Kautilya's Arthaśāstra and modern accounting and auditing

In this article, I suggest that the ICAI is well positioned, as we approach Viksit Bharat\'s target date of 2047, for a global leadership role in accounting and auditing. Viksit Bharat 2047 encompasses not only the economic development of India\'s financial and physical infrastructures, but also progress in a range of matters, including international politics and diplomacy, especially in the United Nations system. It also implies a heightened social responsibility: as Rabindranath Tagore constantly reminded us, India\'s national success will always be closely tied to the promotion of social equality. In addition, Viksit Bharat 2047 has strong implications for international professional practices, and accounting and auditing are fields of endeavour in which India already excels. India\'s domestic genius in these areas is ripe for a significant global impact.

India\'s sui generis culture of accounting and auditing derives from both its ancient pedigree and its uniquely adaptable character. Only China and Greece possess documented histories of accounting and auditing to match the antiquity of those practices in India, but in both those countries the developments have been marked by rupture as much as by continuity. India has a far more obviously continuous history in accounting and auditing.

Kautilya\'s Arthaśāstra is a convenient starting point for understanding the brilliance of India\'s inheritance of uniquely rich accounting and auditing practices. The Arthaśāstra is India\'s oldest extant text on statecraft: the most recent manuscripts date from the early Common Era but the composition of the text is generally dated far earlier. The Arthaśāstra was a blueprint for statecraft that encompassed political governance, state finances, warfare, and economics, alongside audit techniques intended to safeguard public assets from error or fraud. The Arthaśāstra defined sound accounting and auditing as central planks of the administration of socio-economic and political institutions.

As with all ancient texts, there is scholarly disagreement over the Arthaśāstra\'s precise date of composition, but we would do well to follow Amartya Sen\'s judgment that it was written in the 4th century BCE, gathering and consolidating older Vedic traditions (Sen 2005). Although some historians attribute the authorship of the Arthaśāstra to several hands, there is no reason for us to dispute Sen\'s view that Kautilya was the primary author. Kautilya (also known to posterity as Canakya or Vişnugupta) served as prime minister or senior advisor to the emperor Chandragupta Maurya (350-295 BCE). If Kautilya was the organizing genius behind Chandragupta\'s powerful, centralized state, the Arthaśāstra was clearly his masterful policy book.

The Arthaśāstra is divided into 180 \"topics\", spread over 15 sections, or \"books\". Our interest in Kautilya\'s masterwork resides mainly in Book Two, titled \"On the Activities of Superintendents\", that covers topics 19 to 56. Book Two provides a treatment of accounting practices, internal controls, and verification practices of surprisingly enduring value. The emphasis of Book Two is on the activities of bureaucrats charged with securing and controlling the state\'s revenues (Mattessich 1998), and the procedures it advocates to safeguard state finances. In their precision and sophistication these procedures adumbrate many of the modern principles of accounting and auditing practices (Bhattacharyya, 1989). Let us consider some of the Arthaśāstra\'s most striking passages.

In words that resonate with professional auditors today, Kautilya memorably warned us that \"just as it is impossible to know when fish, moving about in water, are drinking water, so it is impossible to know when officers, appointed to carry out tasks, are embezzling money\" (Topic 27). The danger of fraudulent and corrupt practices is a perennial aspect of the human condition, no less today than in Kautilya\'s time, and in the Arthaśāstra accounting and auditing practices are crafted accordingly to minimize risks. One way of both preventing and detecting acts of fraud by those responsible for the custody of attractive assets is to \"shuffle\" individuals \"among different tasks\" (Topic 27), a prudent approach known today as the segregation of responsibilities (or duties). By denying individuals the continuous, untrammeled supervision of attractive assets, we reduce the opportunities for theft. Kautilya lists 40 methods for the misappropriation of assets (Topic 26): this very comprehensive list is indicative of the large variety of techniques used by crafty fraudsters. The Arthaśāstra does not present its list of asset misappropriation methods as a checklist to be ticked off, but rather as a thought-provoking reminder of the variety of possible manifestations of this crime.

