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Business News/ Opinion / A poor account of India’s cities
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A poor account of India’s cities

Lessons from the financial reporting in companies can help cure the miserable track record of city governments

Illustration by Jayachandran/MintPremium
Illustration by Jayachandran/Mint

India’s city governments or municipalities record revenues in the range of 1-2% of India’s GDP. Estimates suggest that an investment of Rupees forty to sixty trillion may be required during the next two decades to catch up on the backlog in infrastructure and service delivery and to meet future demands. In order to raise such substantial investments and ensure such investments meet citizen outcomes in the form of service levels, city governments (read municipal corporations and municipalities) in India need robust accountability frameworks that build trust in capital markets and give assurance of value for money spending. Annual and Quarterly Reports including audited accounts, performance metrics and management analyses of the same are the principal instruments that build trust and credibility in a range of market participants. City governments in India have a miserable track record in respect of all of these and that is worrisome given the steep incline they need to ascend in respect of finances.

The journey of financial reporting in companies offers valuable insights into what ails city governments and how to cure them. Companies in India are required to maintain their books of account as per accrual basis, prepare their balance sheet and income statement based on Accounting Standards issued by the Institute of Chartered Accountants of India in a pre-defined format, have their annual accounts audited by a Chartered Accountant before 30 September each year and publish their audited accounts along with director’s reports. Listed companies have additional obligations in the form of quarterly filings and additional disclosures. Protection of shareholders’ interest resulted in all of the above being written into law, predominantly as provisions of the Companies Act, but also as part of SEBI regulations. Companies are disincentivised from non-compliance by penalties and imprisonment of officials, as well as adverse reactions from market participants such as institutional investors, lenders, credit rating agencies etc.

City governments in India in comparison have a free run. Ironically, while companies have a limited number of shareholders, all citizens of a city are shareholders in the city government, besides lenders and suppliers. However they are virtually abandoned by municipal corporation acts in exacting accountability from city governments. Few city governments realize audited accounts and timely disclosures will position them to eventually raise debt from the market. City governments are therefore neither accountable for value spending nor are they capable of raising additional capital. Consequently, citizens continue to suffer from poor quality of life.

The accountability trajectory of companies offers solutions as well. Companies did not adopt the prevalent financial reporting practices voluntarily nor were laws enacted with urgency. This process was cleverly engineered. Accounting standards issued by the Institute of Chartered Accountants of India were at first mandated for the auditors before they were mandated for companies. This de facto position was made de jure by an amendment to the Companies Act that made it obligatory for companies to follow accounting standards. Simultaneously, accounting standards themselves gained further sophistication to make financial statements or annual accounts more transparent. Subsequently, regulators such as the Reserve Bank of India and Income Tax authorities too followed suit.

The position in city government is further complicated by shortage of competent staff in finance and accounts departments. However empaneling and appointing Chartered Accountants as external auditors of city governments and issuance of a full body of Accounting Standards for Local Bodies can spur much needed reforms. The exacting rigour of an independent external audit mandated by municipal corporation acts with disincentives for non-compliance will ensure city governments hire competent staff in their finance and accounts teams, just like companies. In addition, if the ICAI mandates that Chartered Accountants shall comply with accounting standards for local bodies, city governments will per force adopt the same (just as companies did). The current system of the State finance department auditing city governments through their department of local fund audit is dysfunctional and fails the basic test of independence.

It is equally true that city commissioners and councils need to manage by data. Performance metrics are alien to most city governments. Financial accountability has come to mean spending allocated budgets by creating project outlays. There are also additional layers of reforms that are required; some basic such as transition to double entry accrual based accounting, adoption of standardized formats and protocols for budgeting and accounting and others more complex such as putting in place effective cash management systems, strategic debt management etc. The trigger that sets off a virtuous cycle of financial accountability in city governments could well be appointing Chartered Accountants as their external auditors.

Srikanth Viswanathan is coordinator-advocacy at Janaagraha Centre for Citizenship and Democracy and a chartered accountant.

Anurag Gumber supported with research for this article

Comments are welcome at theirview@livemint.com

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Published: 21 Oct 2014, 11:14 PM IST
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