“TRADE IN SERVICES: OPPORTUNITIES AND CONSTRAINTS”
Project Study Sponsored by Ministry of Commerce Government of India
Executed by Indian Council for Research on International Economic Relations India Habitat Centre, New Delhi 110 003
Report on TRADE IN ACCOUNTANCY SERVICES
Co-ordinator: Dr. TCA Anant Chief Co-ordinator: Mr. B.K. Zutshi
Table of Contents December 1999
Table of Contents
1. INTRODUCTION ..................................................................................... 1 2. THE ACCOUNTING PROFESSION: SOME GLOBAL TRENDS ....................... 3 3. THE PROFESSION IN INDIA..................................................................... 6 4. REGULATION ........................................................................................ 8 5. PROSPECTS FOR TRADE ........................................................................10 6. COMMITMENTS ....................................................................................12 7. MUTUAL RECOGNITION AGREEMENTS .................................................15 8. POLICY INITIATIVES .............................................................................18 9. ISSUES FOR GATS 2000......................................................................18 10. DOMESTIC POLICY INITIATIVES .........................................................22 11. REFERENCES .....................................................................................25
Trade in Accounting Services December 1999
1. Introduction Accounting in India has its roots in the ancient professions of the Munim and the Munshi. The modern profession of Accounting however owes its rise to the rise of the limited corporation (The Joint Stock Companies Act in England) and the statutory requirements of publishing accounts. The increased reliance on direct taxes, especially in the post war period saw the first natural extension of accounting /auditing services to tax consulting in the 1950s. As information technology became important in the late 1970s and 1980s, accounting firms especially the Big six expanded to include consulting services. Trade in services, including professional services like accounting has been expanding rapidly in recent years. However, unlike in the case of trade in goods it is difficult to get data on turnover and volume and direction of trade. Accountancy services are no exception to this general pattern. In India, as in other countries, accounting is entirely structured as partnerships, thus the major data source would be through the Income Tax and unfortunately, there is no public data from this1. Data from the institutes of accountants are on the number of accountants in practice but is not very informative on the volume and distribution of business. In addition the limited International data available on service trade typically underestimates the volume and value of trade. i)
ii)
1
Services "trade" is largely establishment based, that is, it depends on commercial presence. Thus, countries will be able to show income only from flows originating from foreign affiliates of domestic firms. These flows are however based on their gross earnings and not necessarily those from Accounting. Further, retained earnings, would not figure in trade flows. More and more services transactions and businesses are multinational in character and do not conform to a simple export-import model. For example: An Indian Chartered Accountant working for a large International Big four firm in the Middle East.
As a consequence most services are under reported in the national accounts. In the case of most professional services the accounts only record earnings of such individuals as estimated from NSS and CSO surveys. The collections of service tax may eventually provide a more direct estimate of volume of business but there too we have no immediate information.
1
Trade in Accounting Services December 1999
These type of examples illustrate that contemporary services transactions simply do not fit the traditional concept of trade in goods where export/import sales are conducted on a bilateral basis in which the sales values are known and trade flows are quantifiable. In addition, Indian trade data is oriented to merchandise trade, with most service sector earnings classified amongst invisibles. This makes it difficult to get estimates by activities. Still we can get some sense of the overall commercial importance and structure of this sector. World trade in commercial services, measured on a balance of payments basis, accounted for around one-fifth of world exports of goods and services, which reached $6.5 trillion in 1997. In 1995, the European Union was the world's largest exporter of commercial services, accounting for close to 26 % of total global services' transactions, (42 % if intra-EU exports of services are included), compared to a share of 17% for the USA and 5 % for Japan. In aggregate value, the OECD accounts for over 81% of this trade. In accounting, global trade is dominated by what is termed as the big five (The merger of Price Waterhouse with Coopers and Lybrand reduced the big six to the big five.) In 1996 the then Big Six generated combined revenues of US$42.2 billion and employed 48,000 professional staff worldwide. Top revenue generators for 1998 were as follows (allowing for the mergers): Firm Pricewaterhouse Coopers Andersen Worldwide Ernest & Young KPMG Deloitte Touche and Tohmatsu
Global fee Income ($bn) 15.3 13.9 10.9 10.4 9
This report develops an outline for the prospects of growth in trade in accounting services and also outlines some key prospects for India. The first section outlines some major global trends in the profession, which will impact trade growth in accounting services globally and in India. We then do a brief review of the structure of the profession in India in so far as it impinges on the prospects for future development. We then in the third section briefly examine the structure of regulation and its implications for trade. The next three sections discuss trade prospects for India in accounting 2
Trade in Accounting Services December 1999
services, the structure of commitments and the regime for Mutual Recognition Agreements. Based on this discussion the last section draws policy conclusions for India at the multilateral level and at the level of domestic policy. 2. The Accounting Profession: Some Global Trends The world market for accountancy services is growing rapidly. Typically in most countries, accounting firms had enjoyed guaranteed revenues from mandated audit activities reserved for domestic firms. For example the questionnaire circulated by the WPPS reveals that in the OECD, services rendered by accountants in the OECD member countries vary slightly and include traditional accounting, audits and auditing of mergers or contributions in kind, and tax advice. In most countries accountants also provide management consultancy services, investment advice or act as expert witnesses. Further, nearly all countries seem to indicate that accountants do not provide legal services. Activities such as statutory audit are reserved for accountants and are regulated by law. Other activities, such as non-statutory audit or management consultancy are not regulated and are generally reported as not being reserved to specific practitioners. Despite these similarities, it needs to be stressed that accounting services are less regulated in some countries than in others. For example Germany, Norway and Portugal regulate more extensively than, for instance, Finland, the Netherlands and New Zealand. Only Switzerland reported that all activities are free.2 However, developments in E commerce, trade liberalization, the extension of the free market ideology and the development of a commonly accepted set of international accounting principles are combining to change that picture. The Transition economies of the eastern Europe and the exSoviet Union face the needs of a market-based economy. They require value-added accounting information to support financial lending decisions, mergers and acquisitions, stock market development, privatization of stateowned enterprises, valuation of public assets, attraction of foreign direct investment, audit of foreign firms, and improved efficiency of tax collection. At the other end of the spectrum, the New York Stock Exchange has allowed listed firms to submit financial statements prepared outside the U.S.A. provided they conform to international accounting principles. As this trend
2
COMMUNICATION FROM THE OECD Work in the Area of Professional Services, WTO S/WPPS/W/4/Add.1 1996.
