WHY GOVERNMENTS SHOULD ISSUE EQUITY SHARES

This is a suggestion for Central, State Governments & Local Government Bodies such as Municipalities to issue Share Capital and the shares to be traded on Stock Exchanges.

The purpose is to have an online, independent measure of performance of the Government bodies and thereby instil competition.

Following are the suggested steps -

a.       The bodies should issue share capital for which the Initial Public Offers (IPOs) should be linked to the size of the State/Municipality e.g., population, land mass, etc. Thus, the IPO size could be Rs 1 lac per capita

b.      The national accounting body, such as the Institute of Chartered Accountants of India in case of India, should frame accounting policies and standard reports that each class of Government body should publish. The frequency of these reports should not be more than 3 months. The suggested reports are Cash Flow, Profit & Loss account, Balance Sheet, etc.

c.       As profit is not the main objective of Government bodies, additional information should be incorporated such as life expectancy, per capita income, agricultural production, income distribution, index for green initiative, etc. Some suggestions are -

Sr no	Suggested Parameters	2015/16	2014/15	2013/14	± % 15/16 vs. 14/15
1	Per Capita
2	Life expectancy
3	Crime rate
4	Literacy rate
5	International Tourists
6	Indian Tourists
7	Unemployment %
8	Industrial production
9	Agricultural production
10	Service sector
11	Others as may be felt necessary

The above list is indicative. Experts should add/delete/modify the same

d.      As the primary purpose of the exercise is to independently measure the performance of the Bodies online, dividends should not be allowed to be declared. The returns to shareholders should come through Bonus, splitting of shares, trading in them, etc.

e.      There would be no Annual General Meetings, Extraordinary Meetings, Board Meetings, etc. which normal corporates have. The parameters as listed above, the regular conduct of the Assembly as broadcast on TV channels, the schemes and measures announced for the betterment of the State, etc.  would be reflected in the Share price of the State

f.        In the case of a State Government, the Chief Minister would be considered as the de facto CEO and his Ministers the Board of Directors

g.       The next Assembly or General elections would signify as the (Annual) General Meeting

h.      Measures need to be put in place so that the Share price cannot be rigged closer to election date. One of the measures could be freezing the price of the respective State’s share on the date on which elections are announced. In other words, buying and selling of shares can be conducted at the price prevailing on the date elections are announced and this price freeze to be released on the next day after polling is complete. To further limit rigging of share prices, average price over a period could be considered at the time of election

i.         Institutions controlled (even partly and remotely) by Governments should not be allowed to buy Government shares

The above is only suggestive and not comprehensive. Being a novel concept, if it is decided to be adopted, comprehensiveness would have to evolve as it gets implemented. Mock exercise of measures – reports and additional information – should be worked out with actual past data to enable refinement.

PANAMA EXPOSÉ: AUDITORS, CAN WE SEE YOUR TEETH?

The Panama exposé is creating not just ripples, but tsunamis in financial and political circles. Many institutions/persons whose names have figured had to clarify that they have done nothing wrong legally. Even if such legally correct names are ignored, the revenue which governments lost could be substantial. Incidentally, IMF estimates that US$1.5 to 2 trillion is paid annually as bribes worldwide, which is equivalent to around 2% of global GDP. On per capita basis this translates to around US$250 for the population of the world. Governments have initiated steps to nab defaulters. But more needs to be done; otherwise it is equivalent to treating the symptoms rather than the disease.

A.      Plight of Tax Payer

Taking a cue from the exposé, before looking for lacunae with Audit processes or doubting a section of Mankind, let us ask ourselves - is there clarity, stability and consistency in our legislations? Does the taxpayer harbor a feeling that the tax systems uphold equity? Do we have systems to ‘listen’ to tax payers and tweak our laws? The answer to these questions is by and large – no. There are too many laws, too many changes and huge amount of litigation. It’s like a jungle out there, where the road used yesterday may be nonexistent today and a new road formed somewhere else. Just to give an example of the Indian scenario, the government scrapped 1200 laws! Further, within the laws which have survived this axe, the government has started deleting/reviewing irrelevant provisions. And when a particular action affects more than one law, sometimes conflicting advice from specialists of each law leaves the tax payer at crossroads. Authors of laws – international, national, state, municipal levels, etc. - work in isolation. Hence the plight of the tax payer remains secondary whilst meeting the objective of revenue (or other) remains primary. Today the procedure of drafting laws is skewed in favor of a top-down approach rather than a mix between it and a down-top approach.

