UNIVERSITY OF YORK
Sidney J. Gray
UNIVERSITY OF SYDNEY
THE CREATION OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA: THE FIRST STEPS IN THE DEVELOPMENT OF AN INDIGENOUS ACCOUNTING PROFESSION POST-INDEPENDENCE
Abstract: This paper applies the theoretical framework proposed by McKinnon  to the creation of the Institute of Chartered Ac-countants of India (ICAI) which represented an important change to the accounting system in India post-independence. The development of the ICAI is categorized into three phases: source, diffusion, and reaction. Intra-system activity, trans-system activity, and the socio-economic and political environments are shown to influence all stages of the change. Within these phases, the paper focuses on the involvement of the state in the development of the ICAI, credentialism and the importance of the title “chartered,” the disciplinary powers of the ICAI, and the issue of mutual recognition and reciprocity with foreign professional accounting organizations.
This paper applies the theoretical framework of McKinnon  to the creation of the Institute of Chartered Accountants of India (ICAI) and focuses on the involvement of the state in the development of the ICAI, credentialism and the importance of the title “chartered,” the disciplinary powers of the ICAI, and mutual recognition and reciprocity. The paper traces the process of change from the initial proposal to establish the ICAI to its operation in its first years with a focus on the factors influencing the creation of the Institute and its practices. The path of profes-
Acknowledgments: The authors would like to thank Steve Toms, Suki Sian, Mattias Beck, and members of the Cardiff Business School for their comments.
sionalization is then compared with similar processes in other post-colonial states.
The research is informed by the accounting history lit-erature, in particular that related to the sociology of professions. Within this literature, there have been two main approaches to the study of professions, a functionalist-based view and a more critical, conflictual view which predominantly informs this paper. The critical view proposes that professions function as self-interested, occupational groups which act in ways to promote themselves and their members in order to gain rewards associated with professional standing. These include both financial rewards and other more intangible benefits such as prestige, status, and influence [Freidson, 1973; Larson, 1977; Abbot, 1988; Macdonald, 1995].
Within this critical approach to the accountancy profes-sion, key themes have included the study of closure in different socio-economic and political contexts; the understanding of the state-profession relationship, including the importance of senior bureaucrats in the development of accounting professions; and the interface between imperialism and accounting professions. Chua and Poullaos , in particular, have called for historical analyses of specific accounting professionalization projects in different economic, social, and political conditions. Their interests include an analysis of the state-profession axis, a more nuanced tracing of the process of professionalization, and an exploration of unintended consequences within the professionalization process.
Within the accounting history literature, there have been a significant number of studies of accounting professions in the Anglo-Saxon context; for example, studies of accounting professions in the U.K., U.S., and Australia [Lee, 1985, 1997; Kedslie, 1990; Chua and Poullaos, 1993, 1998, 2002; Robson et al., 1994; Shackleton, 1995; Walker and Shackleton, 1995, 1998; Carnegie and Parker, 1999; Carnegie and Edwards, 2001; Walker, 2004]. Only recently have researchers started to study accounting professions in non-Anglo-Saxon states and in post-colonial states [Annisette, 1999, 2000; Dyball and Valcarcel, 1999; Susela, 1999; Yapa, 1999; Uche, 2002; Xu and Xu, 2003; Bakre, 2005a, b; Sian, 2006]. Our study seeks to add to this literature with an exploration of the creation of the ICAI in 1949 and a comparison of the trajectory of professionalization in post-independence India to other British colonies.
In the context of a study of accounting professions in post-colonial states, India is important for several reasons. India was one of the first countries to be colonized by the British and was important enough to have an office dedicated to it, the India Office, separate from the Colonial Office which dealt collectively with all other British colonies. India was also one of the first countries to gain independence from Britain after World War II, and the path of professionalization there showed some interesting features, falling between the processes of professionalization in settler and non-settler post-colonial states. Today, India is the largest secular democracy in the world and is becoming increasingly important in economic terms.
During the colonial period, India was governed by Britain with indigenous Indians having little input on how India was governed. It was only after independence that Indians were able to implement their own approaches to governance. Key developments in the creation of an indigenous institute occurred very soon after independence. The ICAI was established in 1949, just two years after independence. This early period of independence (1949-1955) was an important time for the accounting profession in India. As a time period, this era also differs from other studies in which professionalization has been examined in the late 18th and early 19th centuries or in post-colonial states gaining independence in the 1960s.
There has been one major study on the professionalization of accounting in India, undertaken by Kapadia . This study extends the work of Kapadia by analyzing the creation of the ICAI using the theoretical framework proposed by McKin-non . This approach places the analysis of the creation of the ICAI within the professionalization accounting literature and compares the process in India to that of other post-colonial states.
The article is structured as follows. The theoretical frame-work applied in this paper is discussed next, followed by an outline of the creation of the ICAI. There then appears a discussion of the political, economic, and social environments of India at independence and an analysis of key events in the creation of the ICAI in 1949. Its operations until 1955 within the context of the theoretical framework are analyzed. We conclude by comparing the process of professionalization seen in India with that of other post-colonial states.
