How the CA profession changed circa 2011-a lookback in 2020

We cannot (yet) travel in time, so only time can test my predictions of how the CA profession will evolve. However, so many exciting changes are happening(we live in interesting times) that I just had to pen down my thoughts to connect the dots, and do some crystal ball gazing

The global subprime crisis gave a boost to principles based accounting and auditing standards(IFRS, audit standards) which were nearly universally adopted/adapted from 2008-2013. But if investors thought it would result in lesser fraud incidence, they were sadly mistaken. The IFRS transition and IFRS induced volatility, led to a comedy of errors, misunderstandings and reratings of stocks/sectors. Management subject to tighter performance linked pay, clawback etc(copied from the Western banking sector pay clampdowns) responded by gaming the metrics. And IFRS was an unwitting accomplice. Realizing that they could use aggressive accounting without earning qualified audit reports, management went all out to polish their books. And the auditors still coming to terms with IFRS, auditing standards, new formats laws etc were always one step behind.  But investors were not dummies. The savvier ones among them(FIIs, PE funds etc) demanded forensic audit to be mandatorily performed in addition.  Companies on their part, realized that investor relations was too important to be entrusted to the CFO/CS, and instead decided to develop their in house teams with business understanding/insight AND with expertise in accounting, marketing and communications.  CAs again were picked up for this role, given their integrated understanding.

The global outcry against income disparities, basic necessity deprivation, corporate ‘huge earnings’, Govt spending , corruption and crony capitalism manifested itself in the Arab spring riots(Egypt, Libya, Tunisia..), Lokpal bill struggle in India, Dodd Frank/Obamacare in USA. The Indian Govt did not set up a Lokpal but agreed to be enhance the e-governance substantially, and introduce worldclass measures like self assessment, uniform tax rates, less complexity, tight but fair penalties, deemed resolution in favour of citizen in case of delay etc. This transparency increased the willingness to pay tax, and increased the taxpayer base to 25% of the population. Of course, this was aided by more withholding taxes(TDS/TCS), transaction taxes(STT, GST) and innovative tax base(MAT, dividend tax, reverse charge etc). After plenty of struggles, GST was introduced in 2015, with dual rates

CAs saw the need to collaborate within the profession(alliances, CPE circles, benevolent fund, networking) and with other professions(LLPs).  The MCA introduction of LLP was leveraged by ICAI to permit these partnerships. And how they prospered! Engineers, architects and lawyers helped immensely in valuation, due diligence and expert opinions in audits; while company secretaries and management accountants lent their name to compliance services, cost audits and transactional services performed by LLPs. Of course, the jack of all trades(CA) remained the managing partner. Stung by the fact that LLPs of mostly other professionals were grabbing the premier cost audits, ICWAI tried to amend its bill to prevent that, but failed due to opposition from other professionals.  Networks of LLPs rose(many of them borne from ICAI networking efforts) and challenged the Big4 in specialist areas like forensic accounting, valuation, merchant banking etc.

The ICAI efforts to increase the quality of entrants in the CA profession worked well. Despite a midway oversupply(May-11 CA Final placements!), the overall consensus in 2020 was that academic toppers entering the field, had done excellently and could challenge their science peers. This reflected in the MBA entrance results where more CAs got into the premier IIMs(instead of having to wait and go abroad/to ISB), as their analytical caliber helped them to crack CAT. Of course, the CA Final exam pattern was made more practical/applied to ensure that bookworms/crammers would not get rewarded for just knowing the contents of a Rs 500 CD ROM! Recognizing that the quality and quantity of CAs was going up, industry recognized this by shifting a good chunk of Tier I and Tier II MBA college placements to the ICAI campus placements.

This would not have been possible without an improved training. Discarding the old system of relying wholly on the employer for training inputs during the 3yr period, ICAI adapted the ICAEW system of learning diaries, to be maintained and uploaded online. Like how peer review/FRRB brought out the best/worst practices for assurance practices, the review of these diaries was a valuable source of course correction for ICAI, to help those students where learning seemed too skewed. And by setting up its own coaching infrastructure(attending those to be counted as articleship!) and centres of excellence, ICAI was able to conduct many more student seminars/conferences/training programs. The communication skills training program was made on par with top MBA programs, and the Information systems course also was so interesting that CAs decided to compete with BTech system auditors!

CAs finally entered the digital age with XBRL, which made data crunching less labour intensive. While some KPOs were not happy(!), software companies embraced the movement to offer 100% automated XBRL solutions, which could then be verified by the CA.  Even the source data(ERP system) become standardized with cloudcomputing based ERP solutions, that allowed even SMEs to enjoy the benefits of ERP without the capex costs and learning costs(project failure etc). These twin developments made it more imperative for CAs to be tech savvy, capable of writing that XBRL coder on the fly if necessary, or to liason between operational staff and software persons.