3
Trade in Accounting Services December 1999
continues in other major markets, we expect a greater integration in the market for accounting services. With significant changes in markets and technology, accountancy is developing from its narrow, mainly audit and taxation base to a professional discipline encompassing a wide range of assurance-related services. Accountancy has already expanded to include services such as corporate finance, business recovery and solvency, forensic accounting, litigation support, and corporate security business. The major accounting firms are earning as much or more from their associated practices in general business advisory and information technology services. However, this growth of business has also increased the need for accountants to interact with other professionals and potentially face competition from them as well. Increases in both domestic and cross border mergers and acquisitions are creating opportunities for accountants with an extensive knowledge of the profitability and compatibility of a range of businesses operating in diverse financial environments. Services to be offered include investigation of bona fides, share valuation, feasibility studies, taxation strategies, etc. The growth in stock markets and increasing practice of domestic firms raising capital in foreign markets has tended to increase the demand for forensic accounting to provide for a check on corrupt practices. Clients, particularly those operating in multinational environments frequently want integrated solutions to support decision making. Thus, the Big Five firms are looking to acquire captive law firms in Europe and North America. And this may extend to include banking, brokers, and insurance. Electronic commerce is opening up entirely new areas: services for authenticating information asserted on the Internet, recording electronic transactions, ensuring data integrity and security, and protecting customer privacy. Opportunities will also grow in addressing computer-related crime and fraud. This is an area requiring high degree of interaction between accountants and software professionals. The concern for environmental issues and the increased legal activism on these matters has generated a demand for environmental and resource accounting (ERA). There has been a demand from the central pollution 4
Trade in Accounting Services December 1999
control board that and environmental statement be made as a mandatory part to the companies annual accounts. Internationally the green movement will put pressure on domestic firms seeking an international presence for conforming to these trends. This demand will require cooperation with other professionals such as engineers, lawyers and environmental scientists. However one consequence of this broadening of the profession is that non-traditional sources of competition have also been emerging. Computer service firms, along with computerized accounting packages are providing paid consultative assistance as offline help facilities. Engineers and of course more ubiquitously economists are emerging as sources of information for managerial decision-making. Credit rating services are providing alternatives to relying on audited statements on firm health.3 As the Industry expands the scope of the services it provides it is also facing some potential conflicts of interest. The cross selling of business advisory and other assurance services becomes more frequent, the independence of the audit practice can be undermined. KPMG has already faced criticism about how independent its practices as an ISO 9000 registrar and as ISO 9000 trainer/consultant are. These types of conflicts are increasing the demand for better regulation of the service. Finally we must point out that in addition to the expansion in scope of activities, the post nineties emergence of the ex-communist countries has created opportunities for accounting professionals experiences in free market activities. The lower cost of operations in India imply that global firms can locate some of their business in India, provided, the domestic regulations do not handicap them from doing so. At present most of this takes the form of Indian professional working abroad. The trends outlined above are present in the global market. India, due to its insularity and lack of integration has remained somewhat isolated from these processes. However with liberalization and globalization there are trends that India too will see similar processes at work. How well it responds to them is a function of its domestic framework to which we now turn.
3
It is true a rating agency will use audited statements as part of the information on the firm. But to the extent that the rating agency supplies the brand name, it affects the demand for and nature of the accounting firm.
5
Trade in Accounting Services December 1999
3. The Profession in India The Accountancy sector is regulated in India through a combination of both Law and Professional self-regulation. These are provided under the statutes creating the professional institutes of ICAI (hereafter referred to as the Institute) and ICWAI (Chartered Accountants Act, 1949 and the Cost and Works Accountants Act, 1959) and also through specific provisions in the Companies Act, the Income Tax Act and the Co-operative Societies Act. While the two are distinct professional bodies with different structures and requirements most of the discussion of this paper is focused on the practice of Chartered Accountancy rather than Cost Accountancy. The latter profession is smaller and primarily focused on a limited class of accounts (cost accounts) for manufacturing and mining companies.4 Further even though these accounts are critical from the viewpoint of domestic regulation, the scope for international trade in these services is rather limited. A number of issues concerning domestic regulation are similar for the two professions. Thus in the interest of coherence and brevity we focus attention on the larger profession. The Institute of Chartered accountants had 70,963 members as of 1-41995 (84,180 by 1/4/1998) and approximately 2,940 of these were practising abroad5. One should note that this does not adequately describe the number of people of Indian origin serving as Accountants abroad. A casual inspection of major international accounting journals would indicate their significant presence in the profession. This latter group of professionals would be those who had qualified abroad and thus not be members of the association. The Chartered Accountants Act, 1949 enacted for the regulation of the profession of chartered accountants by the Parliament of India allows practising chartered accountants to form partnership firms. The ICAI in addition imposes the following restrictions on such partnerships. •
membership of the ICAI
•
Regulation 190, The CA regulations 1988 state that the firms trade name must have a nexus with an individual or group of Individuals. Abstract names are not allowed.
