reported in The Times Higher Education Supplement, October 6, 2006. Each column subsumes the previous column: a university in the top 20 is also in the top 50, 100 and 200. * IITs, IIMs ** IITs, IIMs, JNU


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The world’s top 200 universities

2006 rank

2005 rank

Name Country

Peer review score (40%)

Recruiter review (10%)

Int'l faculty score (5%)

Int'l students

score (5%)

Faculty /

student score (20%)

Citations /

faculty score (20%)

Overall score

1 1 Harvard University

US 93 100 15 25 56 55 100.0

2 3 Cambridge University

UK 100 79 58 43 64 17 96.8

4= 7 Yale University

US 72 81 45 26 93 24 89.2

14 15 Beijing University

China 70 55 5 11 69 2 67.9

16 23 Australian National University

Australia 72 30 48 33 38 13 64.8

19= 22 National University of Singapore

Singapore 70 44 82 47 22 8 63.1

19= 16 Tokyo University

Japan 72 29 8 10 35 27 63.1

21 24 McGill University

Canada 57 61 31 33 52 10 62.3

28 62 Tsing Hua University

China 45 34 22 9 84 1 56.1

33= 41 University of Hong Kong

Hong Kong

48 40 84 27 46 6 54.8

57 50 Indian Institutes of Technology

India 45 34 0 1 27 2 44.5

68 84 Indian Institutes of Management

India 31 46 0 10 60 2 41.6

183= 192 Jawaharlal India 32 14 2 6 27 4 29.3


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DOCTORATE DEGREES AWARDED (India/US)(Sources: Universities Grants Commission and National Science Foundation)

Field of Study 2002 2003** 2004**

Arts 4,524/ 5,029 6,144/ 5,018 6,774/ 5,013

Science 3,955/ 19,505 4,976/ 19,995 5,408/ 20,497

Commerce/ Management 728 954 1042

Education 4,20/ 6,491 527/ 6,638 593/ 6,633

Engineering/Technology 734/ 5,077 833/ 5,279 908/ 5,775

Medicine 219// 1,653 246/ 1,633 268/ 1,719

Agriculture 838 1012 1048

Veterinary Science 110 136 189

Law 110 146 129

Others* 336 444 743

Total 11,974/ 39,953 15,328/ 40,740 16,602/ 42,117

*Others includes Music/Fine Arts, Library Science, Physical education, Journalism, Social work etc.** Provisional


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PhD Degrees Awarded in Science and Technology


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Estimated Demand for PhDs(in Higher Education)


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State of Higher Education

Gross Enrollment Ratio (Relevant age)

% Change

Teachers per million population

% Change

1995 2000 1995 2000

North America

61.7 80.7 31 2980 3205 21.2

Asia/Oce. 28.8 42.1 46 2162 3205 48.2

Europe 32.3 50.7 57 2042 2393 17.1

Arab 11.5 14.9 30 653 730 11.8

Latin/Car. 15.7 19.4 24 1422 1608 13.1

India 6 7.2 20 436 434 -0.4

World Total

12.5 17.4 39 964 1084 12.5

Source: World Education Report, 1995 and 2000 (UNESCO)


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Accounting in University

• Universities devote themselves to education and advancement of knowledge

• Many skills important to society are not considered suitable for inclusion in university curriculum (plumbing, bricklaying, real estate sales, etc.)

• Where does accounting stand in university curriculum and why?

• How long can accounting retain its place in university as it is standardized?


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Research

• Interaction between instruction, practice and research

• Engagement of research and professional communities (CA, CWA, investment and commercial banks, mutual funds, financial service intermediaries, government and auditor general of India, etc.)

• Refereed research journals with rigorous standards

• Innovation and international leadership in accounting


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Danger Signs: Quality and Quantity of Scholarship

• As an expatriate Indian who has retained his Indian citizenship after 36 years abroad, please forgive me for sharing one concern I have about a critical weakness in India’s development

• This concerns research and scholarship, as reflected in high quality PHD programs, not only in accounting and management, but in virtually all aspects of academia (with the fortunate exception of chemistry).

• PhD programs, like high quality seed needed for agriculture, are expensive in time and money.

• Yet, unless we have the foresight to find ways of attracting at least 5 percent of the brightest students in each year’s class to scholarly careers, India would have no hope of being able to compete in the world awash in talent and better educational systems.

• Since there is no time today, I shall expand on this analysis in my address at the India Habitat Center at 6:30 PM on January 9.


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To Summarize

• Development of these dimensions of accounting will help India increase the efficiency of its administrative structures and economy, and compete more effectively and equitably in the world markets.

• It will also enable accounting to become a vibrant academic discipline in universities and practice in business community

• Advancement of the practice, education and scholarship of accounting will help India develop an internal and exports market for accounting-related services listed above.


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The Challenge

• What is it that Indian software engineers can do to be among the best in the world that Indian accountants and scholars cannot?

• Innovation and leadership is a state of mind.

• Indian accounting is ready for the challenge

Thank You!

[email protected]

www.som.yale.edu/faculty/sunder

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