THE THEORETICAL FRAMEWORK
and development. Within this framework, the accounting system is viewed as one of the social systems in the country of study, neighbored by other social systems which affect and are affected by that accounting system. What is important are not the technical outputs of the system but the interactions within the system and between systems, the institutional environment surrounding the system, and the authorities who formulate regulations and influence the process of accounting change, both from within the accounting system and from neighboring systems. All systems operate within the cultural and social context of the country, which affects both the interactions between different parts of the accounting system and the interactions with its neighboring systems. Explanations for change events are provided in terms of four major aspects: intrusive events, intra-system activity, trans-system activity, and the environment [Harrison and McKin-non, 1986; McKinnon, 1986]. The framework, as applied in this paper, is shown in Diagram 1.
The source phase encompasses the factors or events causing change to occur. The diffusion phase looks at how change is dispersed and accommodated within the system, and the reaction phase chronicles how the accounting change is modified subsequent to the diffusion phase. Both the diffusion and reaction phases encompass intra-system activity, activity between the different components of the accounting system, and trans-system activity, activity between the accounting system and its neighboring systems.
Intra-system activity involves interactions between regu-latory authorities within the accounting system, including government departments directly involved in the regulation of accounting and professional accounting bodies. Trans-system activity involves interactions between the accounting system and its neighboring social systems. It is expected that in any country the social systems that are most likely to affect the accounting system are the political, legal, corporate, economic, financial, and international systems. The political and legal systems and parliament are assumed to exert important influences on the accounting system primarily because accounting regulation in most countries incorporates some elements of statutory regulation. Corporate sector actors as preparers of accounting information are involved in processes of accounting change and, as such, also influence accounting systems. Accounting information can be linked to economic decision making and performance measurement; hence, economic and financial systems may also influence accounting systems. Finally, international systems also influence accounting systems as, for example, the influence of one country over accounting systems in another through spheres of influence [Parker, 1989] or with the influence of international bodies such as the International Accounting Standards Board. The political, economic, social, and/or environmental contexts of the country affect all social systems and all phases of change and, as such, also impact the accounting system.
In this paper, the theoretical framework is applied to the creation of the ICAI in 1949 and to key issues in the first six years of its operation. The paper focuses on the main regulatory authorities within the accounting system and their interactions, as well as interactions between the accounting system’s authorities and interested parties from neighboring systems who influenced the ICAI’s creation. McKinnon’s framework is used to inform, guide, facilitate, and structure the research without constraining the analysis of the relationships between key interest groups involved in accounting change [Chua and Poullaos, 1993, 1998]. Furthermore, the paper explores the influence of the socio-economic and political environments on the process of change.
Data for the analysis of the creation of the ICAI come from several sources: parliamentary reports and debates on the Charted Accountants Act, 1949; the Chartered Accountants Amendment Act, 1955; the journal of the ICAI, the Chartered Accountant, which has been published monthly since July 1952; and secondary sources on the development of the ICAI. In addition, semi-structured interviews were undertaken in 1998 with different parties interested in accounting in India. Interviewees were asked about different accounting changes in India – what led to the changes, the process of change, and the factors influencing the change. The interviewees were not able to provide direct information on the creation of the ICAI as access to individuals directly involved was no longer possible. However, the interviewees were able to provide supporting information as to the general processes of change in the country and the key parties involved in the process, thus providing valuable support for the archival data. Specifics of these data sources are detailed in the primary sources section of the references.
In the next section, the process which led to the creation of the ICAI and its operations to 1955 is outlined, followed by a brief discussion of the socio-economic and political environments of India at independence.
THE CREATION OF THE ICAI
The creation of the ICAI can be broken down broadly into two periods – the diffusion phase from 1930 to 1949 and the initial reaction phase from 1949 to 1955. The earlier period covers the years leading to the foundation of the Institute while the later period featured those events subsequent to its creation.
The ICAI was established in 1949, soon after independence, by the Chartered Accountants Act, 1949. However, the process can be traced back to an earlier time, in particular to the 1930s when the Indian Accountancy Board (IAB), one of the main institutions involved in the birth of the ICAI, was itself born.
Auditors in India, known as registered accountants, had been required to register with local governments since 1913. The IAB was created in 1932 by the government of India using powers given to it under the Companies (Amendment) Bill, 1930. The role of the IAB was to advise the governor general on all matters of administration relating to accountancy and auditing and to assist him in maintaining the standards of qualification and conduct of persons enrolled on the register of accountants [Companies (Amendment) Bill, 1930].
It was intended by the accountants on the IAB that the IAB would, in time, develop into an autonomous accounting profession in India, very much along the lines of the British model with an accounting profession independent of the government and other interested parties, headed by an independent accounting institute run by elected members. This had not occurred by the time of independence, and the first aim of the Indian accountants was to implement this plan.
The Indian accountants on the IAB initiated the creation of the ICAI through discussions with the Ministry of Commerce (MC) regarding the possibility of setting up an accounting institute. The initial strategy was to establish an independent private accounting institute run by an elected council of accountants which, it was hoped, would have informal government backing. However, very early on, this process came under the control of the MC which was itself influenced by the Ministry of Finance (MF). What emerged was a very different institutional structure than that envisaged by the IAB. The ICAI was eventually given a parliamentary charter and was operationalized under the Chartered Accountants Act, 1949 [The Chartered Accountants Act, 1949; Indian parliamentary debates on the Chartered Accountants Bill 1948, April 1949; Kapadia, 1972].
