Journal Historians Accounting Vol. 31,No.

2 2004 December

UNIVERSITY OF MASSACHUSETTSLOWELL

BalbirS. Sihag

KAUTILYA ON THE SCOPE AND METHODOLOGY OF ACCOUNTING, ORGANIZATIONAL DESIGN AND THE ROLE OF ETHICS IN ANCIENT INDIA
B.C.E. economist, Abstract: recognizedthe Kautilya,a 4th century in economicenterprises. He realmethods of accounting importance was absoof economicperformance ized thata propermeasurement whichwas considallocationofresources, forefficient essential lutely ered an importantsource of economic development.He viewed and politicalscience as separatedisciplinesbut considphilosophy an integral ered accounting part of economics.He specifieda very and predicand considered broad scope foraccounting explanation rulesto tionas itsproper bookkeeping Kautilyadeveloped objectives. economic data, emphasizedthe criticalrole of recordand classify of two periodicaudits and proposedthe establishment independent - theTreasurer and Comptroller-Audibut separateoffices important and above all to reduce tor,to increaseaccountability, specialization, enof interest. He also linkedthe successful the scope forconflicts and to theirclarity, forcement of rules and regulations consistency Kautilyabelievedthatsuch measureswere necessary completeness. He also emphafraudulent butnotsufficient to eliminate accounting. ethicalvalues as the glue which sized the role of ethics,considering economicdevelopment. bindssociety and promotes

INTRODUCTION

one despisesprosperity attainedthrough Thevirtuous ignominy.The bounds of good conductshould neverbe

I am grateful to BhoopendraP. Sinha forencouraging Acknowledgments: me to explorethis topic. I am equally indebtedto Linda Kistlerand Richard in improvfortheir whichwerehelpful Mattessich manyinvaluable suggestions, I am also grateful to thereferees and Stephen and clarity. Walker for ingcontent forimproving comments and suggestions thepresentation and their penetrating theanalysis. foranyremaining errors. OnlyI deserve prosecution sharpening Submitted May2002 RevisedOctober 2002 RevisedApril 2003 RevisedOctober 2003 November 2003 Accepted

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are therootsofrighteousness. crossed.Truth and charity is the ornament of all [Kautilya'sSutra, Righteousness Subramanian, pp. 39, 47, 62]. in the It is possibleto knoweventhepath of birdsflying servants who hide but not the ways of government sky their (dishonest) income [Kautilya's Arthashastra, p. 283]. Vishnugupta Chanakya Kautilya (popularly known as or guru(professor Chanakya)has been addressedas an Acharya or teacher) and a statesman.Nehru [1998, p. 123] describes Kautilya as follows:"He sat with the reins of empire in his moreas a loved pupil than hands and looked upon the emperor in the as master.Simple and austere in his life,uninterested of and pomp pageantry highposition." rule withdestroying the Nanda (tyrant) Kautilyais credited and installingChandraguptaMaurya (321-297 B.C.E.) on the throne.No one reallyknows the dates of his birthor of his death. It is almost certainthat he and ChandraguptaMaurya were adults in 321 B.C.E. when theysucceeded in topplingthe It is reasonableto assume thathe was olderand Nanda Dynasty. in orderto commandthe wiser thanChandragupta undoubtedly in the Nanda rule. for success destroying respect necessary 360 born around was B.C.E., was veryinfluprobably Kautilya rule ential duringChandragupta's (321-297 B.C.E.), and might have lived beyondthe latterdate. This implies that he was a of Aristotle(384-322 B.C.E.). However, junior contemporary ideas. thereis no evidencethatKautilyawas aware ofAristotle's the science of wealthand KautilyawroteTheArthashastra, B.C.E.. The welfare,duringthe latterhalf of the 4th century whichare classified Arthashastra contains150 chapters, bytopic well developedparts: in 15 books. It consistsofthreereasonably a foreign issues including (i) nationalsecurity policy,(ii) admincrimeand punishment istration ofjustice including issues, and taxation,labor (iii) policies relatedto economic development, The latter includes a and financialmanagement. management is The Arthashastra role of accounting. discussionon the critical and treatise a theoretical kingseverywhere designedto instruct for all time. Kautilya also completed two other works: (Rules of Science) and Chanakya-Rajanitisastra Chanakya-Sutras Policies). (Science ofGovernment to accounting may be classified Kautilya's contributions of principlesof acthe under fourheadings: (i) development of the and of (ii) the specification methodology scope counting,