4
The size is dictated by the potential demand for services of the profession. Unlike the case of ICAI, most members of ICWAI work for either the public sector or Private Industry. (See the Indian response to the WPPS questionnaire S/WPPS/W/7/Add.17) 5
The Chartered Accountant Feb 1997,
6
Trade in Accounting Services December 1999 •
In addition to these restrictions of the ICAI, additional restrictions on size comes from sections 11 and 224 of the companies Act which restricts the numbers of partners to 20 and the number of statutory audits of companies to 20 (with no more than 10 large ) per partner.6
It is important to note that the profession is not restricted by citizenship. The big Five accounting firms are present in India, and there is limited international presence outside of these firms as well. The quality of education and training provided under the auspices of institute has been of a high order.7 Further as a consequence, the country has developed a large body of qualified professionals who have been rendering quality services at a low cost. Unlike other professional areas, these institutes have maintained high standards of ethical functioning and have active professional panels for this purpose. Thus in professional services accounting and allied services have a number of advantages in being able to deal with the opportunities of globalisation. However, there are a number of areas of weakness that remain. It is to these we now turn. The Institute at present does not recognise any foreign qualifications. The reason being lack of reciprocity. Till 1995, the institute had recognised UK qualifications. Reciprocity has been often justified on grounds of national honour, professional self -respect and also to use as a "bargaining chip". While these are valid it is important to note that these lack of recognition has had a serious consequence for the opportunities for employment of Indian professional's abroad. Further under the framework of GATS and the WTO, reciprocity is no longer an admissible basis to justify policy. The agreement and subsequent guidelines have provided for a framework for mutual recognition, which needs to be, made use of. We return to this discussion a little later in the context of Mutual Recognition Agreements under GATS. The regulations of practice under the Chartered Accountants Act prohibit a accountant from advertising, soliciting custom, paying commission, brokerage or share of profits to any body other than another accountant.
6 7
The mew Companies Bill seeks to raise this to 25 with no restrictions.
Though there are members of the profession who feel even this could be enhanced by improvements in the quality of practical training, especially by small firms.
7
Trade in Accounting Services December 1999
In addition to the restriction imposed by the Institute, there are restrictions, which arise from the law on partnerships which limits the number of partners in a firm to twenty and also has no provisions for limited liability. One implication of all of these has been to create a rather fragmented market for these professionals. There are almost no All India firms of accountants except for those associated with the big five (though informal arrangements do exist) The average size of the accounting firm is small at close to two! This structure handicaps the Indian professional from taking full advantage of the potential market in accountancy services. 4. Regulation At present the industry in India and across the world is largely regulated by domestic, self regulatory bodies.8 Though " The degree of selfregulation, which has historically been very significant in the profession in many countries, has decreased in the recent past, for example as a result of the implementation of EU Directives and of similar legislative initiatives elsewhere."9 Self-regulation has a number of advantages, first it adheres to the principle of the most informed agent being the regulator. It has the potential to be flexible and innovative. The costs of regulation are borne by the beneficiaries. However, self-regulation suffers from some drawbacks, which need to be kept in mind on discussions on public policy. Firstly, one must note that in this case the concept of regulatory capture is immediate, as by definition the regulated are the regulators. Further, there is a difficulty in separating the interests of maintaining quality with the desire to limit competition via the restrictions of new entry. It has often been argued that this is the case with the medical profession in 8 See also the discussion in WTO: Synthesis Of The Responses To The Questionnaire On The Accountancy Sector Note by the Secretariat S/WPPS/W/11
9
The Accountancy Sector Note by the Secretariat S/WPPS/W/2
8
Trade in Accounting Services December 1999
the US. In view of this, it is important that conditions for entry to the profession should be a transparent and linked to very obvious requirements of training and education.10 Secondly, concerns for the existing members may make the regulator to modify institutional forms. Part of the resistance, of the established elements of the profession in India, to demands for corporate forms, advertising and removal of restrictions on foreign participation are, it has been argued, based on these grounds. In addition to the concerns for competition as the class of services provided by the profession expands, the need for regulation expands as well. Thus by the same token that greater range of services would need accountants to collaborate with software engineers, lawyers, economists, engineers etc, the same professionals would need to be involved as regulators as well. While these are issues that are being discussed across the profession, it is also true that countries will have to evolve their own responses to this phenomenon11 . To illustrate the nature of the problem here, consider the dilemma posed by integration of legal services and accountancy. One profession is geared to confidentiality and protecting client interest while the other is oriented to disclosure and public policy. Compromising on either could have serious effects for either profession. The example illustrates the need for very careful coordination between different regulators, the Institute and the Bar Council, but will also need to resolve issues of control, and conflict amongst the regulators. Cross border supply & multi-national presence would need greater cooperation between regulators in different countries. To some extent this has happened with the creation of the IASC (International Accounting Standards Committee) and IFAC (International Federation of Accountants). However, the publications of this body are recommendatory only. In India the Institute has played a major role in adopting international standards but increasingly as we move to a unipolar world dominated by the US it may be necessary to have tighter adherence to the US GAAP. The major limitation here still lies within the Govt. and the corporate structure, which need to increase the demand for such standards in disclosure. The Indian accounting profession has the requisite training to supply these services.
10
11
Thus for instance the framework of Article VII provides an adequate basis to maintain quality and provide adequate competition from alternative sources. IFAC has constituted a committee to examine ethical issues in multi disciplinary practices.
9
Trade in Accounting Services December 1999
Thus while we noted the trend for a globalised market place, domestic regulations tend to keep this market fragmented. In India a consequence of regulation has been a fragmented market with small firms. One oft heard concern is that how will these firms cope with the competition from larger international firms. This concern is spurious. The markets served by smaller and larger firms are complementary and not substitute. The larger firm will take up increasingly the demand from large globalised firms seeking international markets. Secondly, Indian professionals will still largely staff small or large firms, this is because we have a considerable comparative advantage in educated professionals. This fear is often a reflection based on the unexpressed concern of current market leaders who may lose share to newer (maybe younger) and more dynamic professionals. 5. Prospects for Trade Discussions of service trade distinguish between four modes of supply •
Cross-border trade, where the trade takes place from one country into the other. Only the service itself crosses the border. (e.g. international telephone calls)
•
Consumption abroad, where the customer travels to the country where the service is supplied. (e.g. tourism)
•
Commercial presence, where the supplier establishes a commercial presence abroad. (e.g. foreign banks)
•
Movement of natural persons, where the provider of the service crosses the boarder (e.g. consultants)
To understand the demand for accounting services, we must recognize that this demand is a derived demand. It originates in the requirement of the client to meet either statutory requirements or management needs. 12 The dominant, mode of supply for accounting services is through commercial presence. This is because accounting professionals believe that clients are best served through personal contact and the development of intimate knowledge of local market conditions. Further, firms operating across national borders appreciate the convenience of dealing with the same firm in different regimes. Note, this type of firm could help the client meet statutory obligations in more than one legal regime. 12
Statutory requirements could arise from restrictions on company law or for raising funds.
