KAUTILYA ON THE SCOPE AND METHODOLOGY OF ACCOUNTING, ORGANIZATIONAL DESIGN AND THE ROLE OF ETHICS IN ANCIENT INDIA

Accounting Historians Journal, The, Dec 2004 by Sihag, Balbir S

Abstract: Kautilya, a 4th century B.C.E. economist, recognized the importance of accounting methods in economic enterprises. He realized that a proper measurement of economic performance was absolutely essential for efficient allocation of resources, which was considered an important source of economic development. He viewed philosophy and political science as separate disciplines but considered accounting an integral part of economics. He specified a very broad scope for accounting and considered explanation and prediction as its proper objectives. Kautilya developed bookkeeping rules to record and classify economic data, emphasized the critical role of independent periodic audits and proposed the establishment of two important but separate offices - the Treasurer and Comptroller-Auditor, to increase accountability, specialization, and above all to reduce the scope for conflicts of interest. He also linked the successful enforcement of rules and regulations to their clarity, consistency and completeness. Kautilya believed that such measures were necessary but not sufficient to eliminate fraudulent accounting. He also emphasized the role of ethics, considering ethical values as the glue which binds society and promotes economic development.

INTRODUCTION

The virtuous one despises prosperity attained through ignominy. The bounds of good conduct should never be crossed. Truth and charity are the roots of righteousness. Righteousness is the ornament of all [Kautilya's Sutra, Subramanian, pp. 39, 47, 62].

It is possible to know even the path of birds flying in the sky but not the ways of government servants who hide their (dishonest) income [Kautilya's Arthashastra, p. 283].

Vishnugupta Chanakya Kautilya (popularly known as Chanakya) has been addressed as an Acharya or guru (professor or teacher) and a statesman. Nehru [1998, p. 123] describes Kautilya as follows: "He sat with the reins of empire in his hands and looked upon the emperor more as a loved pupil than as master. Simple and austere in his life, uninterested in the pomp and pageantry of high position."

Kautilya is credited with destroying the Nanda (tyrant) rule and installing Chandragupta Maurya (321-297 B.C.E.) on the throne. No one really knows the dates of his birth or of his death. It is almost certain that he and Chandragupta Maurya were adults in 321 B.C.E. when they succeeded in toppling the Nanda Dynasty. It is reasonable to assume that he was older and undoubtedly wiser than Chandragupta in order to command the respect necessary for success in destroying the Nanda rule. Kautilya was probably born around 360 B.C.E., was very influential during Chandragupta's rule (321-297 B.C.E.), and might have lived beyond the latter date. This implies that he was a junior contemporary of Aristotle (384-322 B.C.E.). However, there is no evidence that Kautilya was aware of Aristotle's ideas.

Kautilya wrote The Arthashastra, the science of wealth and welfare, during the latter half of the 4th century B.C.E.. The Arthashastra contains 150 chapters, which are classified by topic in 15 books. It consists of three reasonably well developed parts: (i) national security issues including a foreign policy, (ii) administration of justice including crime and punishment issues, and (iii) policies related to economic development, taxation, labor management and financial management. The latter includes a discussion on the critical role of accounting. The Arthashastra is a theoretical treatise designed to instruct kings everywhere and for all time. Kautilya also completed two other works: Chanakya-Sutras (Rules of Science) and Chanakya-Rajanitisastra (Science of Government Policies).

Kautilya's contributions to accounting may be classified under four headings: (i) the development of principles of accounting, (ii) the specification of the scope and methodology of accounting, (iii) the codification of financial rules and regulations and the creation of an organizational structure to reduce the potential for conflicts of interest, and (iv) the role of ethics in the restraint of fraudulent accounting (often spawned by excessive greed), in the maintenance of law and order, the efficient allocation of resources, and the pursuit of happiness.

Mattessich [1998] sheds light on Kautilya's contributions under the first heading. He identifies elements of modern principles of accounting in Kautilya's Arthashastra and shows that it contains more accounting theory than Pacioli's Summa. Mattessich deserves much credit for his interpretations of Kautilya's implicit analysis. He makes insightful and bold observations, noting that many studies in accounting history have focused too narrowly on the search for the origin of double-entry bookkeeping. He places Kautilya's Arthashastra on a par with Pacioli's Summa.

In this paper, I concentrate on Kautilya's contributions under the remaining three headings. A modest attempt is made to offer glimpses into Kautilya's grand vision and his impeccable logic.

The second section of the paper contains Kautilya's ideas on the scope and methodology of accounting. Two types of arguments are presented to show that Kautilya considered explanation and prediction as the objectives of analytical inquiries related to accounting. First, it is argued that he did not recommend separating accounting from economics. He proposed testable hypotheses and thus implied that accounting had an equal claim to the use of the scientific method. Second, according to Kautilya, even if accounting is considered a discipline separate from economics, its methodology is still scientific. It appears on closer examination that Kautilya understood the importance of the accurate measurement of economic performance to economic growth. He linked decisions on production and trade patterns to profitability and implicitly considered innovation in accounting methods as a general-purpose technology (GPT), which improved the efficiency of the whole economy. Kautilya's ideas on the importance of the financial health of the Treasury to achieve the various objectives of the state are also included in this section.