The ICAI was born within six months of the Chartered Accountants Act becoming law in May 1949. The council of the ICAI was staffed with elected representatives from the membership plus nominated representatives from the government, both the MC and the MF, as well as from chambers of commerce representing the corporate sector. The council held its first meeting on November 15, 1949, and elected G.P. Kapadia, an important figure in the creation of the ICAI, as its first president.
The ICAI gained some authority from its statutory basis and government backing. However, it still needed to persuade the government and the wider community of its expertise and credentials in accounting. In particular, it wanted to demon-strate to the government and wider interest groups that the ICAI was indeed the leader of a “reputable profession” with strong procedures and processes and which regulated its members effectively. The reasons for this desire were two-fold: first, the ICAI sought to pre-empt any undue interference by the government in their affairs and, second, it wanted to prevent the development of rival professional accounting organizations.
The ICAI did this by seeking to establish a strong, competent secretariat and to develop processes to deal with examinations, education, professional ethics, and discipline. In doing so, the Indian professional institute was able to control entrance into the newly formed organization, to implement its own educational and training requirements using internally controlled professional examinations and articleship requirements, and to begin the articulation of ethical rules. In practice, there was little interference from the government and others outside the Institute in these matters. In adopting these practices, the ICAI modeled itself very much on the British design, that of a private-sector professional body setting its own examinations and training regulations, but without adopting British accounting qualifications directly.
Throughout the period, there were both formal and social interactions between the ICAI and the government. For example, government officials were represented on the council of the ICAI and were invited to attend key functions. On the whole, there was support for the ICAI. The government expected the ICAI to create a strong, semi-independent, and ethical accounting profession. The corporate sector and other parties interested in accounting supported the ICAI with only a few issues needing to be resolved. The first of these was the issue of mutual recognition and reciprocity, discussed below. The second was the creation of a second professional accounting institute, the Indian Institute of Cost and Works Accountants, which is outside the scope of this paper [Indian parliamentary debates on Chartered Accountants Bill 1948, April 1949; editorials, Chartered Accountant, 1952-1960; Indian parliamentary debates on Chartered Accountants Amendment Bill 1955, April 1955].
THE POLITICAL, ECONOMIC, AND SOCIAL ENVIRONMENTS OF INDIA AT INDEPENDENCE
India gained independence from the British in 1947 after a long colonial period. The economy inherited by India at independence was in a very poor state, predominantly due to British imperial policies. During the period of colonization, the economy of India had been run mainly in the interests of Britain. For example, it was British policy that India produce raw materials and foodstuffs which were exported to Britain while British manufactured goods, fashioned from these same raw materials, were in turn exported back to India. This import/export policy was very much in the interests of British entrepreneurs. In addition, much of the economic surplus generated by India had been
1References for the discussion that follows are Panikkar, 1964; Spear, 1978; Kumar, 1982; Kulke and Rothermund, 1990; Jalan, 1992; Rothermund, 1993; Brass, 1994; Brown, 1994; Joshi and Little, 1994; Dreze and Sen, 1996.
Verma and Gray: Institute of Chartered Accountants (India) 139
exported back to Britain or spent on British administration and the British army. India was left with a predominantly agrarian economy using low-productivity methods with little use of fertilizers and irrigation to improve output.
Foreign capital, especially British firms, dominated industry in India, either directly through ownership or indirectly through managing agencies. Some Indian family-based companies such as the Tata group ran successful businesses, for example in iron and steel, but these were insignificant in comparison to British-run companies. At independence, what little Indian industry there was produced low-technology, low-productivity, low-wage, and labor-intensive goods, concentrated in only a few selected industrial sectors such as textiles. There was little production of capital goods and a lack of infrastructure industries, mod-ern banking, and insurance. Overall, India’s economy was very underdeveloped with low per-capita income, poor economic growth, prevalent poverty, and little industrialization. In ad-dition, India also had to deal with problems arising from the partition of India into India and Pakistan. A large and violent migration of people between the two new nation states created a large number of refugees.
India also inherited some advantages at independence, in-cluding both tangible and intangible assets. Numbered among tangible assets were a national transport system, some development projects (such as food growing and irrigation projects), and some reserves of foreign exchange. Intangible assets included an established political party, the Congress Party, which had gained much experience while opposing the British rule of India; an attitude of monetary and fiscal conservatism; and an administrative apparatus to run the institutions in India after independence.
The problems outlined above were initially tackled by the Congress Party led by Jawaharlal Nehru, a western-educated, Fabian socialist who held strong beliefs on economic develop-ment, social welfare, and foreign affairs, and who dominated the political landscape of India until his death in 1964. Many political, economic, and financial institutions and systems were implemented in this period. The political system adopted by India at independence was similar to that seen in Britain in many ways with a cabinet-style government led by a prime minister and supported by a strong civil service. India chose a federal structure and a system of parliamentary democracy in which there was both centralized and regional government. Responsibility for economic and social planning, trade and commerce, commercial and industrial monopolies, and trade unions was shared between central and local government.