10
Trade in Accounting Services December 1999
Consumption abroad13 is the next most important form of trade, the nature of services provided here would be more limited. The client would typically seek services in the country of origin to meet local statutory or management needs. For example, an Indian firm would buy the services of a New York accountant for meeting either its management goals in the US or to satisfy US reporting requirements. Movement of Natural persons, at present, is not significant (except within the European community and between the USA and Canada) except through the vehicle of permanent or long duration migration. This is largely because there have been few vehicles for short-term movement of professionals in this area.14 Cross border trade, where say a Indian firm, buys services abroad to meet Indian requirements, would also at present, be virtually negligible. This is because of the nature of domestic regulation, most countries require compliance with domestic laws. Further, the accountant is a facilitator who intercedes on behalf of the client to different groups: the Government, stock exchange investors etc. Geographical distance makes this interceding rather unlikely. However, there are some trends, which are diluting this. As countries, under pressure from GATS, and integration in the trade of goods, move to harmonization of standards of accounting, the spread of MRA's imply a greater reach of recognition. It is likely that clients could receive accounting services across national frontiers. At present, the prospect of such trade is limited inside free trade areas rather than globally. However, growth in both cross border trade & consumption abroad raise issues related to electronic delivery. This raises a number of distinct issues related to the use and acceptability of electronic certification. These concerns are similar to those raised in e-commerce in other areas. The conceptual policy issues in cross border trade or consumption abroad are unrelated to the additional problem of e-commerce. Since that is being taken up as a separate item, horizontal commitments could ensure its applicability to accounting. 13
The difference between consumption abroad and cross border trade in the case of accounting is really who is the intended target for the product. Accountants provide certification, if this certification is taken from firm A in use in the same country as firm A, then it is consumption abroad. If it is for use in the clients home country it is cross border trade. Note the physical movement of either the client or the provider is not necessary, the service can be done entirely through e-commerce.
14
Most countries have typically either not committed to any such movement or limited it too trainees and /or intra-corporate transfers in which case it gets covered in commercial presence.
11
Trade in Accounting Services December 1999
In trying to assess what would be India's prospect for earnings from trade in accounting services one needs to assess the nature of demand. This could arise from a number of sources: 1. The requirements of Indian firms going abroad for commercial presence or for raising foreign funds. 2. The demand from foreign firms wishing to locate activities in India. 3. Indian professionals travelling abroad to act as short term consultants. 4. Providing accounting to businessmen of Indian origin settled abroad. 5. Finally, Indian accountants could provide services which do not require physical presence, for instance data processing. The first two are clearly a function of the pattern and pace of domestic liberalization. The direction of trade will depend on the major areas of such activity. The next two are closely linked, because it is likely that significant component of such demand for Indian consultants will come from NRI's. To some extent, the potential for this can be gauged from the presence of Indian professionals in accounting in these countries. The last area would depend on the acceptance of electronic records and the familiarity with Indian professionals in creating and working with such records. As noted earlier growth in this area is closely linked to developments in e-commerce, which is as yet a rapidly evolving are and would need close monitoring and evaluation. 6. Commitments The General Agreement on Trade in Services (GATS) is the first ever set of multilateral, legally enforceable rules covering international trade. Like in the trade of goods, the agreement seeks to improve market access and provide for non-discrimination both between nationals and foreign suppliers (National Treatment) and amongst foreign suppliers (Most Favored Nation - MFN). MFN Principle15 WTO members under GATS can and have made separate lists of exceptions to the MFN principle of non-discrimination. 15
Article II: 1. With respect to any measure covered by this Agreement, each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country.
12
Trade in Accounting Services December 1999
When GATS came into force, a number of countries already had preferential agreements in services that they had signed with trading partners, either bilaterally or in small groups. WTO members felt it was necessary to maintain these preferences temporarily. They gave themselves the right to continue giving treatment that is more favorable to particular countries in particular service activities by listing "MFN exemptions" alongside their first sets of commitments. In order to protect the general MFN principle, the exemptions could only be made once; nothing can be added to the lists. They will be reviewed after five years (in 2000), and will normally last no more than 10 years. The exemption lists are also part of the GATS agreement. Commitments on Market Access and National Treatment: Individual countries' commitments to open markets in specific sectors - and how open those markets will be - are the outcome of multi-lateral negotiations, although bilateral bargaining sessions are needed to develop the packages. These commitments are 'bound" like bound tariffs, they can only be modified or withdrawn after negotiations with affected countries which would probably lead to compensation. The commitments are made by sector and mode of supply, in a positive list approach. Unfortunately, this has certain inherent limitations. The non-generality of national treatment, and the sector-specificity of market access commitments reduces the value of the GATS to governments seeking to liberalize. Lobbies that oppose liberalization cannot be told that GATS membership implies national treatment for all sectors. The positive list approach to commitments ensures that the commitments reflect domestic compulsions rather than those implied by greater international trade in these services. As of November 1998, 56 countries (counting the European Community 12 as one) have made commitments under the category of accounting, auditing and bookkeeping services. Within the Professional Services subsector, the accountancy category ranks second to engineering
2. A Member may maintain a measure inconsistent with paragraph 1 provided that such a measure is listed in, and meets the conditions of, the Annex on Article II Exemptions. 3. The provisions of this Agreement shall not be so construed as to prevent any Member from conferring or according advantages to adjacent countries in order to facilitate exchanges limited to contiguous frontier zones of services that are both locally produced and consumed.
