y v reddy : role of accountants in fostering economic growth inaugural address by dr y v reddy, governor of the reserve bank of india, at the international conference on role of accountancy profession in anchoring economic growth, organised by the institute of chartered accountants of india, mumbai, 19 january 2006. * * * distinguished guests, ladies and gentlemen, i am thankful to shri kamlesh vikamsey for inviting me to this august gathering. this conference is of relevance to all of us, not only because of the eminence of the speakers who are addressing this gathering, but also because it represents an important step by the institute of chartered accountants of india ( icai ) to distill from the experiences of other countries in its quest for global benchmarking of our accounting standards. the agenda for the conference is comprehensive while focusing on critical but contemporary issues. i congratulate the organisers for ensuring a professionally stimulating feast. in my address today, i will confine myself to a few general observations. broadly speaking, from the micro - economic point of view, accounting standards encompass mechanisms for providing information about the financial condition and performance and importantly, the risk profile of firms to all potential users. it therefore, constitutes one of the core elements of the financial infrastructure. from the macro - economic point of view, the information supplied serves a dual function. first, by facilitating the identification of most productive use of economic resources, it constitutes the basis for assessment of prospective rewards and risks. second, it acts as an enabling mechanism for control over the effective utilisation of resources. taken together, this forms the basis of income allocation among various constituents and the exercise of financial discipline. it is not appropriate to believe that the ‘ invisible hand ’ of the market would generate the requisite information, irrespective of the accounting standards in place. this argument of the presumed omniscience of markets tends to disregard the fact that producing information can be costly. more importantly, the costs of generating information are private, while the benefits are dispersed across all potential users, resulting in a tendency to under - supply. this under provision of information, as you would all know, was a key factor behind the build - up of financial imbalances and contributed to the enormity of the asian crisis. in fact it is the asian crisis that brought into clear focus the close links between micro and macro aspects of economic growth as well as institutional aspects as distinct from policy aspects of economic management. effective

market mechanisms must, therefore, be instituted to ensure efficient capital mobilisation and its prudent allocation in securing long - term economic growth with assured stability. needless to say, the development of efficient markets needs to be supported by high - quality market participants. intermediaries, issuers, investors, regulators and professionals play important roles in generating this growth dynamism in our financial markets. within the context of both domestic and international challenges, the accounting profession therefore plays an important complementary role towards building a credible, reputable and internationally competitive economy, irrespective of the capacities in which they perform. this includes not only in your capacity as auditors, but also as advisors, consultants, directors or even as members of the corporate sector. in auditing financial statements, accountants have the most intricate knowledge of the financials of companies. they are able to ascertain the drivers of performance and are equipped to provide an independent and objective evaluation on the opportunities and risk profiles of firms. thus, for instance, in the absence of accurate financial reporting, it would become difficult for banks to make informed decisions about credit allocation unless they have confidence in the information provided by financial reporting. it is the quality, reliability and objectivity of this information which stakeholders rely upon to make informed judgment and allocate resources efficiently. transparency is imperative to imbue confidence amongst investors in our markets. the quality of information and the integrity of the market place act as strong modes for brand differentiation. while the quality of information has immediate and far - reaching implications for a particular enterprise, it eventually permeates to the market and the economy as a whole. it is, therefore, not surprising to find that the accounting profession is being constantly challenged to meet the demands for quality information. as key providers and verifiers of information, the bottom - line is simple : the higher the quality and integrity maintained by the profession, the stronger and more resilient will our markets be. the investing public in india is at present broader and much more discerning than earlier. a crisis behind closed doors in past decades often becomes a matter of the broadest public concern at present. the globally noticed accounting irregularities at leading corporate entities in recent years have provided graphic evidence as to how much the absence of accurate, timely and comparable financial information can impede the effective working of markets. more generally, the debilitating effects of deficiencies in financial reporting have been amply demonstrated by the spate of financial crises