Despite his Marxist tendencies, Nehru did not lead India towards communism. Instead, he introduced a mixed economy in which there was a role for both private and public enterprise and in which socialist ideals were operated within a secular democracy. The key elements of the economic system that were implemented soon after independence included central planning of the economy, the development of a large public sector, control and licensing of private enterprise, price control within the private sector, the use of import substituting policies, the introduction of a predominantly public financial sector with nationalized banking and insurance, state control of foreign investment, protective tariffs, and prohibition of imports. These were all enacted using legislation promulgated by Parliament and governmental resolutions and ordinances.
Social reform also took place under Nehru with the outlawing of untouchability, the introduction of quotas for ex-untouchables in government services, and the passing of laws improving the rights of women in the Hindu Succession Act (1955) and the Hindu Marriage Act (1956). The Hindu Succession Act gave women equal rights with men in the matter of succession to property, while the Hindu Marriage Act provided women protection and rights in marriage and divorce. Once again much of the social reform took place through legislative means with strong involvement by government bodies.
Despite initial optimism for strong economic growth and rapid social reform in the early 1950s, India started to face many economic problems from the late 1950s onwards. For instance, there was deterioration in the balance of payments which led to India’s needing foreign aid, which was explicitly included for the first time in the third five-year plan.
The period 1949 to 1955 was an important time for eco-nomic and social development in India. It is in this time period that the ICAI was created.
ANALYSIS OF THE CREATION OF THE ICAI USING THE THEORETICAL FRAMEWORK
The analysis of the creation of the ICAI using McKinnon’s framework focuses on four main issues: the state-professional axis in determining the structure of the ICAI, credentialism and the importance of the designation “chartered,” disciplinary procedures of the ICAI, and mutual recognition and reciprocity.
THE STATE-PROFESSIONAL AXIS IN DETERMINING THE STRUCTURE OF THE ICAI
The Source Phase: The cause for the early creation of the ICAI in 1949 can be traced to events in the period before independence. The ideal of an autonomous and independent accounting profession had been inherited from the colonial period, and the groundwork for an independent profession, based on the U.K. model, had been put in place with the creation of the IAB in 1932. The IAB had been set up to advise the government on all issues relating to accounting and auditing, including the registration of Indian auditors, and continued in existence until 1949. Initially the members were nominated and represented senior British and Indian accountants; later the IAB contained both nominated and elected members.
The intention of the Indian members of the IAB was to develop an indigenous accounting profession headed by an in-dependent institute, but such a structure had not emerged at independence. The Indian members of the IAB wished to establish an accounting profession based on the U.K. model soon after independence. This vision had been discussed with the government representatives on the IAB with a view to gaining their support for the professional institute.
One of the main reasons that persuaded the government to support the development of an accounting profession came from outside the accounting system. There was the perception in the government that accounting was an important tool for economic development [Report of the Company Law Committee, 1952]. In particular, some of the key aims of the government at independence were rapid economic growth, together with social development leading to a fairer distribution of wealth. The perception held at this time was that accounting could help facilitate both these aims by allowing for the provision of comparable information across the corporate sector, facilitating decision making. It was also thought that the provision of information within the accounting system might help encourage the private sector to act in ways congruent to the government’s aims, and that a stronger audit framework would help monitor the actions of directors and perhaps curb abuses within the corporate sector. Finally, it was also assumed that accounting might also provide information for national economic planning purposes [Report of the Parliamentary Committee on the Chartered Accountants Bill, 1948; Report of the Company Law Committee, 1952; Report of the Company Law Amendment Committee, 1957].
The Indian accountants on the IAB were therefore seen as instrumental in changing the accounting system, but it was clear that they would not be able to do this without the authorization and approval of the government. The MC, in particular, had to be persuaded by the IAB that an accounting profession was important. The government became supportive of the accounting profession due to the social and economic concerns of the time.
The Diffusion Phase: During the diffusion phase, intra-system activity between the Indian members of the IAB and the MC, and trans-system activity between the Indian members of the IAB and the MF, influenced the formation of the ICAI and its structure. The Indian accountants on the IAB at independence argued strongly for an independent, autonomous accounting institute and profession, very much along the lines of the Institute of Chartered Accountants in England and Wales (ICAEW) in the U.K. [Kapadia, 1972; Chakravorty, 1994; interviews with senior representatives of the accounting profession]. The senior accountants on the IAB discussed this with the MC representatives on the IAB, but no immediate action was taken. The MC representatives were more cautious about the creation of a completely independent accounting institute and decided to consider carefully the question of an accounting institute and what form this institute should take if considered appropriate.
The members of the IAB continued to argue their case to members of Parliament, government ministers, and government officials and, in 1948, persuaded the MC to agree to the creation of an institute to head the Indian accounting profession. Although the British model would have been preferred by the Indian accountants, the MC was not amenable. The MC proposed a quite different institutional framework, an accounting institute set up under statutory legislation promulgated by Parliament, with government and corporate sector representation on the council heading the institute. The British accounting model was seen as inappropriate in the social and political environment of India at this time. Strong government involvement characterized all areas of political, economic, and social life. Corporate regula-tion, economic planning, and social affairs were all subject to ordinances, statutes, and involvement of government bodies. As a consequence, an independent profession was not a possibility at this juncture in India. The British model, wherein practicing accountants band together and evolve into an accounting profession headed by an institute through a variety of closure techniques, was not on the cards. Instead, the ICAI was established by statutory legislation with government involvement in both the process of formation of the ICAI and in the ICAI itself.
