Use Data Consent To Strengthen Financial Reporting

India’s Account Aggregator ecosystem allows a paradigm shift to real-time, concurrent audit and of inter-related transactions among companies

Use Data Consent to Strengthen Financial Reporting

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India’s Account Aggregator ecosystem allows a paradigm shift to real-time, concurrent audit and of inter-related transactions among companies; the RBI must use that for regulating Banks and NBFCs, and other companies to enhance the quality of financial reporting

T K Arun

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India’s total fertility rate (TFR), the number of children a woman in India will have, on average, during her lifetime, has dipped below 2.1. Time we upgraded the quality of our financial reporting. What is the connection between the two, you might ask. The link will decide whether India grows old before it becomes rich, or grows rich before it turns old.

When TFR is above 2.1, a woman gives birth to more children, on average, than are required to replace herself and her partner, setting the stage for the population to grow. That 0.1 is to take care of children not growing up to adulthood for assorted reasons. When TFR is 2.1, the population is set to stabilise. Below 2.1, the population is set to decline, after a gap, during which the children who have been born grow to adulthood, reproduce and add to the population.

Grow Rich Before Old
TFR dipping below 2.1 is a significant stage of the demographic transition, the early death knell of the so-called demographic dividend. From levels of underdevelopment marked by high birth rates and high death rates, when societies evolve to low birth rates, the share of the working-age population rises and the share of dependants, those who have to be taken care of from the income of those who work, falls. Even with no increase in output per worker, the sheer rise in the number of those who work increases total output.

Having to take care of fewer dependants makes larger savings possible. Additional savings enable additional investment. That feeds growth. The third component of the demographic dividend is women joining the workforce, making it larger still. Good things don’t last forever. Neither does the demographic dividend. When the birth rate keeps falling, as it happens when TFR falls, fresh additions to the workforce keep dwindling.

Eventually, we all become Japan, with a declining population and a rising share of the non-working elderly within that declining population. The trick is to grow prosperous as a society, before this happens, as Japan has. But this is not automatic. China is desperately asking its people to have three children, instead of penalising them for having more than one, because China is on the verge of a population decline, before having grown rich as a nation.

Growth comes from investment. The more we invest, whether in physical or human capital, the more we grow. Domestic savings finance investment, for the most part. However, an economy can attract external savings, and invest more than it saves internally. The world is awash with investible savings looking for decent deployment: the money must be spent well and generate returns, the returns must be reported transparently, and its due share repatriated to the external supplier of capital.

This calls for credible corporate governance, globally accepted financial reporting standards, and integrity in complying with those standards. The more we improve on these parameters, the greater we stand to gain as an economy and a society. India’s accounting standards are now aligned with global norms. But what of corporate governance and integrity of financial reporting? Not great, the last time we checked with Nirav Modi.

Better shareholder vigilance that makes itself heard and felt at annual general meetings, and a functional market for corporate control, which threatens to oust mediocre managements and replace them with those who express their faith in the company’s ability to generate better returns from its assets by buying up its shares at a premium, can improve corporate governance.

Call Account Aggregators
And leveraging data-sharing consent for audit will improve the quality of financial reporting beyond anything available anywhere else in the world. India now has in place a body of so-called Account Aggregators, who can pull data on a company’s diverse financial transactions from multiple sources and share the consolidated data, with the company’s consent, with one or more financial entities. The goal is to let these entities that gain access to financial transaction data make an informed judgement on the company’s creditworthiness. Instead of relying on unaudited quarterly reports or a year-old audited annual report, the data consent layer now allows lenders to use current, real-time financial data.

The RBI must mandate all banks and non-banking financial companies (NBFCs) to share their financial transaction data with their audit firms and with their supervisor, the central bank itself, on an ongoing basis. Similarly, the company law must be amended to mandate all companies to share their financial transactions in real time with their audit firms.

This would permit concurrent audit and sophisticated analysis that can deploy algorithms to detect circular lending among a group of borrowers and lenders, opaque to the sequential scrutiny of individual entities. The transparency that operationalising the data consent layer for purposes of audit would bring about would enhance the credibility of India’s financial reporting. This would enthuse the world’s savings to pour into Indian projects, to ratchet up growth and prosperity.

It would also mark a pioneering paradigm shift in audit for the world at large. Audit would turn from a dry, thankless slog to the harbinger of virtue and prosperity.