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The Importance of Robust Internal Accounting Systems

This article explores the relevance and application of Principles and Strategies discussed in the 3rd Century BC treatise, Kautilya’s Arthashastra, in Today’s Corporate World.

The treasury is the heart of an organisation. It is always based on the financial performances of the company that it is evaluated by its investors, shareholders and promoters.

Both the CEO (Chief Executive Officer) and the CFO (Chief Financial Officer) have an important role to ensure that the organisation is in good financial condition. It is important for them to not only build a good internal accounting system but also ensure that there are no unwanted expenses. Thus they can control the corruptions that their employees.

In order to achieve this, Kautilya says that a good financial reporting system has to be developed in an organisation. Following are a few steps he advices in order to maintain a good accounting system within an organisation:

In addition to reporting in detail as well as in aggregate, there is also an individual accountability for the revenues and the expenditures” (2.7.24)

The revenues and the expenditures is a continuous cycle. A regular record of both these has to be maintained. A detailed accounting of each of the heads of revenues and expenses is to be recorded by the accounts department. Kuatilya’s Arthashastra deals in depth on this topic covering this subject from various angles.

Mostly, revenues happen in bulk through a single department but expenditures are through many sources. Therefore, a detailed as well as a collective reporting of the same has to be maintained. Expenses have to be recorded not only as heads but also keeping into consideration the individuals who are responsible for the same. In this manner it is easy to keep a track of the outgo in an organisation and who is causing it.

“He (leader) should check the accounts for each day, group of 5 days (a week), fortnight, month, four months (quarterly) and a year” (2.7.30)

Not only proper records have to be maintained, it is important for the leader to check these on a regular basis. As seen above, Kautilya gives the periods of checking these accounts. He says the checking of accounts should be done daily, weekly, every 15 days, monthly, quarterly and yearly.

This system started by Kautilya 2400 years ago is already been widely practiced by organisations across the globe. Not only this principle has been applied in the accounting systems, it can be applied in various departments in order to ensure productivity.

For example, if a sales target or the deadline for completing a project is set, the leader has to keep checking the progress on a daily, weekly, monthly, quarterly and yearly basis. This will keep the employees on their toes and the leader alert and active.

Jack Welch, the former head of GE once said, “Regular reporting and inspections are required in order to get focused and refocused on our goals.”

Contributed by  - Radhakrishnan Pillai

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