Kautilya is also interested in standardizing measurements, for comparability purposes. In calling for \"standard weights and measures\" (in Topic 37) he realizes that standardization is a prerequisite for reliable accounting and auditing. Another aspect of standardization is the application of consistent principles to the measurement and valuation of assets. In an era in which the adequacy of food storage often meant the difference between survival and starvation for the general population, Kautilya emphasizes the importance of measuring changes in the volumes of foodstuffs. For example: \'the amount of gain or loss that different types of grain undergo when they are pounded, ground, milled, and fried, and when they are soaked, dried, or cooked\' affects their periodic measurement (Topic 33). This hints at the ways in which modern cost accountants assess the shrinkage of perishable foodstuffs. Kautilya also advises the state\'s Chief Goldsmith to ensure the consistent quantity and quality of the gold under his purview, but Kautilya does give space for \"depletion and wear\" (Topic 32). This is a clear indication of the concept of depreciation applied to fixed assets, and specifically to gold as a store of wealth, and it is consistent with modern accounting practices.

In terms of accruals accounting, the manner in which accounting transactions are allocated to the time periods most closely related to underlying occurrences, rather than to the more arbitrary timings of related cash flows, Kautilya encourages an accruals basis for the recognition of the state\'s revenues. He describes income as comprising three elements: \"the current, the miscellaneous, and the arrears\", defining the latter as \"carryovers from the previous year\" (Topic 24). This has clear affinities with revenue recognition concepts embodied in modern financial reporting standards. Kautilya also sets out strict parameters for defining accounting periods, presumably to ensure a rigorous cut-off of transactions, and he refers to \"estimated revenue\", an indication of the importance of budgetary control through variance analysis (also Topic 23). He also emphasizes the importance of ensuring the completeness of consolidated accounts (Topic 25), and this is related to maximizing customs duties (Topic 28). From these examples we can see how Kautilya promotes tight accounting controls over the state\'s revenues.

A fuller analysis of the Arthaśāstra\'s guidance for sound accounting and auditing practices would require a substantial book-length treatment. But our brief review indicates that the Arthaśāstra is a starting point for understanding the role of accounting and auditing in protecting the public interest in ancient India. In addition to being a national treasure of India, it also has a universal significance as an early expression of timeless principles.

The Arthaśāstra\'s contents have been described as undoubtably Vedic in nature (Saputra & Anggiriawan, 2021). On to this Vedic conceptual bedrock India has assimilated foreign accounting and audit practices during more than two millennia, from the Hellenistic culture of Alexander the Great (introduced to India during Kautilya\'s lifetime) to the centralizing tendencies and Persianate culture of the Delhi Sultanate and the Mughal Empire to the Anglo-American culture of the modern era. Let us briefly consider these waves of foreign influences.

In 324 BCE, three years before Chandragupta established the Maurya Empire, for which the Arthaśāstra (as we have seen) was the administrative blueprint, Alexander the Great abandoned his recent invasion of India. Alexander\'s incursions into the subcontinent had caused immense political, economic, and cultural upheavals, and the Arthaśāstra has been described as a means of reordering the Indian polity following the Hellenistic disruption (Rao 1958). The Greek military invasion of India was accompanied by the arrival of a broader, eclectic Hellenistic culture in which strong Egyptian and Persian influences were discernable (O\'Regan 2024a). Indeed, Alexandrine Hellenistic influences had probably the first major, external impact on Vedic statecraft, undoubtedly including accounting and auditing techniques to safeguard public finances. Some of these Hellenistic influences may well have found their way into the near-contemporary Arthaśāstra.