In 1948, the MC prepared a memorandum on a scheme for an autonomous association of accountants in India and requested feedback on its ideas. In particular, it solicited opin-ion on a proposed name for the institute and whether foreign qualifications should be recognized [Kapadia, 1972]. The MC also required the IAB to set up an expert committee to review the proposed scheme. The MC set the terms of reference for the expert committee and required the committee to be subject to its approval. The terms of reference were to embody the tentative scheme for an autonomous association of accountants and to indicate whether the institute could be set up by amendments to existing laws or whether new legislation was necessary. The expert committee was formed on May 1, 1948 by the IAB and approved by the MC on May 13, 1948.
During its review of the MC’s proposals for the creation of the accounting profession, the expert committee of the IAB conducted a detailed study of the constitutions of foreign accounting associations and accountants outside India. In particular, it studied the workings of the ICAEW in the U.K. and the Society of Certified Public Accountants of New York. It was also in frequent contact with the MC on the proposals it was considering so as to discuss proposals before they became finalized [editorials, Chartered Accountant, 1952-1960; Kapadia, 1972; interviews with senior representatives of the accounting profession].
The IAB’s expert committee submitted its report on the autonomy scheme proposed by the MC together with a draft of possible legislation in July 1948. The main recommendations included that a professional accounting institute, called the ICAI, should be set up by a special act of Parliament, the Chartered Accountants Act. The members of the institute would initially be Indian registered accountants, renamed chartered accountants. The role of the ICAI would be to set examinations for ICAI membership, regulate the training of its members, regulate certificates of practice given to its members, and exercise disciplinary procedures over its members. The affairs of the ICAI would be managed by the council consisting of 15 elected representatives, one nominated representative of the corporate sector, and three nominated representatives of central government. The council of the ICAI and the accounting profession would be completely autonomous, free from control from the central government, except in a small number of matters which would be agreed and specified in the Chartered Accountants Act.
During this period, the Indian accountants tried to restrict outside involvement in the institute and tried to minimize the perceived adverse effects of the institutional form that had been imposed on them. Their aim was to retain as much control over the admission, educational, and disciplinary requirements of accountants as was possible in the socio-economic and political climate of India at this time. For example, they obtained an informal agreement that governmental involvement in the new institute would be kept to a minimum and that is was not the government’s intention to be involved in its daily operations. In this period, there were two main areas of contention and debate – the use of the designation “chartered,” and the issue of reciprocity and mutual recognition. Both issues were resolved through intra-system activity between the MC and the Indian accountants on the IAB. The former was settled in the diffu-sion phase and the latter, straddling the diffusion and reaction phases, was finally resolved in the reaction phase.
Once the expert committee had reported, the MC reviewed the report of the expert committee and approved its recommendations to form an accounting institute, the ICAI, headed by a council run by elected members but with governmental representation as well. The MC then prepared a circular on the proposals to set up the ICAI which it distributed to all government departments. At this stage, trans-system activity played an important role in the processes of the proposed accounting institute. The MF, unhappy with the disciplinary procedures of the institute with respect to taxation matters and interactions between the Central Bureau of Direct Taxes (CBDT) within the MF and Indian accountants on the IAB, significantly altered the disciplinary procedures of the proposed institute. Once this issue had been resolved, the Chartered Accountants Act, 1949 was promulgated through the parliamentary system and the ICAI was formed.
Once established, the authority of the ICAI was not com-pletely reliant on its own status and reputation which it devel-oped over a period of time using a variety of strategies to gain a monopoly over competing, would-be accounting organizations. The authority of the ICAI and the accounting profession came, in some part, from statutory authority and governmental backing with approval given to an accounting system more akin to that of some European countries [Bocqueraz 2001; Ramirez, 2001]. Thus, although not an intended outcome, the accounting profession ultimately gained some credibility through the direct involvement of the government. The Indian accountants had to accept this intrusion and revise their initial professionalization strategy. They had to work with the MC’s proposals in order to try to minimize the government’s involvement as far as possible [Kapadia, 1972; interviews with senior representatives of the accounting profession].
CREDENTIALISM AND THE IMPORTANCE OF THE DESIGNATION “CHARTERED”
The name of the institute was determined by intra-system activity in the diffusion phase, by interactions between the Indian members of the IAB and the MC. The IAB had suggested that the name of the institute might be “The Institute of Chartered Accountants of India.” The MC was concerned about using the name “chartered accountant.” It argued that this might cause some problems with the British accounting profession since the name might be deemed to be too similar to that of the ICAEW in the U.K. In particular, after consultation with the Ministry of Justice (MJ), the MC argued that the term “charter” had become associated with a British royal charter and, thus, should not be used by the IAB for the proposed institute. In addition, some Indian accountants who had travelled to the U.K. and qualified with the ICAEW raised some objections to the use of the term “chartered accountant.” These accountants argued that this might cause some confusion in the corporate sector as to the institute with which accountants had qualified. The British qualified accountants wished to be distinguished from accountants qualified in India as they expected that they would have higher status and gain more work than Indian qualified accountants [Indian parliamentary debates on the Chartered Accountants Bill 1948, April 1949; Kapadia, 1972; interviews with senior representatives of the accounting profession].
