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
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