The Hindu Business Line : Every vote has a cost, but what about its value?

Story so far: At a study circle meeting in the CA Institute we discuss the role of unaudited results that are routinely published in newspapers. "Unaudited results, unread, and un-understood," I mused.

Episode 76

The query that I had posed last week was a drab one: "How do you study the ads showing unaudited results of companies?" However, responses have been enthusiastic. "Dear Swati," begins Thangavelu. "Frankly speaking, when these results are audited, there will always be correction at a later date. By presenting a rosy picture now, these companies inflate their share prices in the market. Did you come across anybody doing any research on market movement of those shares at the time of quarterly report and after?" That's a point I should remember when meeting research analysts. "It only improves the bottom line of the newspapers by getting those ads. Except for the above two, very few people care for these ads. Even companies are not interested in these except for statutory obligations and inflation of their shares." What a pessimistic note to start with, but I am sure many would share such a view.

Lakshmi Pichaimani, a CA Final student writes: "Hi, this is my (simple) approach of interpreting the quarterly statements: (a) Compute the growth of sale and net profit; (b) positive growth in sale with negative growth in net profit implies inefficiency in cost control; (c) try to work out percentage of increase in expenses; (d) depreciation may be neglected for all the above purposes; (e) try to find cash profits; and (f) observe the changes in EPS with change in the number of shares." That's crisp presentation, Lakshmi. "Obviously the comparison is with the quarterly report of the previous year.

If data are given you can make an analysis of trend during the past nine months, six months, one year and so on. But my personal opinion is that just having a look at these statement will not give any meaning unless it is read with the accounting policies adopted and notes to accounts." I'm sure you'd make a successful accountant.

"Dear Swati," writes Anubrata, promptly. "The question of putting ads of accounting results in newspapers was put so simply by you, but has immense significance! In fact, it is the very basis of the profession of accounting." Huh! "Why do we have accountants?

We have them to ensure transparency, disclosure and proper reporting to the shareholders, employees, bankers and the society at large. Refer to the firs chapter of the first ever book on accountancy we would have read in our lives! Now, put simply, this is what these ads are supposed to do." I should dust and see my old book from the attic. "However, like the activity of accounting itself, this has become a formality, and people's perception has changed as expected!" That sounds quite resigned, like a fallen philosophy.

"Swati," says Mahadevan, "it is very easy to read and study the unaudited results. You make a very simple assumption that the figures are true and correct." That should be as simple as assuming I know everything! "Compute various ratios based on the figures given, for the quarter, previous quarter and also for the corresponding period in the previous year. While evaluating, discount the figures by 50 per cent for probable omissions, mistakes, errors, manipulations and so on." Lot of salt? "Based on the discounted figures you can arrive at your own conclusions. The same methodology applies to audited results also. Only change you need to make is the discounting rate, say 40 per cent or so." Ten per cent value addition is no mean job, and so if we had the same accounts audited four more times, we would have something really clean!

Radhakrishnan asks: "Swati, being a member of the Institute, I fail to understand why such topics are chosen for study circle meetings? If we chartered accountants feel things could be camouflaged even in the simple format of the quarterly results, it needs a meeting to hone our skills in interpretation? Everyone of us knows that quarterly unaudited results carry minimum disclosures only; it would be more meaningful to conduct a meeting on how published balance sheets are read." He adds a postscript: "With year end work on, can you ask in your column how AS deals with treatment of options? Rupee being so volatile, it would be an interesting topic, especially because our AS 11 is inadequate to deal with it." I wish the ICAI sent in a mail to clarify the point.

**********

On the previous week's discussion regarding expenses, there are a few more thoughts. "Will saving wealth lead to prosperity?" asks Naresh. "Today India is doing great in economic terms. But, our consumption is less than 1/10th of that of the US, though our population is more than double of the US. Their prosperity depends on ability to consume and that leads to higher demand and eventually to higher productivity. It is an economic cycle. We should work towards breaking the conservative cycle that retards consumption."

Gangoly talks about his evolution: "Dear Swati, so long as I was bachelor, I had never any clue of the kind of expenses I had been incurring. It was only cash basis accounting. I had a decent salary, good disposable income and heavy, rather very heavy spends. Ironically though I was an accountant, I never put to use all those tools of the trade." Did somebody say that when accounting begins, happiness ends? "Some months back, I got married to a lady pursuing an M. Phil in Economics at JNU. And after a few months we decided to check our expenses. All my accounting skills were put to rest and my wife recorded all that was being spent very decently. I don't think recording of household expenses help. Expenses fall in two categories: uncontrollable and impulsive. Say in Delhi, a decent accommodation costs Rs 10,000 a month, a car EMI is around Rs 7,000, servants and so on cost Rs 1,500, minimum on food etc Rs 5,000. So you are committed to Rs 25,000 a month, which is uncontrollable. Now you would go out for dinner once in a while, stop at a street corner to pick up some stuff, to do something interesting — a movie outing for two here costs at least Rs 900 (2 popcorns @ Rs 90, included!). So I feel there is not much help in thinking about these things. Take life as it comes." Practical wisdom!

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Well, today is important for me, because I am going to vote. I ask around my neighbours, and am disappointed to see apathy among the educated. What I put in the ballot box is going to determine the direction of the country, I feel, and that makes me as important as the kingmakers. Every vote has a cost, if you add up all expenses incurred for the exercise. But do votes have value? Send in your thoughts by Friday.

Swati_CA@hotmail.com

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