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

The content of Kautilya's work indicates that the prerequisites for the establishment of the discipline of accounting already existed in India during 4th century B.C.E.. Kautilya used fractions, percentages, summation and subtraction operations, and even permutations and combinations quite extensively, displaying a deep knowledge of arithmetic. He developed not only bookkeeping rules but also the procedures for preparing periodic income statements and budgets and performing independent audits. Ifrah's [2000] findings also supports the existence of the required capabilities in arithmetic to support a separate discipline of accounting in the period under study. He [p. 434] writes, "Before the beginning of the fifth century B.C.E., then, all the necessary "ingredients" for the creation of the written place-value system had been amassed by the Indian Mathematicians."

Kautilya did not see the need for separating accounting from economics and believed that any demarcation of the boundary between them would be arbitrary. He considered accounting an integral part of economics. By contrast, he explicitly treated Political Science and Philosophy as separate disciplines. This view is supported by the fact that the role of accounting was considered to be embedded in economic policy. Kautilya perceived 'explanation and prediction' as the true objectives of a scientific inquiry and applied these to analyze the impact of various policies on the creation of wealth. He applied these objectives, both explicitly and implicitly, to inquiries relating to accounting. This leads to the conclusion by Kautilya that explanation and prediction lay within the rightful domain of accounting.

Kautilya on the Importance of Wealth: Kautilya methodically approached economic issues by first explaining the importance of wealth and then suggesting policies for its creation. He [p. 637] observed "Man, without wealth, does not get it even after a hundred attempts. Just as elephants are needed to catch elephants, so does wealth capture more wealth. Wealth will slip away from that childish man who constantly consults the stars. The only [guiding] star of wealth is itself; what can the stars of the sky do [9.4.26-27]?" According to Kautilya, wealth complemented human effort (by enhancing labor productivity) in creating prosperity, which in turn creates more wealth.

Kautilya [p. 149] added, "In the absence of fruitful economic activity, both current prosperity and future growth are in danger of destruction. A king can achieve the desired objectives and abundance of riches by undertaking productive economic activity [1.19.35-36]." He advanced the hypothesis that the pursuit of productive activities was the key to stabilization of the current income and its rapid growth in the future.

Incentives to Encourage Creation of Wealth in the Private sector: Kautilya explored all possible means of creating wealth. He suggested many policies to encourage capital formation in the private sector. For example, he [p. 231] recommended (i) Tax Holidays: "Any one who brings new land under cultivation shall be granted exemption from payment of agricultural taxes for a period of two years. For building or improving irrigation facilities exemption from water rates shall be granted [3.9.33]." (ii) Full Protection of Private Property Rights: Kautilya [p. 121] wrote "The wealth of the state shall be one acquired lawfully either by inheritance or by the king's efforts [6.1.10]." He [p. 231] added, "Water works such as reservoirs, embankments and tanks can be privately owned and the owner shall be free to sell or mortgage them [3.9.34]." (iii) Concessionary Loans: He [p. 179] recommended, "[On new settlements] the cultivators shall be granted grains, cattle and money which they can repay at their convenience [2.1]." (iv) Duty Free Imports: Kautilya [p. 238] suggested "Any items that, at his discretion, the Chief Controller of Customs, may consider to be highly beneficial to the country (such as rare seeds) [2.21] are to be exempt from import duties."