The IAB was able to argue successfully that the name “In-stitute of Chartered Accountants of India” was appropriate and that no confusion would arise with this name [Kapadia, 1972]. The name was of great importance to the IAB due to the perception of quality, prestige, and status that had become associated with the term during the colonial period as well as the preference for audit work accorded to chartered accountants in this period. Any other term in the IAB’s opinion would signal a lower-status profession and was, thus, undesirable. At the request of the IAB, the MC obtained further advice from the MJ, which advised that the proposed accounting institute be set up under a parliamentary charter. Thus, the MC was finally persuaded that the name of the proposed institute could be the “Institute of Chartered Accountants of India” and the issue was resolved.
An important role for the proposed ICAI was disciplinary. The expert committee’s report proposed that this was to be undertaken internally by a disciplinary committee. The CBDT within the MF raised objections to the proposal. It was unhappy that the ICAI should have complete autonomy to conduct disciplinary proceedings with regards to income tax matters and argued that it would be too much to expect a relatively new profession to deal with issues such as vested interests and independence. Indeed, other professions with much older traditions and histories than the accounting profession (e.g., the legal profession) were not self-regulating but instead were controlled by the courts. In addition, investigation of cases of professional misconduct in income tax matters by the Council of the ICAI might involve confidential information about assesses which was not desirable and contrary to the Income Tax Act, 1922 [Indian parliamentary debates on the Chartered Accountants Bill 1948, April 1949; Kapadia, 1972].
The CBDT argued in favor of tightening control over the accounting and auditing profession. Specifically, it suggested that the list of persons prevented from being chartered accountants should be expanded to include anyone who had been dismissed from public service and anyone upon whom a final order of penalty had been imposed under the income tax laws. The Bureau also argued that the dennition and scope of audit needed to be more tightly denned so that auditor negligence could be more easily determined, that auditors of private companies should possess the same qualifications as auditors of public companies, and that the involvement of accountants in cases of under payment of tax should be classed as gross negligence [Indian parliamentary debates on the Chartered Accountants Bill 1948, April 1949; Kapadia, 1972].
The IAB were particularly concerned about the MF’s objections. It wanted as independent an institute as possible which would deal with all disciplinary proceedings and tax-related issues on its own. The IAB defended its proposals arguing that autonomy was important for the profession and that government involvement in professional misconduct matters would seriously affect the standing and reputation of the profession. It also raised the issue that the MF had informally agreed previously to an autonomous profession and suggested that the Ministry was now being unreasonable by withdrawing its agreement. Finally, it argued that other accounting professions in the world had similar powers to that proposed for the Indian institute by the IAB. Particular reference was made to the accounting professions in the U.K. and U.S. [Indian parliamentary debates on the Chartered Accountants Bill 1948, April 1949; Kapadia, 1972].
The MC considered the viewpoints of both the IAB and the MF before drafting the Chartered Accountants Bill. This bill included most of the recommendations made by the IAB’s expert committee with the exception of its recommendations on the disciplinary process. On this issue, the MC initially accepted the MF’s suggestions and gave the CBDT and the MF powers to deal with disciplinary matters relating to income tax [Kapadia, 1972].
The Chartered Accountants Bill was introduced into Parliament on September 1, 1948, and was referred to a select committee for review on February 1, 1949. The IAB was unhappy with the disciplinary provisions in the Chartered Accountants Bill as it considered that the proposals would undermine the independence and autonomy of the accounting profession and the institute. The provisions also indicated a lack of trust in the accounting profession which would be detrimental to the interests of the accounting profession [Indian parliamentary debates on the Chartered Accountants Bill 1948, April 1949; Kapadia, 1972]. Thus, there was direct conflict between the IAB and the MF. The IAB considered control over disciplinary matters by the MF to be unacceptable, while the MF thought that ICAI control over income tax cases to be inappropriate.
Meetings were held between Kapadia, a senior member of the expert committee of the IAB and later the first president of the ICAI, the Minister of Commerce, and the CBDT to try and resolve the conflict. Initially, these meetings were not successful. It appeared that the bill might not be promulgated since agreement could not be reached on the disciplinary issue. However, the negotiations continued outside of the formal parliamentary system when Kapadia met with the Finance Minister and a compromise was reached [Kapadia, 1972]. The institute would be given powers to deal with all disciplinary issues through its disciplinary committee. However, the disciplinary process would be monitored by government representatives on the council of the institute. In addition, all disciplinary proceedings relating to income tax matters and other public interest matters would be subject to approval of the high courts which would be empowered to alter any penalties imposed by the institute [Kapadia, 1972]. The IAB was not happy with this compromise but ac-cepted that it was probably the best that it could hope to achieve at this point in time.
The importance of informal interactions in the determina-tion of the outcome of the professionalization project ultimately proved to be more important than the formal interaction between interested parties within the parliamentary system. The importance of the interaction between the government and the IAB was also crucial in determining the outcome of accounting change and the development of the accounting profession in India. In this case, two different government departments influenced the process of accounting change.
MUTUAL RECOGNITION AND RECIPROCITY
The issue of mutual recognition and reciprocity was seen to be important in both the diffusion and reaction phases of the creation of the ICAI.