In the Islamic period, notably the Delhi Sultanate and the Mughal Empire (together lasting from the early thirteenth to the mid-nineteenth centuries of the Common Era), new accounting and auditing practices were introduced to India. The two Persianate regimes possessed increasingly centralized administrative tendencies, and they introduced new currencies, measurements, accounting practices, and auditing procedures. The Mughals in particular deployed meticulous accounting records and auditing routines (Pollock and Elman 2018). This period of India\'s history culminated in Emperor Aurangzeb\'s Fatawa \'Alamgiri, developed by 500 Islamic scholars, Indian and non-Indian. The Fatawa \'Alamgiri was the Mughals\' Islamic response to the Vedic Arthaśāstra in that it covered the essence of statecraft - political governance, warfare, taxation, legal matters, and economic policies and regulations. And, of course, the safeguarding of state funds through rigorous accounting and auditing procedures.

In the modern era, the main influences on India\'s traditions of accounting and auditing have been Anglo-American. In the British colonial period, under both the East India Company (the hundred years from 1757 to 1857) and the near-century long Crown Rule in India (from 1858 to 1947), the formal institutional structures of Anglo-Scottish accounting and auditing were introduced to India. Following Britain\'s Joint Stock Companies Act of 1844, the remarkable rise of the institutes of chartered accountants in the United Kingdom (Matthews et al., 1998) were mirrored in India, and the ICAI of course traces its origins to affinities with its Anglo-Scottish cousins. Alongside the development of the statutory audit, more informal British auditing practices also arrived in India, through the railways. The chartered accountants\' audit focus was on providing opinions on financial statements, while the railway companies developed the less formal \"bookkeeping\" audit. The latter audit consisted of verifications and spot checks undertaken largely by individuals without formal training in accounting and auditing, with the objective of controlling the notoriously risky revenues of the sprawling railway systems. The \"bookkeeping\" audit was a form of proto-internal auditing, and modern internal auditing is a field in which India has distinguished itself in the twentieth and twenty-first centuries. Following the British colonial era, the United States has dominated both financial auditing and internal auditing internationally, and India has assimilated what it considers to be the best elements of the American professional accounting and auditing bodies.

In summary, the uniqueness of modern Indian accounting and auditing is derived from both a rich Vedic bedrock of theory and practice, and an assimilation of selected foreign influences. Indian accounting and auditing have never been inward-looking, but rather responsive to international \"best practices\", to use a modern expression. In this way, India has preserved the continuity and flexibility of its accounting and auditing culture.

More recently, the independent strength of India\'s accounting and auditing culture has risen to the challenge of modern internal auditing. We have noted that modern internal auditing originated from the humble \"bookkeeping audit\" of England\'s and India\'s railway companies, but today the Institute of Internal Auditors (IIA), an organization based in the United States, claims global pre-eminence for its brand of internal auditing. The IIA promulgates \"global\" professional standards. In India, however, the ICAI has developed Standards on Internal Audit for its members. The principles-based nature of the ICAI\'s Standards on Internal Audit provides India with a protective shield against the international ambitions of the IIA\'s increasingly prescriptive and formulaic standards. In this era of North America\'s checklist-based, unimaginative, and mechanistic style of global internal auditing, the ICAI\'s standards offer a more fluid, creative, principles-based approach, not unlike that of Kautilya\'s Arthaśāstra two and a half millennia ago. The Institute of Cost Accountants of India, the ICMAI, has also issued high-quality, principles-based Internal Audit & Assurance Standards, adding to the effervescence and sui generis nature of India\'s approach to internal audit. No other country in the world has developed two domestic, credible sets of internal audit standards on a par with, or perhaps superior to, the IIA\'s standards (O\'Regan 2024b).

In conclusion, we should discern in the ICAI a vehicle for preserving, safeguarding, and enhancing India\'s millennia-old traditions of accounting and auditing. These traditions, unparalleled anywhere else in the world, bestow on the ICAI (as with the Arthaśāstra) the status of a national treasure of India. This bodes well for the future global influence of the ICAI and its activities. Viksit Bharat 2047 aims to solidify both India\'s hard economic realities and the softer skills of professional expertise. The ICAI, as inheritor of the Arthaśāstra\'s wisdom, is well-positioned for these aims.