Chapter 8 Naturally Since Those Firms Are Simply Groups

CASE 8.10

INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Synopsis

This case examines the development of the accounting profession in India with a particular

focus on the regulatory agency that has oversight responsibility for that profession. After gaining

independence from Great Britain in 1947, India’s government established a regulatory structure for

its financial reporting system generally patterned after that of Great Britain and, to a lesser extent,

the United States. India’s Parliament passed a federal securities law that requires public companies

to issue annual financial statements audited by an independent accounting firm. Unlike in the United

India’s central government adopted a protectionist mindset after the nation gained independence

from Great Britain in 1947. The central government’s overall social and economic policy changed

abruptly in 1991 when a nationwide financial crisis nearly bankrupted the country. The so-called

“liberalization movement” that began in 1991 encouraged foreign companies and professional firms

to become actively involved in the Indian economy. The major international accounting firms took

advantage of this new mindset to significantly expand their operations in India.

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Institute of Chartered Accountants of India—Key Facts

Case 8.10 Institute of Chartered Accountants of India 357

1. Britain’s colonial rule left a lasting imprint on India’s financial reporting system, including its

accounting profession and independent audit function.

2. In 1949, India’s Parliament created the Institute of Chartered Accountants of India (ICAI), a

federal agency, to oversee the nation’s accounting profession and independent audit function.

4. India’s independent audit function is perceived to be less rigorous than that of the United States;

5. In 1991, India’s central government dropped its protectionist mindset, which encouraged the

major international accounting firms to greatly expand their operations within India.

7. In 2002, the ICAI commissioned the Chartered Accountants’ Action Committee for Level

8. The CAAC’s report created a storm of controversy by accusing the MAFs of engaging in a

9. The CAAC report called for a wide range of sanctions to be imposed on the MAFs, including

measures that would drastically curtail, if not eliminate, those firms’ operations in India.

11. The International Federation of Accountants (IFAC) encouraged the ICAI not to implement the

12. The ICAI’s principal response to the CAAC report was to adopt measures to strengthen the

global competitive position of Indian accounting firms; these measures included attempting to

establish reciprocity agreements with other countries.

Instructional Objectives

358 Case 8.10 Institute of Chartered Accountants of India

1. To identify the comparative strengths and weaknesses of different regulatory structures for

financial reporting systems.

Suggestions for Use

To launch discussion of this case, consider requiring one or more students or groups of students

to provide an update regarding recent developments within the Indian accounting profession (see

case question #1). If you are fortunate enough to have Indian students in your class, you might ask

Suggested Solutions to Case Questions

1. Consider assigning individual student groups specific issues or topics to investigate and report

on in class. For example, you might have one group research recent policy decisions made by the

2. Advantages of having the accounting profession regulated by state agencies:

(a) State regulatory agencies, because they are smaller than federal agencies, can likely respond

Case 8.10 Institute of Chartered Accountants of India 359

(a) State regulatory agencies may be more prone to being pressured (successfully) by the parties

3. Your students may not grasp the subtle distinction between a “watchdog” and a “bloodhound,”

but, in my view, the major difference is that a “watchdog” would likely be a passive party in terms of

its professional responsibilities, while a bloodhound would be much more proactive in that regard.

So, in an auditing context, a “watchdog” auditor would effectively stand as a sentinel over the

4. Clearly, there is a distinct difference of opinion on this issue. The ICAI and its proxy, the

CAAC, believe that the Big Four firms circumvented the intent of Indian laws and regulations by

establishing alliances with domestic accounting firms; while the Big Four firms apparently believed

5. The Federal Trade Commission effectively forced the accounting profession to drop its ban on

advertising and related activities in the late 1970s. Many critics of the accounting profession point to

that decision as the cause of the serious problems that befell large accounting firms over the

360 Case 8.10 Institute of Chartered Accountants of India

Listed next are specific “pros” and cons” associated with allowing professionals to advertise:

Pros:

—Advertising supposedly allows the “cream to rise to the top.” By permitting professionals to

advertise—assuming that such advertising is truthful, the most highly qualified professionals

should garner a disproportionate share of the given market and/or command a disproportionately

Cons:

—As demonstrated by the recent history of the accounting profession within the U.S., largely

unconstrained advertising and marketing of professional services can lead to dysfunctional

outcomes. For example, the advent of intense commercialism within the accounting profession

6. Listed next are the key parties impacted by regulatory policies intended to protect a given

profession from foreign competitors.

—Protectionist policies prevent foreign competitors from taking control of the given country’s

profession and the related markets for professional services and thus protect the economic

livelihoods of that country’s professionals.

Case 8.10 Institute of Chartered Accountants of India 361

—Obviously, foreign professionals who want to practice in the given country are deprived of the

opportunity to expand their practices and revenue base.

—Protectionist policies limit the number of professional service providers that consumers have to

Are policies specifically intended to protect a given country’s professionals from foreign

competition ever justified or appropriate? Of course, economic “protectionism” is not an issue

relevant only to markets for professional services. Choose any industry or profession and you will

almost certainly find at some point in history that protectionist economic policies have been a major

issue or concern within that industry. Arguably, the most heated debate in this context currently

involves so-called “medical tourism.” The surging costs of medical services in major industrialized

7. The key issue that the NASBA focuses on in this context is the competence of foreign

professionals. The NASBA’s point of view is that its primary responsibility is to ensure that only

qualified accountants are allowed to “ply their trade” in the U.S. For this reason, the NASBA has

established rigid standards for foreign professionals who want to sit for the IQEX examination. As

pointed out in the case, professionals from only a handful of countries currently qualify to take the

362 Case 8.10 Institute of Chartered Accountants of India

8. Since the date this case was written, there may be new “developments” in this area. So, you

might have students research this issue before addressing this question.

As implied in the case, many accounting firms are reluctant to disclose to their clients that they

are outsourcing services provided to those clients to foreign countries. Students typically express the

point of view that firms should voluntarily make such disclosures to their clients. These students see

such disclosures as consistent with the general principles of the AICPA Code of Professional

Conduct, in particular, the “public interest,” “integrity,” “objectivity,” “due care,” and “scope and

nature of services” principles. A review of each, or any, of those principles could easily lead one to