The general improvement in personnel, systems, tax compliance mood etc made the Govt/Regulators even more trusting, and sparked off a virtuous cycle. Human interface kept reducing(or replaced by helpdesks instead of that pesky inspector!), with the limited manpower focused on major cases/test cases only instead of picking on the small fry. Of course, the severe penalties for fraud/major mistake ensured that the tax payers/regulated parties themselves preferred the least human errors, for which systems were designed to auto generate the returns from the ERP/other MIS. This led to reduction in Finance Dept size(now one did not need so many people to manually prepare the basic stuff!).  Compliance hassles became fewer(thanks to model laws like LLP/new companies Act) as Govt focused on ensuring companies had processes in place, instead of just an accurate output. The CARO question on internal audit sufficiency and appropriateness, expanded to cover a chunk of other key processes like tax.

With all that technology push, finance departments decided to proactively respond to the double dip recession/cost push inflation/high interest rates etc. Management accounting became in vogue again, and companies began to actually read and apply their cost audit reports.  ICWAs finally got their due respect and status on par with CMAs abroad, as companies realized that they had ignored their low hanging fruits for decades. The worst hit sectors(banking, insurance, infrastructure) learnt to apply those lessons, and were now on the rescue path. 

So finally, the profession(service and practice) saw substantial changes. Those who went with the wind prospered, others were left wondering what happened.  

Why 100% audit testing is again in vogue

In the old days of hand made goods, the brand was enough to show that the craftsman had tested the good and certified its quality. As the scale of operations grew, the producers decided to retain the quality marks, but resorted to sampling(around which a whole cottage industry grew of sampling statistics, testings, Six Sigma etc). When the scope of financial audit enlarged from balance sheet audit to include transactional testing, test of controls etc; auditors just lifted the ready made library of tools/techniques from the sampling industry, under the mapping that transactions/records were like goods-for which 100% testing was not economically feasible. While that hypothesis is shrinking in physical goods with the advent of non destructive testing(like acoustic testing, use of optics etc), digitization has made it possible to apply CAATs and digital auditing to do 100% testing of information.

Technological feasibility is one reason, but the real reason is the increasing competition+globalization, which has really reduced profit margins. Companies must now innovate(to maintain the high margins/market share), or else die. The lower profit margins lead to lower audit materiality levels, and therefore need for more audit testing. After all, commodity players operating at 1% margins, would have low audit materiality levels. But even high margin financial sector players have other issues like lax controls, fraud risk, compliance testing etc. Money laundering legislations demand data mining to detect connected transactions. The stray transaction which slipped through, may result in headlines about XYZ bank being a terrorist conduit. To protect their reputational capital, those subject to money laundering legislation must have digital records. And when the underlying digital records are in place, it is a natural leap to use them for statutory financial audit purpose.

Another reason is the increasing frauds/collapse of listed companies, where the public/regulators blame the auditors for being asleep at the wheel. While this perception is due to expectation gap, the audit firms would naturally like to improve the audit quality to avoid such issues. And one of the cheapest(given their economies of scale across clients) ways to do so is to use computers effectively for 100% audit testing.

As I blogged earlier, the data analysis trend today is to use the automated bulldozer instead of the manual shovel. Hence, the need for smart work

Anon Analytics-the new Wikileaks of Equity Research?

Sell Side equity research has been critiqued for its inherently conflicted business model, where issuer pays. Unlike credit rating agencies, there is no statutory mandate for equity research, nor is there a fair dealing provision for access to company. Therefore, any sell side analyst,even if objective, will think twice before giving a SELL rating/publishing bad news because that may cutoff access to the company, and 'disadvantage' him in relation to the other analysts. Whether more access to management is an advantage(better insight) or a demerit(familiarity bias) is a value judgement I leave to the reader. But despite the delinking of investment banking mandates to equity research compensation, the fact remains that 10years after the 2001 Spitzer settlement, things have not improved much. Research on herd mentality does state that crowds tend to go berserk, because each member of that crowd revels in anonymity, and thus allows the animal spirits/suppressed side to come out. Given that published equity reports are likely to err on the optimistic side, anything that encourages the negative side to be more extensively published/reported, is only a good thing. But don't short sellers anyway plant news articles, talk down the stock and 'manipulate prices'? What new can an anonymous equity research report accomplish? For one, the report mentioned here(http://anonanalytics.com/pdf/Chaoda.pdf) is 100% based on public information. They have creatively used a mosaic of reports, transcripts, primary research, public filings etc to weave together a damning indictment of that company. And in that sense, it is simillar to Wikileaks(in terms of audacity, novelty), but different in the sense that no confidential information is disclosed initially. Perhaps to prevent a Wikileaks type attack on their servers, they have warned that if their identities are ever compromised, they would release the (for now) non public information password on the internet, which would presumably raise even more furore. So why will this succeed? I'm sure that several equity research analysts have a conscience, which is hardly slaked by having to sugar coat reports to avoid seeing their bonus pools shrunk/relationships harmed. Given the facility to submit reports anonymously, with the editing/fact checking being done by that website, I can almost visualize a Wikipedia type crowdsourcing of work, culminating in a series of reports. Of course, it would be negatively biased, but we have enough positive stuff out there! Relying on 100% public(or verifiable) information may seem restrictive, but as websites like footnoted.org show, there is often gold hidden away in those filings which analysts miss due to information overload or just lack of interest/training. Hence, this scope should permit scalability(easier to verify/fact check reports) and make markets more efficient.