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
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
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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.
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But, That is Not Enough
• All the Seven Wonders of the Ancient
World?
– Great Pyramid of Giza
– Hanging Gardens of Babylon
– Temple of Artemis
– Statue of Zeus at Olympia
– Mausoleum of Maussollos
– Colossus of Rhodes, and the
– Lighthouse of Alexandria.
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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
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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?
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Elements of Accounting to
Modernize the Indian Economy
•
•
•
•
•
•
•
•
•
•
•
•
•
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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
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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.)
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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
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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)
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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
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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
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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
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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
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Taxation
• Efficiency of revenue collection (costbenefit analysis)
• Efficiency of audit decisions in taxation
• Economic analysis of consequences of
taxation
• Alternative means of revenue collection
(VAT vs. sales tax, etc.)
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Internal auditing
• Role and extent of internal auditing
• Reporting relationships of internal auditors
(executives, board, etc.)
• Divide of work between internal and
external auditing
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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
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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
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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
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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
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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
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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?
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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
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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
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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?
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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.
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Sketch of Dujiangyan Weir
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Dujiangyan Weir
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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
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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
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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
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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
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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
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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.
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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 humanresources 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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World University Rankings
Population
(millions)
1,321
7
1,169
128
1,250
3,875
21
33
4
Top 20
Top 50
Top 100
Top 200
China
1
2
2
6
Hong Kong
0
2
3
4
India
0
0
2*
3**
Japan
1
2
3
11
Other Asia
1
1
3
9
Sub-total
3
7
13
33
Australia
1
6
7
13
Canada
0
3
3
7
New
0
1
2
2
Zealand
U.K.
61
4
8
16
30
U.S.
303
11
22
33
55
Total
6,396
20
50
100
200
Source: from the survey reported in The Times Higher Education Supplement,
October 6, 2006. Each column subsumes the previous column: a university in the top 20
is also in the top 50, 100 and 200.
* IITs, IIMs
** IITs, IIMs, JNU
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The world’s top 200 universities
2006
rank
2005
Name
rank
Country
Peer
Int'l
Int'l
Recruiter
review
faculty students
review
score
score
score
(10%)
(40%)
(5%)
(5%)
Faculty Citations
/
/
Overall
student
faculty
score
score
score
(20%)
(20%)
1
1
Harvard
University
US
93
100
15
25
56
55
100.0
2
3
Cambridge
University
UK
100
79
58
43
64
17
96.8
4=
7
Yale
University
US
72
81
45
26
93
24
89.2
14
15
Beijing
University
China
70
55
5
11
69
2
67.9
16
23
Australian
National
University
Australia
72
30
48
33
38
13
64.8
19=
22
National
University
of Singapore
Singapore
70
44
82
47
22
8
63.1
19=
16
Tokyo
University
Japan
72
29
8
10
35
27
63.1
21
24
McGill
University
Canada
57
61
31
33
52
10
62.3
28
62
Tsing Hua
University
China
45
34
22
9
84
1
56.1
33=
41
University
of Hong
Kong
Hong
Kong
48
40
84
27
46
6
54.8
57
50
Indian
Institutes of
Technology
India
45
34
0
1
27
2
44.5
68
84
Indian
India
Institutes of
Management
60
2
41.6
183=
192
27
4
29.3
Jawaharlal
India
0
Shyam31Sunder:46Accounting
as 10
Infrastructure
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14
2
6
40
DOCTORATE DEGREES AWARDED (India/US)
(Sources: Universities Grants Commission and National Science Foundation)
Field of Study
2002
2003**
2004**
Arts
4,524/ 5,029
6,144/ 5,018
6,774/ 5,013
Science
3,955/ 19,505
4,976/ 19,995
5,408/ 20,497
Commerce/ Management
728
954
1042
Education
4,20/ 6,491
527/ 6,638
593/ 6,633
Engineering/Technology
734/ 5,077
833/ 5,279
908/ 5,775
Medicine
219// 1,653
246/ 1,633
268/ 1,719
Agriculture
838
1012
1048
Veterinary Science
110
136
189
Law
110
146
129
Others*
336
444
743
Total
11,974/ 39,953
15,328/ 40,740
16,602/ 42,117
*Others includes Music/Fine Arts, Library Science, Physical education,
Journalism, Social work etc.
** Provisional
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Infrastructure
PhD Degrees Awarded in Science
and Technology
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Estimated Demand for PhDs
(in Higher Education)
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State of Higher Education
Gross Enrollment
Ratio (Relevant age)
1995
2000
61.7
80.7
Asia/Oce. 28.8
Europe
Arab
%
Change
Teachers per million
population
%
Change
1995
2000
31
2980
3205
21.2
42.1
46
2162
3205
48.2
32.3
50.7
57
2042
2393
17.1
11.5
14.9
30
653
730
11.8
Latin/Car. 15.7
19.4
24
1422
1608
13.1
India
6
7.2
20
436
434
-0.4
World
Total
12.5
17.4
39
964
1084
12.5
North
America
Source: World Education Report, 1995 and 2000 (UNESCO)
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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?
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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
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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.
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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 accountingrelated services listed above.
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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
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Thank You!
Shyam.sunder@yale.edu
www.som.yale.edu/faculty/sunder