The Diffusion Phase: In the diffusion phase, the Indian ac-countants on the IAB were keen that the proposed ICAI should be recognized by the ICAEW and other foreign professional accounting bodies on a mutual recognition basis. The MC was keen for the ICAI to continue to recognize foreign professional accounting bodies, in particular the ICAEW without any conditions attached to this recognition. At first the expert committee proposed that members of foreign accounting institutes would only be recognized by the Indian institute if members of the ICAI were recognized on a reciprocal basis. The MC put pressure on the expert committee to include provisions to recognize foreign qualified accountants, in particular British chartered accountants, with no reciprocity requirement. The MC perceived this as important for their relationship with the U.K. authorities, in particular with the Board of Trade [Kapadia, 1972]. The Indi-an members of the ICAI rather reluctantly included recognition provisions in their scheme which did not specifically require mutual recognition and reciprocity. However, they also included a provision that the ICAI would recognize accountants with foreign qualifications but typically on a reciprocal basis. This was acceptable to the MC at this stage.
The Reaction Phase: In the reaction phase, the issue of mutual recognition and reciprocity became important once again. The ICAI initially asked the MC for help in negotiations with U.K. authorities concerning ICAI recognition. In response, the MC initiated discussions with the British authorities on the issue of reciprocity. However, it was not successful and the ICAI was not given mutual recognition status. While accountants qualified with the ICAI were given practicing rights in the U.K., this fell far short of the mutual recognition desired. At this stage, the ICAI wished to withdraw recognition of professional accounting bodies that did not recognize it. The MC was concerned since it perceived that its interests and negotiation position on other issues might be impaired if goodwill with the U.K. authorities was lost over the reciprocity issue. It therefore put pressure on the ICAI to continue to recognize British professional accounting bodies and their qualifications both at meetings of the ICAI council and in written letters directed to the council [Indian parliamentary debates on the Chartered Accountants Amendment Bill 1955, April 1955; Kapadia, 1972].
The ICAI did eventually succumb to this pressure, but it did not do so totally. The ICAI proposed issuing regulations on reciprocity, which would allow the recognition of foreign qualifications, but only conditionally. These included a requirement that the foreign qualified accountant must be resident in India, that recognition would be for five years, that the accountant would not be allowed to vote for or become a member of the ICAI council, and that recognition would usually be accorded only if recognition was reciprocal [Kapadia, 1972].
This was a compromise between the ICAI’s and the govern-ment’s positions. Many members of the ICAI, including council members, felt that they had given in to the government by allowing foreign accountants to be recognized without a reciprocal arrangement. However, they also recognized that the government did have power to regulate the ICAI under the Chartered Accountants Act and that the government had indicated that it would override the ICAI if necessary. Hence, the ICAI accepted that it had little choice in bowing to the will of the government since its position might have been weakened further had the government insisted on full recognition of U.K. qualifications with no reciprocal measures at all [Indian parliamentary debates on the Chartered Accountants Amendment Bill 1955, April 1955; Kapadia, 1972].
Despite the actions of the ICAI, the government was not happy with the reciprocity provisions. In 1955, it amended the Chartered Accountants Act and, contrary to the wishes of the ICAI, the government took the power to specify foreign accounting qualifications acceptable in India [Indian parliamentary debates on the Chartered Accountants Amendment Bill 1955, April 1955; Kapadia, 1972]. In the reaction phase, the ICAI was given some autonomy to carry out its activities, but the government proved itself to be more influential than the ICAI on issues which it considered important.
The reaction phase is indicative of the power relationship within the state-professional axis in India. On unimportant issues, such as operational structure, the government let the ICAI progress with little interference. However, on any issue which had wider implications, such as relations with the U.K., the government acted quickly and unequivocally to force its will on the ICAI even if previous legislation had to be amended to achieve this.
Recent work on the professionalization of accounting in-dicates that there are many different trajectories possible and that the outcomes of professionalization projects are varied [Walker, 2004]. It has also been noted that there are particular differences between the professionalization processes in British settler and non-settler colonies post-independence [Chua and Poullaos, 1993, 1998, 2002; Annisette, 2000, 2003].
In broad terms, settler states with dominion rights have seen the development of rival professional accounting bodies which have entered into a variety of inclusionary and exclusionary closure strategies at different periods of time. The process of professionalization has involved both local and metropolitan agencies. What has generally resulted has been the development of local accounting bodies following the British model. However, exact replication of the British model is not in evidence. Instead, a variety of professional structures have developed in different states [Chua and Poullaos, 1993, 1998].
Studies of professionalization have been undertaken in non-settler states where independence was gained in the 1960s and professional accounting institutes were formed in the 1960s and 1970s. While different professional outcomes have occurred in these non-settler states, some commonalities remain. These include the use of legislation in supporting the accounting profession, local professions developing only post-independence, the use of Association of Certified Chartered Accountants (ACCA) qualifications, the importance of both formal and informal interactions, and issues of race and imperialism within the professionalization process [Annisette, 2000, 2003; Uche, 2002: Bakre, 2005a, b; Sian, 20062].