13
Trade in Accounting Services December 1999
services (with 58 commitments), and ahead of architectural services (50 commitments). 1. The greatest level of full market access (i.e. "None" specified in the schedule to indicate no restrictions) is granted for consumption abroad, i.e. by 41% of the Members making commitments (see Annex 2). 2. The greatest use of "Unbound" in the schedules (i.e. no commitments) is with regard to cross-border supply (30% of schedules). 3. In light or our earlier discussion on the nature of trade this is not surprising. 4. Commitments for partial market access are very high for commercial presence (89%) and the presence of natural persons (86%). 5. Regarding national treatment, by mode of supply, the pattern is very similar, except that the level of full access for commercial presence (32%) is far higher than is the case in respect to market access (9%). 6. Comparing commitments in Accounting with those in other professional services, we see that while more countries have made commitments in accounting, the level of openness of these commitments is lower than in most other professional services. 7. The most common restrictions appearing in the schedules are limitations on the type of legal entity permitted, e.g. only partnerships or sole proprietorships may be allowed; limitations on equity participation; economic needs tests; and restrictions (or even prohibitions) on the use of foreign company names. In both the European community and USA there are no restrictions on the use of names although restrictions on corporate forms are present.. The commitments discussed above are in effect restricted in almost all cases by the qualification requirements and requirements for residency or 14
Trade in Accounting Services December 1999
even citizenship in some cases. These restrictions affect multiple modes of supply but most critically movement of natural persons. These restrictions have wider implication than just for accountancy. (Certainly legal but other services as well). Thus, it is not enough to ensure that a country allows natural persons to supply the service, if requirements on recognition and qualification effectively constrain this outcome. India has not made any commitments on Accounting. However as we have noted in our discussion of the profession in India, the status quo in India meets and often exceeds the level of commitments mad by most countries. In view of this a limited commitment to status quo would imply that India appears to be on board with regard to trade in this critical area. Given India's cost advantage and ability to create skilled professional this would be of considerable value.
7. Mutual Recognition Agreements Traditionally, unilateral recognition conducted on an ad hoc basis was a norm for a professional wishing to practice across borders. That is, the qualification of the professional requiring recognition would be compared with that of the home country, where he wishes to practice and would be assessed with some level of equivalence according to unilaterally determined criteria on an individual basis. The recent trend towards Mutual Recognition Agreements have been one way of removing these barriers. The World Trade Organization (WTO), in Geneva, recently approved "Guidelines for Mutual Recognition Agreements or Arrangements in the Accountancy sector". Agreements on mutual recognition turn the procedure from a unilateral to a reciprocal one, reducing transaction costs of granting entry for regulatory bodies and the uncertainty related to rights of entry for professionals. The guidelines issued by the WTO are only recommendatory and seek to impose minimal reporting requirements on bilateral MRA's. Formally a Mutual Recognition Agreement (MRA) is one in which the domestic regulatory authorities accept, in whole or in part, the regulatory
15
Trade in Accounting Services December 1999
authorizations obtained in the territory of the other Party (or Parties) to the agreement in granting their own authorization. The practice originated in the European Community, in the Treaty of Rome, with the directive on Mutual recognition and has now spread to North America-NAFTA, and the Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA). Recently the US has notified a MRA with Australia and is negotiating one with the UK. Europe has moved from sectoral MRA's to a more horizontal approach embodied in the General systems directives of 1994. These agreements are complemented by the initiatives, discussed earlier, aimed at developing common minimal standards across borders. However, in almost all cases, MRAs fall short of setting up single passports for professionals. Rather, they constitute mechanisms whereby the host country "takes into account" the qualification obtained in the home country. Ideally, the system should move to one where not just the qualification is taken into account but also the experience and the gaps in eligibility reduced. Further, these need to be integrated with rules on movement of natural persons. Till date MRA's have been conducted with Free trade areas, and to a limited extent within the OECD. The risk of this practice is to create a compartmentalized world, where one group which is developed has high mobility and access than the other amongst the less developed world. India has a large vested interest in the creation of MRA's given its large pool of trained professionals and the potential to generate more, given the quality and spread of the higher education system. It is important to note that while the WTO and GATS are merely enabling provisions, the Indian Govt. and the professional bodies will have to take a more active role in seeking to obtain recognition. An important bridge between bilateral & multilateral MRA's would be the requirement of transitivity i.e. if a Indian professional gets recognized in the UK the recognition should be extended to all countries recognizing the UK qualifications, the EC, at present. While there will be hurdles on grounds of language and legal environments, there is a case to be made for single window recognition within established free trade areas.
16
Trade in Accounting Services December 1999
Recently, WTO has released the Disciplines on Domestic Regulation in the Accountancy Sector that seeks to restrict the use of standards as a barrier to trade.16 A key provision is the general requirement that measures taken for these purposes should not be more trade-restrictive than is necessary to fulfil a legitimate objective. Examples of legitimate objectives specified in the Disciplines are the protection of consumers (including all users of accounting services and the public generally), ensuring the quality of the service, ensuring professional competence, and ensuring the integrity of the profession. The disciplines relate to measures taken by governments and to those taken by non-governmental authorities exercising delegated powers. The disciplines now adopted, in addition to transparency requirements and other general provisions, contain provisions on the administration of licensing requirements, qualification requirements and procedures, and technical standard for the accountancy profession. A key provision is the general requirement that measures taken for these purposes should not be more trade-restrictive than is necessary to fulfil a legitimate objective. These are particularly useful, in restricting the use of market restricting domestic regulation. For example, restrictions on firm names are to be avoided. However, the disciplines are primarily effective on countries who have made commitments from introducing new trade restricting regulation. They are of limited use against existing regulations, these would need to be handled through negotiations on commitments and changes in domestic policy. Thus as they stand now this is complementary to the process of negotiating fresh commitments.
