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

Explanation and Prediction: Kautilya recommended both preventive and remedial measures to deal with natural disasters. He [p. 116] asserted: "In the interests of the prosperity of the country, a king should be diligent in foreseeing the possibility of calamities, try to avert them before they arise, overcome those which happen, remove all obstructions to economic activity and prevent loss of revenue to the state [8.4, 8.5]." It may be noted again that Kautilya considered the prevention of loss of revenue as crucial to economic prosperity.

Kautilya on the Evaluation of a Policy and the Anticipation of Analysis of Variance: Kautilya did not know how to measure risk or separate the total variation (in the dependent variable, wealth) into explained and unexplained (random) components. However, his insights into issues related to risk are revealed in his work. For example, he was aware of a risk-return trade-off and risk premium. He [p. 619] stated "As between land dependent on rain and land with flowing water [i.e. a river], a smaller tract with flowing water is preferable to a larger drier one because with flowing water, which is always available, the production of crops is assured [7.11]." He [p. 426] suggested an interest rate of 120% and 240% on commercial loans involving highly risky travel through forests and by sea respectively [3.11]. Incidentally, this indicates that capital was in short supply in Kautilya's India. There were no usury laws to regulate interest rates at that time.

Where, W = wealth is the dependent variable, X = exogenous policy variables which may be used to create wealth or prevent any reduction in it, e = random error, the acts of God.

Kautilya used the word "knowable" for finding the causes that promote wealth and the word "foreseeable" for the ability to predict the impact of the various policies. It may be noted that the phrase 'if the cause is knowable and, hence, foreseeable' implies that Kautilya believed that if something can be explained, one should be able to predict it. In practice, that is not always possible. For example, Hahn [1984, p. 10] points out that while scientists are able to explain why earthquakes occur they cannot predict their occurrence.

Additionally, Kautilya [p. 120] stated, "A councilor or minister of the highest rank should be a native of the state, born in a high family and controllable [by the king]. He should have been trained in all the arts and have logical ability to foresee things. He should be intelligent, persevering, dexterous, eloquent, energetic, bold, brave, and able to endure adversities and firm in loyalty. He should neither be haughty nor fickle. He should be amicable and not excite hatred or enmity in others [1.9]." The requirement 'the logical ability to foresee things' for hiring a councilor or a minister is of interest since this 'forward looking' human behavior is the cornerstone of the recent rational expectations revolution.

Kautilya's analysis shows that the application of scientific methodology to accomplish the objectives of 'explanation and prediction' is embedded in accounting. He contended that innovations in accounting methods make two types of contributions. First, his analysis implies that just like innovations such as writing, printing, steam-engine, the electric dynamo and computer microchips, accounting innovations are a general-purpose technology (GPT) which improves the efficiency of the whole economy (see Lipsey et al. [1998a,b] for a discussion on GPT). second, he understood the importance of accounting methods in preventing loss of revenue by detecting fraud and thus contributing to the creation of wealth. Let me elaborate on these themes.