Other eyes

Self-regulation is a confusing issue to get ones head around. Economists mostly fail at understanding it,but the rest of us are accustomed to thinking,pragmatically,that it works in some areas. After all,we have trusted chartered accountants for so long that it seems almost an afterthought,the recognition that the self-regulatory nature of the profession is right there in the name. This complacency was misplaced,as is shown by the cataclysmic events surrounding the discovery that thousands of crores of Satyams cash was imaginary cash that its auditors,Price Waterhouse,allowed into its results as an asset.

Other parts of the world have moved away from unrestrained faith in self-regulation. In America,the fall of Enron and the consequent vanishing of its auditors,Arthur Andersen caused the accounting profession to be forced to abandon peer reviews as their only form of regulation. About time: recent research has indicated not all peer reviews were objective or rigorous. Meanwhile,stockbrokers and securities dealers in the US last year were told by the government to set up a joint organisation last year after their internal policing clearly failed. Self-regulation only really works when the internal dynamics of a profession or organisation support it; when departures from the norm are visible,and when there are clear costs to the whole group from any such departure. It seems the former doesnt hold in corporate India,which has not made of internal transparency a virtue. The second must be avoided at all costs: a collapse of confidence in audits is disastrous.

The profession must recognise that they anyway have to reconcile conflicting interests: those to whom they owe allegiance differ from those who hire and pay them. These have,possibly in this case and definitely in the past,created perverse incentives for individual firms; to add to this an additional set of conflicting interests for the profession as a whole stretches both theory,and,clearly,practice. The time has come in India,as it already has in the rest of the world,to take a close,hard look at the bodies responsible for the involved professions: merely accepting their self-exculpatory press releases is not an option. Not when the stakes are this high.