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

According to Kautilya, the major underlying factor for resorting to aggressive and creative accounting (which he calls 'false accounting') is excessive greed, and he attempted to contain it through moral persuasion and legal means. He considered the conditions for ensuring honesty and systemic efficiency. The third section of the paper lays out Kautilya's ideas on the necessary conditions for increasing efficiency and compliance. He proposed at least three conditions. First, he believed that citizens (including government officials) have to be informed of the laws. With that in mind, he modified, extended, and above all, codified the existing rules and regulations. Second, he proposed an organizational structure that reduces the scope for conflicts of interest. Third, he suggested comprehensive schemes of rewards and punishments to increase compliance. He suggested ways to handle problems that may arise whenever a principal (owner, shareholder, or even a king) entrusts financial operations to his agents (managers). This section of the paper also recognizes Kautilya's contributions on systematic record keeping, periodic accounting, budgeting, and independent auditing.

Kautilya was aware that ethical values encompass much more than the social values codified in rules and regulations. He believed that even the most comprehensive set of rules and regulations was insufficient for checking greed and eliminating the potential for fraudulent practices. The fourth section of the paper contains his ideas on the critical role of ethical values in maintaining law and order and the creation of wealth. He emphasized the role of virtue ethics in building good character. Recognizing that the concept of virtue ethics was already well developed in the Vedas, the Hindu religious scriptures and philosophy, he focused primarily on the action-oriented principles of ethics, such as the golden rule, fairness, and 'servant leadership' and undertaking various measures to improve the ethical climate. Before exploring these dimensions of Kautilya's work a brief introduction to The Arthashastra is provided in the next section.

A BRIEF INTRODUCTION TO KAUTILYA AND THE ARTHASHASTRA

Mattessich [1998] noted that Kautilya developed some rudimentary principles of modern accounting and stated: "One may even raise the question of why the Arthashastra concerns itself, at least to some extent, with accounting issues, while the even more comprehensive writings of Aristotle (despite revealing an awareness of economic issues) are silent about accounting theory." Kautilya had a grand vision for building an empire, one that was prosperous, secure, stable, and based on fairness. He realized that the attainment of prosperity required not only human effort but also the accumulation of capital, which was not possible without the development of accounting methods.

Kautilya's Vision: Kautilya [pp. 120-121] stated his vision thus:

The kingdom shall be protected by fortifying the capital and the towns at the frontiers. The land should not only be capable of sustaining the [native] population but also outsiders [when they come into the kingdom] in times of calamities. It should be easy to defend from [attacks by] enemies and strong enough to control neighboring kingdoms. It should have productive land (free from swamps, rocky ground, saline land, uneven terrain and deserts as well as wild and [unruly] groups of people). It should be beautiful, being endowed with arable land, mines, timber forests, elephant forests, and good pastures rich in cattle. It should not depend [only on] rain for water. It should have good roads and waterways. It should have a productive economy, with a wide variety of commodities and the capacity to sustain a high level of taxation as well as a [large] army. The people shall be predominantly agriculturists [artisans and craftsman], devoted to work, honest, loyal and with intelligent masters and servants [6.1.8].