The issue of tax ‘planning’ has attained such a gigantic proportion that if one desires to start a business, you should be more knowledgeable about the nuances of taxes and laws rather than the business itself!

B.      Suggestions

1.       Auditing as a stream of Education from college level

If one tries to find the root cause for the diversion of wealth, it is the confusion between priorities by a section of Mankind. It may be a cultural issue. The remedy for this is not uniform and is difficult to administer. As experience suggests, habits ingrained inside a matured adult are difficult to change. Therefore, the primary macro level suggestion is – instead of attempting to change, let us concentrate on training the new generation - that is to introduce a new stream of education called Auditing from the college level. This stream of study shall be at par with streams of Science, Commerce, Arts, etc., and should be one of the options which students can choose from for higher studies. Apart from training students in techniques & skills of Auditing, it should inculcate human values - awareness, concerns, effects and fears for wrong doing. Information Technology audit, Forensic audit, criminal laws, investigation skills, etc. should be introduced to the students. Auditor is expected to be Jack of All & Master of All. Hence there is a lot to include in the curriculum. Risk assessment & mitigation is a large subject, having broad connotations. Successful students should pass out as Bachelor/Masters/Doctorates of Auditing.  

It could be argued that the existing education systems are supposed to inculcate these Human values. However, the reason for suggesting the Auditing stream is that at present these values are taught as a child, hence a booster dose is needed as adulthood approaches. Also, institutions such as The Institute of Internal Auditors or Institute of Chartered Accountants exist for the technical education on Auditing. However, these have fallen short in preventing/addressing the issue.

This suggestion, if agreed to implement, would be too slow in obtaining results.

2.       Reporting structure for Internal Audit function

For Audit to be effective, the main ingredient required is its Independence. However, by and large, this prerequisite has not been effectively granted to the Auditing fraternity. Mostly, both legislative & administrative means adopted have failed the feasibility test. Ideally, the function should report to the ‘Stakeholders’. Unfortunately, in many Organizations the function reports to CEO or sometimes even the CFO. Further, where this aspect is correctly taken care of, it is not uncommon that the reporting gets blurred because the Auditor reports functionally to a group of persons (Audit Committee), thereby sacrificing timeliness. In addition, whilst deliberating on different members’ valuable views on audit issues, there arises an apprehension that the organizational position of the Audit function may get compromised. The same approach needs to be maintained in case of appraisal of the Auditors for the purpose of periodic rewards or increment. The Audit Committee should take into consideration the organizational trend in recommendations of rewards and ensure equity for Auditors in the process.

To an extent outsourcing of the function helps. This is because the Auditors so appointed are not entirely dependent on the client for their income. However outsourcing compromises the essentials like having deep understanding of the Organization, its culture, consistency & continuity of audit personnel.

3.       Government role

Firstly, make laws simple. This needs to be addressed not only within one region’s laws, but across regions. Here regions could mean nations, states, municipalities, etc. Next, in many countries the legal process takes umpteen years thereby losing its characteristic of acting as a deterrent. Whistle blower legislation needs to be put in place. The ambiguity in legislations needs to be eliminated. Introducing Auditing as one of the streams of education is within the powers of the Government. Creating a framework for the Auditors to be more independent by strengthening Auditor bodies is one more thought.

4.       Systems & Information Technology

Introduction & improvement of IT Systems is likely to bring the fastest results. It has the ability to eliminate/restrict manual intervention in decision making & hence curb arbitrariness. Most of the steps leave electronic trail, and thus it becomes difficult to steal or hide what is stolen. Fortunately, this solution is getting administered for other reasons, curbing graft remaining as a byproduct of this development. The suggestion, therefore, is not only to undertake this solution for other reasons, but make curbing graft as the main reason. The world has implemented only a miniscule portion of what is available today. More IT system inventions would be found which will help. Auditors can and should recommend introducing IT systems into processes – it is a big tool for risk identification and mitigation. In addition it assists in finding defaulters as they leave trail of electronic footprints. Sometimes, this non invasive method also warrants showing of teeth on part of the Auditors for getting systems implemented!

To conclude, is it not better to start charity after addressing one’s legal and moral obligations?

Last write up from me - http://www.rediff.com/money/2008/oct/15bcrisis.htm