India is an interesting case since it falls somewhere between the two identified groupings. The professionalization project in India started before independence with the British Government looking to create job opportunities for Indians. The British Government, deciding that accountancy was an “appropriate” profession for Indians, established qualifications to allow Indian accountants to become registered accountants and to undertake audit work [Companies Amendment Act, 1930]. This is in direct contrast to the treatment of the indigenous population in other non-settler states before independence where accountancy was not deemed suitable for the local population and professionalization only commenced post-independence [Annisette 2000, 2003; Sian, 2006].
As in other colonial states, the U.K. chartered accountancy profession was held up as the ideal professional organization, the best professional model under colonial rule to which Indian accountants could aspire. That an accounting institute was set up so quickly after independence may be ascribed to the existence of an Indian accounting profession which revered the British model. However, this model was not adopted in India since it was not congruent with the socio-economic and political environments at independence when most social and economic reform was taking place with government involvement and the wide use of statutory legislation and governmental ordinances. Models of professionalization are unlikely to be successful if they are not congruent with the socio-economic and political environment of the country.
The state-professional axis was crucial on the path of pro-fessionalization with the ICAI established by statute and with governmental membership on the ICAI’s council and involved in its disciplinary procedures. The state took early control of the professionalization process; intra-governmental activity influenced the structure of the ICAI. To some extent, the MC allowed the ICAI to operate with the autonomy it desired, but only when the interests of the Ministry were not impacted, as illustrated by the mutual recognition dispute. Throughout the process of establishing the ICAI, informal interactions between key parties were important, a pattern observed in other professionalization studies [Uche, 2002; Sian, 2006].
Credentialism was an important issue for the Indians on the IAB, as for all other professionalization projects, both in settler and non-settler states. The designation “chartered” was adopted after debate with the MC in consultation with the MJ due to the signals of status and quality attached to the term.
British qualifications were not adopted, and ACCA qualifications were not recognized in India. This route to becoming an accountant was therefore not available in India [Companies Act, 1956] in contrast to other non-settler states [Annisette, 2000, 2003; Uche, 2002, Bakre, 2005a, b; Sian, 2006]. Instead, the ICAI council chose to set up its own exams, disciplinary procedures, and code of ethics and did not choose to use British accounting qualifications directly. However, the examination structures were similar to those of the British chartered accountancy profession, indicating the continuance of the imperial influence on the ICAI post-independence. Ideals and practices which had come to be accepted as superior in the colonial period continued to be regarded as superior post-independence.
In this paper, the theoretical framework proposed by Mc-Kinnon  has been applied to the creation of the ICAI in 1949. The framework appears to be useful in analyzing instances of accounting change in India, in this case in the development of the ICAI post-independence. The analysis of this change to the accounting system into source, diffusion, and reaction phases appears to be useful as different issues and concerns and different interested parties affect the process differently at different stages of change. McKinnon’s framework recognizes the importance of the social, political, and economic environments on accounting and links accounting to other social systems. This is confirmed, in this case, by the taxation system affecting the structure of the ICAI in relation to its disciplinary procedures. The analysis of intra-system and trans-system activity also ap-pears to facilitate the analysis of interactions between different parties interested in the accounting system.
However, the framework does have some limitations. The model is complex and the identification of the diffusion and reaction phases may not always be straightforward. Exactly when one phase ends and another begins is not always clear. In reality, the reaction phase may include some events which themselves could be studied as independent changes. There may be some overlap between the phases. Furthermore, the reaction phase of one event may become part of the source or diffusion phase of another event. In addition, not all changes will feature all three phases and all types of activity. Nevertheless, for purposes of structuring the analysis, the split into diffusion and reaction phases and the analysis of intra and trans-system activity appear to be useful in this study as is the centrality of the social, political, and economic environments on the creation of the ICAI.
This paper presents one episode in the development of the accounting profession in post-independence India. Further research is needed on the professionalization of accounting in India, both pre and post-independence. Particular issues that need addressing in the pre-independence period include the development of the local accounting profession under colonial rule, the impact and influence of local and imperial agencies on the trajectory of professionalization, and an exploration of the differences and commonalities between the process of professionalization in India and other colonial states. Within the post-colonial period, the study of further episodes in the development of the Indian accounting profession to explore the trajectory of professionalization in this period would be useful. Particular episodes that need to be analyzed include interactions with the Indian Institute of Cost and Works Accountants, standard setting by the ICAI, accounting regulation within the companies acts, and taxation standards.
Indian parliamentary legislation, reports, and debates reviewed:
Companies (Amendment) Bill, 1930
Report of the Parliamentary Committee on the Chartered Accountants Bill, 1948
Indian parliamentary debates on the Chartered Accountants Bill, 1948
Chartered Accountants Act, 1949
Report of the Company Law Committee, 1952
Indian parliamentary debates on the Chartered Accountants (Amendment) Bill, 1955
Companies Act, 1956 Report of the Company Law Amendment Committee, 1957
Summary of Interviewees:
three representatives from multinational companies in India
three representatives from Indian companies
three representatives of stock exchanges (two from stock exchanges and one
from the Securities and Exchange Board of India) one representative from an international accounting firm two representatives from Indian accounting firms (also, former presidents of the ICAI)
34 representatives of the Indian accounting institutes (two from the ICAI, one
from the ICWAI, and one from the ICSI) two Indian academics
two representatives from the Department of Company Affairs one representative from the tax authorities
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