16
25. Members shall ensure that measures relating to technical standards are prepared, adopted and applied only to fulfil legitimate objectives. 26. In determining whether a measure is in conformity with the obligations under paragraph 2, account shall be taken of internationally recognized standards of relevant international organizations16 applied by that Member
17
Trade in Accounting Services December 1999
8. Policy Initiatives This last section aims to pull together elements from the preceding discussion to outline possible areas of policy debate. These fall into two broad related categories. First, we take up a set of concerns which relate to the forth coming dialogue under GATS 2000. These stands would however make sense only if we were to undertake a corresponding set of initiatives on the domestic policy front. The nature of services businesses in the modern world and the complexity of transactions make it very difficult to define national interests. The traditional approach has been to take a mercantilist attitude and identify national interests synonymous with export interests: where the national interest in trade negotiations is served by maximizing export opportunities and minimizing concessions on imports. Both economics, and common sense, teach us that imports can be and are highly beneficial. Unfortunately given the framework of GATS rules, governments aided by domestic service associations persist in taking the traditional approach of defining their nations' interests in purely export terms. However in a number of services, especially in the area of business and professional services, the direct contribution of these services in imports and exports is less important that the feedback effect they have on the trade in other goods and services whose production they facilitate. Thus to illustrate in accounting, focussing exclusively on the prospects of export of accounting services, we overlook its vital link with exports of other goods and services. For instance, an Indian firm setting up an establishment abroad or raising resources abroad is hampered by the lack of globalization in our profession in both standards and service providers. Similarly, Foreign investors in India would be better served if they could comparable services to what they receive in the home country. Further, note that while the discussion on policy is obsessed with conditions of supply, in accounting as with other professional services, there is a vital need to focus on the demand side as well. We had seen how the trends in technology and trade have created the need for more integrated service providers give a internationally acceptable product. 9. Issues For GATS 2000 As we had noted in our discussion of GATS and the commitments made therein that 'The non-generality of national treatment, and the sector18
Trade in Accounting Services December 1999
specificity of market access commitments reduces the value of the GATS to governments seeking to liberalize'. The existing approach tends to focus on a positive list to liberalization and puts the onus on doing so effectively on the domestic industry. In such a situation, it is natural that existing service providers functioning in closed markets will feel threatened and often opt for slower rates of opening up than is desirable from the viewpoint of global trade. Secondly, sector specific issues mean that unlike in goods, concessions in one set of areas cannot be negotiated with greater access in others. For example, India could concede greater liberalization on the financial sector in return for greater market access for professional services.17 The scheduling of commitments by modes of supply distorts incentives and resource allocation by creating the opportunity for biasing incentives towards a particular mode of supply. As we have noticed in our discussion in commitments in accounting that completely open structures in consumption abroad are combined with extremely restrictive rules on cross border supply and movement of natural presence. In examining the trade pattern in accounting, we had noted that the demand for accounting services is a derived demand. Thus, in so far as expectations from our principal trading partners go they would be primarily for India to make commitments on commercial presence, where foreign firms can establish local affiliates to meet their requirements in both environments. Thus we should expect that we will be asked to make some commitments on commercial presence. In so far as India, is concerned, it does not as yet have large firms with international visibility. But given its manpower resources there are clearly disguised prospects in movement of natural persons. Therefore, in our perspective, a liberalized framework with more opportunities for the movement of natural persons is in our interest, in the specific case of accounting and possibly, in general in services as a whole. Thus we can see that there are clearly conflicts of interest for India across different modes of supply, but again insisting on uniform standards and commitments implies that we will benefit because what we may seem to lose
17
However, it is entirely possible that in the next round of negotiations there will be pressure for countries to expand on the scope and coverage of their commitments.
19
Trade in Accounting Services December 1999
on commercial presence we gain in the case of movement of natural persons and cross border supply. Finally, we must note, a critical aspect of commitments. Accounting firms as we have noted serve two classes of related functions, Certification and Advice. Commitments only relate to who can provide the certification components of accounting services. Domestic accounting firms can and will face competition from other business advisory firms, whose presence is only limited by rules on investment and movement of natural persons. Not opening the industry runs the risk of creating small narrowly defined domestic certification agencies. The growth in value lies in being able to take advantage of the synergy between certification and advice. There is a related concern, should we seek to broaden the definition of accountancy to include the larger advisory functions of accountancy. The difficulty is in defining expertise: in a number of areas, there are overlapping concerns for instance in mergers and acquisitions there are differences in the advice given by Lawyers, Accountants and management consultants. Each one is critical to the process. Integrating these different concerns can be done by a Law firm, and accounting firm or by a business consultant. The advice cannot be limited to a single professional and interdisciplinary services cannot be provided with a narrow perspective. The answer is not to expand the scope of a single regulator but to allow interdisciplinary joint ventures. Finally, as we noted that the existing provisions on MRA's are somewhat limited. They have the potential to create a dualistic trading system in professional services. This is both because of the bilateral nature of these agreements and the difficulty in comparing alternative regimes of qualification. To this it is important that we should explore the possibility of obtaining transitivity within free trade areas. Further existing MRA's would reduce the burden of proof on the developing country professional. Secondly, instead of identifying recognition or non-recognition it would be more useful if countries could identify specific remedial measures in order to qualify for recognition. However, our case in MRA's is weak because we too, unfortunately, have not been aggressive enough to establish such agreements. The major benefit of these agreements would be to enable younger professionals to obtain access to other markets. Lastly, developing countries with weak infrastructure may have difficulties in meeting the technical standards of the developed world. we 20
Trade in Accounting Services December 1999
should consider linking recognition to adherence to multilateral standards on training and qualifications Here it would be useful if seek to create international certification agencies, so that when a person from a developing country meets its requirements (consider for example the Association of International Accountants recognized in the UK, Malaysia, Singapore etc) it would then get qualification in other countries. While this will not eliminate bilateral negotiations it could provide an effective vehicle for developing country professionals to obtain recognition in other countries. It goes without saying, that a primitive requirement is that the countries themselves accept certification of such agencies. Lastly rather than using commitments and opening up as strategic bargaining chips there should be a strict time frame for all countries to enter into market access rules for all services. a. To summarize our discussion we can outline certain strategic options: make unconditional commitments on Consumption abroad; This is entirely consistent with status quo b. Seek to obtain improved multilateral commitments in movements of natural persons in return for increased commitments on commercial presence. "insisting on uniform standards and commitments implies that we will benefit because what we may seem to lose on commercial presence we gain in the case of movement of natural persons and cross border supply". c. Finally, on cross border trade defer commitments until better understanding of issues in e-commerce and regulation of certification through electronic means. Further on matters related to recognition we should seek to link standards across countries, in particular this would mean taking a concerted attempt at seeking recognition within free trade areas. We could also seek to enhance the disciplines on regulation and recognition to take account of such concerns of transitivity. Lastly rather than using commitments and opening up as strategic bargaining chips it is in our interest that there should be a strict time frame for all countries to enter into market access rules for accounting services under all modes of supply.
