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

Kautilya suggested three measures to deal with the problem of fraud. First, people have to be informed of the existing laws, since it is not possible to obey them in the absence of proper information. He codified (along with modifications and extensions) all the rules and regulations. According to Kautilya, the laws must be unambiguous and as comprehensive as possible. second, he proposed an organizational structure, which reduced the scope for conflicts of interest. Third, he suggested long lists of punishments for cheating the government and rewards for commendable service. Each of these measures is now discussed in turn.

Laws Must have Clarity, Consistency, Completeness and be in Written Form: Kautilya wrote [p. 213] "The rule of kings depends primarily on [written] orders; even peace and war have their roots in them [2.10]." He believed that effective enforcement of rules and regulations requires clarity (no 'confusion'), completeness ('is avoiding redundancy or deficiency of letters, words and subject matter; citing reasons, quotations and illustrative examples'), and consistency ('non-contradiction') and must be in a written form. He [p. 213] suggested that the Royal Scribe "Have a [thorough] knowledge of all conventions, be quick in composition and have good handwriting. He shall also be able to read [clearly] documents and edicts [2.10.3]." Kautilya recommended that the Royal Scribe be one of the highest paid (48000 panas) employees to emphasize and ensure that the Royal Edicts were accurately recorded. Kautilya [p. 215] went so far as to suggest "Cutting off both feet and a hand or a 900 panas" for the "Royal Scribe deliberately writing down wrongly a Royal Edict, by omission or commission [4.10.14]."

Designing an Organizational Structure to Minimize the Scope for Cheating and Conflicts of Interest: Kautilya realized that no financial management is possible in the absence of accurate and complete records. He proposed the establishment of two very important offices to monitor and manage the financial health of the state: the positions of Treasurer and Chief Comptroller-Auditor. Both were to be very well paid, and in turn they were to be incorruptible and efficient. It is very interesting to note that Kautilya divided financial responsibility between the Treasurer and the Comptroller-Auditor. Both were supposed to report directly to the king.

The Treasurer was responsible for managing assets while the Comptroller-Auditor handled: the construction and maintenance of the Records Office, maintenance of Records, compilation of rules, inspection, audit, and preparing and presenting financial reports to the king. Thus Kautilya attempted to encourage specialization, accountability and to limit the scope for conflicts of interest.

According to Kautilya [p. 225] "The Comptroller shall be responsible for the compilation of all fixed rules as well as the conventions used [2.7.3]." It appears that in 4th century B.C.E. India there were some accounting conventions, the application of which were monitored by the Comptroller-Auditor.