Exploring Non-Western Roots of Accounting

Exploring Non-Western Roots of Accounting

By Suvro Banerjee-Lahiri, Quality Assurance Manager, Ethics

Globalization has increased the need for auditors and accountants to be aware of international professional standards and to develop a broader view of the accounting profession. A common hindrance to fulfilling this need, however, is that contemporary American schools of thought on accounting do not generally devote much attention to the historical contributions of non-European cultures. A more well-rounded view could be achieved through acknowledging the accomplishments of non-Western cultures in the development of professional practices, particularly the accounting profession.

A major obstacle to understanding the contributions of Eastern cultures to accounting may be attributed to the lack of a broad access to research material focused on the accounting history of non-European cultures. The majority of accounting history journals, for example, emphasize a Eurocentric view of the profession.

Richard Mattessich, writing in Accounting, Business & Financial History (1998, Vol 8. No. 2), notes that many studies in accounting history have focused too narrowly on the search for the origin of double-entry bookkeeping, something which has been credited to Luca Pacioli’s mathematics book titled Everything about Arithmetic, Geometry, and Proportions, writtten in 1494.

Accounting history research in many journals disregards non-Western contributions to the profession, according to Salvador Carmona, of Spain’s Institute de Empresa, in the November 2004 issue of Accounting History.

“Patterns of dissemination in accounting history research result in a neglect of the majority of accounting history researchers who are affiliated with non-Anglo-Saxon institutions, conduct their research in non-Anglo-Saxon settings and focus on observation periods other than 1850–1945,” Carmona wrote.

Ancient India is a prime example of a culture whose accounting practices merit more attention due to their complexity and innovation.

Mattessich, writing in Accounting Historians Journal (Dec. 1998), notes that fourth century BCE Indian economist Vishnugupta Chanakya Kautilya developed highly sophisticated principles of accounting, which are detailed in his work, Arthashastra. These included: various types of income, including aspects of accounting for price and price-level changes and a possible distinction between what modern accountants call real versus fictitious holding gains and their potential relations to other accounting concepts; classifications of expenditures or costs, including possibly fixed and variable costs; and some notions of assets, debts and capital.

Balbir S. Sihag writes in the December 2004 edition of Accounting Historians Journal that the depth of arithmetic knowledge displayed in Kautilya’s work demonstrates that the prerequisites for the establishment of the discipline of accounting existed in India during fourth century BCE.

“In particular,” Sihag noted, “Kautilya used fractions, percentages, summation and subtraction operations, and even permutations and combinations quite extensively.”

In addition to bookkeeping rules, Kautilya developed the procedures for preparing periodic income statements and budgets and performing independent audits. In addition, he also emphasized the codification of accounting rules into one uniform system to prevent problems in translating financial data between disparate methods of accounting, Sihag wrote. Today, the international accounting community is dealing with this same issue in terms of the convergence of U.S. GAAP with that of the other nations.

Kautilya also promoted segregation of duties. Under his vision of effective government, financial responsibility was divided between a Treasurer and a Chief Comptroller-Auditor, both of whom reported directly to the king. The Treasurer was responsible for managing assets, while the Comptroller-Auditor handled the construction and maintenance of the Records Office, the maintenance of records, compilation of rules, inspection, audit, and preparing and presenting financial reports to the king. In this way, Kautilya attempted to encourage specialization and accountability and to limit the scope for conflicts of interest. Similar themes are present in the school accountability legislation newly adopted in New York as a response to the results of the comptroller’s audits of several Long Island school districts.

Kautilya also gave a great deal of thought to the ethical behavior of all citizens of the government, especially those in positions of power. One of his recommendations was that the king not consult with any advisor who had a vested interest in the outcome of a particular project. Kautilya, Sihag wrote, also emphasized the establishment of an ethical code of conduct—a topic which has received a great deal of attention during the past few years after the Enron and WorldCom scandals.

And all this was done nearly a millennium before Pacioli’s book was written.

The NYSSCPA has long recognized the importance of understanding global professional issues. In late October, the Society will host three seminars devoted to international accounting: An Overview of International Financial Reporting Standards, on Oct. 24 and 25; Comparison of IFRS (International Financial Reporting Standards) with U.S. GAAP, on Oct. 26; and First-Time Adoption of IFRS: Level 1, on Oct. 27. In January, the Society will hold its International Tax Conference.