21
Trade in Accounting Services December 1999
10. Domestic Policy Initiatives Before examining issues specific to accounting there is the general issue of the Govt.'s attitude to services. At present the Indian policy establishment is still in the goods only framework. To illustrate, consider the attitude to export incentives: they are with, exceptions for tourism and software, by and large structured for commodity exports. The Government has for reasons of raising revenue included a variety of service industries in the indirect tax net. Unfortunately, the excise system is still caught up with the framework of physical good production designated plants. Thus the requirements on records and establishments created are archaic. We need a distinct service orientation in policy. Domestic initiatives in Accounting take on a number of forms. First there is a urgent need to move away from the small is beautiful mentality. The needs of regulation and trade require more versatile equipped professionals who can respond to a number of different needs. This would imply that we need to look at our restrictions on size, brand names, corporate form and linkages with other professionals. While it is true, that small firms have lower establishment costs and greater flexibility, they are limited in the amount of institutional software and specialization they can develop to meet modern needs. Ideally a industry would compromise of a mix of small and large firms where the larger firms provide the necessary global dimension. Unfortunately given the legal regime in, India effectively the only large all India firms are the Multinationals. The restriction on 20 partners has meant that a number of professionals have formed multiple legal firms increasing transaction costs. A number of countries have tended to do away with these restrictions with no compromise on quality. In fact, purely from a regulatory viewpoint it is easier to regulate larger firms. Restricting the number of audits is similarly misplaced. The place to regulate quality is through adoption of standard and their enforcement not by an even distribution of the spoils. Further, the proposal on limited liability partnerships should be actively implemented. In general most legal and accounting professional have felt they will benefit from such a step.
22
Trade in Accounting Services December 1999
Not allowing firms to advertise, or create brand names is similarly archaic. As has been seen in the case of other goods and services, brand identities help in quality control and recognition. Further, since brand identity is long term it ensures inter-temporal equity. The no-brand name strategy in India oddly creates a bias in favor of family or relational identities. Similarly advertising can be done in a dignified manner which is consistent with ethical obligations. There is another perverse implication, the lack of advertising restricts the larger firms from diversifying which means that they cannot free up more of the traditional book keeping and accounting work to be done by younger and less established firms.18 One argument against the use of international brand names is that it would discriminate against Indian firms in view of their hereto limited exposure. One response would be to allow tie-ups and for firms to reflect such tie-ups in their letter head and stationary. However, in the long-run allowing domestic firms to build brand equity will increase their international competitiveness. Similarly as noted in our introduction accounting firms are expected to provide a variety of different services. These demands of clients require us to explore more flexible institutional forms away from partnerships to limited liability partnerships and corporate forms. Thus it is important that both at the level of the Government and the professional bodies urgent attention is paid to the need for regulating and developing multi-disciplinary practice. Clearly more research and dialogue will be needed but once again, it is important to be ahead of events. It is not the intention of this paper to suggest that these are an all or none package or that all these changes have to be implemented at the same time. The point is that we need to examine the profession not as it is now but as it is likely to evolve inn the future given developments in other fields and the on going process of globalization. These trends impart a certain dynamic to the profession and needs for change should be anticipated else substitutes will evolve which are less effective. In trying to understand the motivation and need for such dramatic reform we can benefit from an example in another professional service "stock broking". Stock Brokers until recently were functioning as partnerships regulated by a self-regulatory stock exchange. The consequence, of this and other public policies, was a relatively opaque thinly 18
Deepak Kapoor: Taking Account: Much More Pride and Prejudice Business Standard Oct 9 1998.
23
Trade in Accounting Services December 1999
traded system. The objections by stock brokers to moving to a corporatised form were similar to what we have here within the accounting profession. However, the stock market exists not to serve the interest of the broker's but has a vital role in raising capital. Thus to modernize the market and provide for quality broking services backed by an assurance of safety, the imperative was clear. This story like all analogies is limited but does suggest some important principles: 1. The need for reform in intermediary services must be gauged from the users of the service not only its suppliers. 2. Regulation must reflect the needs of Government, the suppliers and the demanders of the service. 3. Institutional forms cannot be rigid and have to change with technology and market structures. Finally, we need to examine the need to embrace international accounting standards and reporting requirements. The level and extent of harmonization in standards is dictated by the extent of integration of the country in the world economy. Since by virtue of the WTO rules on trade in goods, investment and property rights imply that we are locked to a increasingly integrated world the case for diverse domestic standards is weak. We need to treat the process of adoption as urgent and make concomitant changes in domestic statutory legislation. As we have noted in this case it is not really the ability of the profession to deliver, but that complementary legislation needs to keep pace. To conclude, one should note that GATS represents a significant opportunity for the Indian Accounting profession. It is imperative that it takes advantage of this by entering to fruitful bilateral and multilateral agreements to enhance the ability of Indian professionals to expand their area of service.
