1. 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, USA Accounting Research Conference Indian School of Business, Hyderabad December 17-19, 2007

2. Shyam Sunder: Accounting as Infrastructure 2 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

3. Shyam Sunder: Accounting as Infrastructure 3 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.

4. Shyam Sunder: Accounting as Infrastructure 4 But, That is Not Enough All the Seven Wonders of the Ancient World? –Great Pyramid of GizaGreat Pyramid of Giza –Hanging Gardens of BabylonHanging Gardens of Babylon –Temple of ArtemisTemple of Artemis –Statue of Zeus at OlympiaStatue of Zeus at Olympia –Mausoleum of MaussollosMausoleum of Maussollos –Colossus of Rhodes, and the –Lighthouse of Alexandria.Lighthouse of Alexandria

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6. 6 Here is another list prepared later OK. So you think this is a Mediterranean list prepared by the Greeks. Stonehenge Colosseum Catacombs of Kom el Shoqafa Great Wall of China Porcelain Tower of Nanjing Hagia Sophia Leaning Tower of Pisa Other sites that have been mentioned include: Cairo Citadel[6]Cairo Citadel[6] Ely Cathedral[7]Ely Cathedral[7] Taj Mahal[8]Taj Mahal[8] Cluny Abbey[9]Cluny Abbey[9]

7. Shyam Sunder: Accounting as Infrastructure 7 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

8. Shyam Sunder: Accounting as Infrastructure 8 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?

9. Shyam Sunder: Accounting as Infrastructure 9 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

10. Shyam Sunder: Accounting as Infrastructure 10 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.)

11. Shyam Sunder: Accounting as Infrastructure 11 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

12. Shyam Sunder: Accounting as Infrastructure 12 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)

13. Shyam Sunder: Accounting as Infrastructure 13 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

14. Shyam Sunder: Accounting as Infrastructure 14 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

15. Shyam Sunder: Accounting as Infrastructure 15 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

16. Shyam Sunder: Accounting as Infrastructure 16 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

17. Shyam Sunder: Accounting as Infrastructure 17 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.)

18. Shyam Sunder: Accounting as Infrastructure 18 Internal auditing Role and extent of internal auditing Reporting relationships of internal auditors (executives, board, etc.) Divide of work between internal and external auditing

19. Shyam Sunder: Accounting as Infrastructure 19 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

20. Shyam Sunder: Accounting as Infrastructure 20 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

21. Shyam Sunder: Accounting as Infrastructure 21 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

22. Shyam Sunder: Accounting as Infrastructure 22 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

23. Shyam Sunder: Accounting as Infrastructure 23 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

24. Shyam Sunder: Accounting as Infrastructure 24 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?

25. Shyam Sunder: Accounting as Infrastructure 25 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

26. Shyam Sunder: Accounting as Infrastructure 26 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

27. Shyam Sunder: Accounting as Infrastructure 27 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?

28. Shyam Sunder: Accounting as Infrastructure 28 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.

29. Shyam Sunder: Accounting as Infrastructure 29 Sketch Map & Introduction to Dujiangyan WeirSketch Map & Introduction to Dujiangyan Weir IndexA: 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. IndexA: 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 WeirSketch Map & Introduction to Dujiangyan Weir IndexA: 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. IndexA: 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

30. Shyam Sunder: Accounting as Infrastructure 30 Dujiangyan Weir

31. Shyam Sunder: Accounting as Infrastructure 31 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

32. Shyam Sunder: Accounting as Infrastructure 32 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

33. Shyam Sunder: Accounting as Infrastructure 33 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

34. Shyam Sunder: Accounting as Infrastructure 34 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

35. Shyam Sunder: Accounting as Infrastructure 35 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

36. Shyam Sunder: Accounting as Infrastructure 36 Sharply Rising Salaries Suggest Shortages India Has Highest Salary Hikes in Asia By THE ASSOCIATED PRESS Filed 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.Hewitt Associates

37. Shyam Sunder: Accounting as Infrastructure 37 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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41. Shyam Sunder: Accounting as Infrastructure 41 DOCTORATE DEGREES AWARDED (India/US) (Sources: Universities Grants Commission and National Science Foundation) Field of Study20022003**2004** Arts4,524/ 5,0296,144/ 5,0186,774/ 5,013 Science3,955/ 19,5054,976/ 19,9955,408/ 20,497 Commerce/ Management7289541042 Education4,20/ 6,491527/ 6,638593/ 6,633 Engineering/Technology734/ 5,077833/ 5,279908/ 5,775 Medicine219// 1,653246/ 1,633268/ 1,719 Agriculture83810121048 Veterinary Science110136189 Law110146129 Others*336444743 Total11,974/ 39,95315,328/ 40,74016,602/ 42,117 *Others includes Music/Fine Arts, Library Science, Physical education, Journalism, Social work etc. ** Provisional

42. Shyam Sunder: Accounting as Infrastructure 42 PhD Degrees Awarded in Science and Technology

43. Shyam Sunder: Accounting as Infrastructure 43 Estimated Demand for PhDs (in Higher Education)

44. Shyam Sunder: Accounting as Infrastructure 44 State of Higher Education Gross Enrollment Ratio (Relevant age) % Change Teachers per million population % Change 1995200019952000 North America 61.780.7312980320521.2 Asia/Oce.28.842.1462162320548.2 Europe32.350.7572042239317.1 Arab11.514.93065373011.8 Latin/Car.15.719.4241422160813.1 India67.220436434-0.4 World Total 12.517.439964108412.5 Source: World Education Report, 1995 and 2000 (UNESCO)

45. Shyam Sunder: Accounting as Infrastructure 45 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?

46. Shyam Sunder: Accounting as Infrastructure 46 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

47. Shyam Sunder: Accounting as Infrastructure 47 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.

48. Shyam Sunder: Accounting as Infrastructure 48 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.

49. Shyam Sunder: Accounting as Infrastructure 49 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

50. Thank You! Shyam.sunder@yale.edu www.som.yale.edu/faculty/sunder