24
Trade in Accounting Services December 1999
11. References The Chartered Accountant Journal of the Institute of Chartered Associations of India, especially February, April , May, June 1997 Curran, Christopher, Regulation of The Professions in The New Palgrave Encyclopedia of Law and Economics. Hoekman, Bernard Tentative First Steps: An Assessment of the Uruguay Round Agreement on Services World Bank 1995. .Nicolaï dis, Kalypso Managed Mutual Recognition: The New Approach To The Liberalization Of Professional Services Working Paper: Kennedy School of Government Kapoor, Deepak Taking Account The Business Standard, especially: Nov 6 1998; Oct 9, 1998; May 8, 1998; April 10, 1998; Taylor, Peter and Turley, Stuart Blackwell, Oxford 1986
The Regulation of Accounting, Basil
25
Trade in Accounting Services December 1999
Annex 1. World exports of commercial services by selected regions and Countries, 1980-98 (Million dollars) Value 1980 1985 World
1990
United States
1998
36570 38260 78430 119280 129010 100 100 100 0 0 0 0 0 15050 0 7115 9356 18350 13218 38110 63493 4
North America 45200 72800 Canada
1995
Share 1990 1996 1997
22310 19.1 262400 0 9 25696 28769 2.34 19741 16.8 233630 6 5
19.1 2 2.25 16.8 8
19.8 2 2.22 17.5 9
Latin America
17100 17600 29200 44400 52800
3.72 3.63 3.82
Western Europe France Germany United Kingdom
21230 0 42156 25764 34295
53.2 1 8.45 6.58 6.78
European Union (15)
19110 17090 37060 51050 47.2 42.0 40.6 549900 0 0 0 0 5 0 6
Africa Egypt South Africa Sudan
12700 2321 2924 250
Middle East Israel Saudi Arabia Asia
19360 0 34720 22819 29454
11300 2918 1982 315
41730 0 66274 51605 53172
57060 0 83108 75192 74572
620300 78573 75734 99541
46.7 5 6.48 6.18 6.34
18600 4813 3442 134
25000 8262 4254 82
25800 7822 4226 ...
2.37 0.61 0.44 0.02
... ... 2707 3123 5104 3561
... 4512 3031
... 7669 3480
... 8668 ...
... ... ... 0.58 0.63 0.63 0.39 0.22 0.34
50800 61500
13250 26150 16.8 22.3 22.6 252300 0 0 9 9 3 26
2.14 0.71 0.35 0.00
45.7 5 6.09 5.67 6.97
2.09 0.69 0.37 0.00
Trade in Accounting Services December 1999
Australia Bangladesh China Hong Kong, China India Japan Nepal Pakistan Sri Lanka Source: WTO.
3660 4007 172 207 ... 2925
9833 296 5748
15741 15832 469 ... 18430 23045
1.25 1.42 1.39 0.04 0.02 0.02 0.73 1.61 1.86
5763 7731
18128 34338 34169
2.31 3.01 2.90
2861 18760 118 563 223
4609 41384 166 1213 425
0.59 5.28 0.02 0.15 0.05
3274 21648 92 740 234
27
6763 63966 592 1425 800
10545 60806 ... ... ...
0.56 5.21 0.05 0.12 0.06
0.66 5.17 0.06 0.11 0.06
Trade in Accounting Services December 1999
28
Annex 2 Commitments Percentage by Sector and Mode of Supply (Professional Services) (Percentages in each activity) I. MARKET ACCESS
Cross-border
Consumption Commercial Abroad Presence Partial No. Full Partia No. Full Partia No. l l 67% 16% 24% 67% 9% 4% 87% 9% 41% 30% 41% 45% 14% 9% 89% 2%
Natural Persons
Full
Full
Legal Services 18% Accounting, Auditing and 29% Bookkeeping Services Taxation Services 44% 44% Architectural Services 52% 26% Engineering Services 50% 28% Integrated Engineering Services 59% 22% Urban Planning and Landscape 45% 36% Architectural Services Medical and Dental Services 34% 29% Veterinary Services 54% 19% Services provided by Midwives, 33% 33% Nurses, Physiotherapists Other 33% 67% II. NATIONAL TREATMENT Cross-border
82% 72% 72% 59% 73%
2% 2%
Partia No. l 91% 7% 86% 13%
12% 22% 22% 19% 18%
53% 68% 55% 66% 52%
44% 20% 28% 22% 36%
3% 12% 17% 13% 12%
15% 24% 24% 31% 24%
3% 4% 3% 9% 3%
0% 0% 0% 0% 0%
88% 12% 92% 8% 85% 5% 94% 6% 97% 3%
37% 27% 33%
61% 34% 69% 23% 47% 53%
5% 8% 0%
21% 68% 11% 31% 58% 12% 20% 80% 0%
0% 4% 0%
87% 13% 81% 15% 93% 7%
0%
33% 67% 0% Consumption Abroad
0% 100% 0% Commercial Presence
0% 100% 0% Natural Persons
Trade in Accounting Services December 1999
Full
No.
Full
Partia No. l
Full
Partia No. l
Partia l 60% 18% 31% 58% 11% 16% 76% 36% 30% 50% 36% 14% 32% 64%
Full
Partia No. l
Legal Services 22% 9% 2% 91% 7% Accounting, Auditing and 34% 4% 4% 80% 16% Bookkeeping Services Taxation Services 41% 41% 18% 56% 35% 9% 35% 56% 9% 12% 71% 18% Architectural services 52% 30% 18% 64% 22% 14% 56% 38% 6% 8% 80% 12% Engineering Services 45% 31% 24% 60% 21% 19% 52% 43% 5% 9% 79% 12% Integrated Engineering Services 63% 19% 19% 72% 13% 16% 72% 13% 16% 9% 78% 13% Urban Planning and Landscape 52% 30% 18% 61% 24% 15% 58% 33% 9% 9% 85% 6% Architectural Services Medical and Dental Services 47% 18% 34% 66% 24% 11% 45% 45% 11% 3% 87% 11% Veterinary Services 62% 12% 27% 81% 8% 12% 58% 35% 8% 8% 77% 15% Services provided by Midwives, 40% 27% 33% 53% 47% 0% 53% 47% 0% 0% 93% 7% Nurses, Physiotherapists Other 33% 50% 17% 33% 50% 17% 33% 67% 0% 17% 67% 17% Note: Full = Full commitment (indicated by "None" in the market access or national treatment column of the Schedule) Partial = Partial commitment (limitations are inscribed in the market access or national treatment column of the Schedule) No = No commitment (indicated by "Unbound" in the market access or national treatment column of the Schedule) Percentages may not add up to 100 due to rounding. Basis of total is listed sectors. Source: WTO Secretariat. Accountancy Services Background Note Dec 1998
2