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of financialrules and regula(iii) the codification accounting, structure to reduce tions and the creationof an organizational of interest, and (iv) the role of ethics the potentialforconflicts in the restraint of fraudulent accounting(oftenspawned by exoflaw and order, cessivegreed),in themaintenance theefficient and thepursuit ofhappiness. allocationofresources, Mattessich[1998] sheds light on Kautilya'scontributions elementsof modernprinunderthe first heading.He identifies in Kautilya's Arthashastra and shows thatit ciples of accounting contains more accounting theory than Pacioli's Summa. Mattessich deserves much credit for his interpretations of He makes and bold obserKautilya's implicit analysis. insightful vations,notingthat many studies in accountinghistoryhave on the search for the originof doublefocusedtoo narrowly He on a par entry bookkeeping. places Kautilya'sArthashastra withPacioli'sSumma. In thispaper,I concentrate on Kautilya'scontributions under the remaining threeheadings.A modestattempt is made to offer glimpsesinto Kautilya'sgrandvision and his impeccable logic. The second sectionofthepaper containsKautilya's ideas on the scope and methodology of accounting.Two typesof argumentsare presented to show thatKautilyaconsideredexplanation and prediction as the objectivesof analyticalinquiriesrelated to accounting. First, it is argued that he did not recommendseparatingaccounting fromeconomics. He proand thusimpliedthataccounting had posed testablehypotheses an equal claim to the use of the scientific method.Second, acto Kautilya, evenifaccounting is considered a discipline cording is still scientific. It separate fromeconomics,its methodology thatKautilyaunderstood the imappears on closerexamination portance of the accurate measurementof economic performance to economicgrowth. He linkeddecisionson production and tradepatterns to profitability and implicitly consideredinnovationin accountingmethodsas a general-purpose technology (GPT), which improved the efficiency of the whole economy.Kautilya'sideas on the importanceof the financial healthof the Treasury to achieve the various objectivesof the stateare also includedin thissection. to Kautilya,the major underlying factorforreAccording sortingto aggressiveand creativeaccounting(which he calls 'falseaccounting')is excessivegreed,and he attempted to contain it throughmoral persuasion and legal means. He considered the conditions for ensuring honesty and systemic

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The third sectionof the paper lays out Kautilya's efficiency. conditions forincreasing and ideas on thenecessary efficiency at leastthree conditions. he beHe proposed First, compliance. haveto be lievedthatcitizens officials) (including government in mind, that he modified, informed ofthelaws.With extended, theexisting rulesand regulations. Secand aboveall, codified structure thatreduces the an organizational ond,he proposed of interest. he suggested Third, comprehenscopeforconflicts to increase of rewards and punishments siveschemes complithatmay arise ance. He suggested waysto handleproblems or evena king)ena principal whenever shareholder, (owner, to his Thissection financial trusts operations agents (managers). contributions on systemofthepaperalso recognizes Kautilya's and indeatic record accounting, budgeting, keeping, periodic pendent auditing. much was aware thatethicalvalues encompass Kautilya inrules andregulations. He than thesocialvaluescodified more set of rules and themost believed that even regucomprehensive the forchecking lations was insufficient greedand eliminating The fourth section of the fraudulent for papractices. potential valuesin role of ethical his ideas on thecritical per contains ofwealth. He emand thecreation law and order maintaining in character. virtue ethics the role of good building phasized well ethics was already ofvirtue thattheconcept Recognizing and Hindu in the the Vedas, religious scriptures phideveloped on theaction-oriented he focused principles primarily losophy, leaderand 'servant suchas thegolden ofethics, rule, fairness, the measures to various and improve ethical undertaking ship' work a of dimensions these Before climate. Kautilya's exploring in next is the Arthashastra to The introduction brief provided section. TO KAUTILYA A BRIEF INTRODUCTION
AND THE ARTHASHASTRA

somerudithat Mattessich [1998]noted developed Kautilya "Onemay and stated: ofmodern accounting mentary principles concerns theArthashastra ofwhy evenraisethequestion itself, withaccounting at leastto someextent, issues,whiletheeven an ofAristotle morecomprehensive revealing (despite writings awarenessof economicissues) are silentabout accounting one an empire, vision for hada grand building Kautilya theory." He and based on fairness. thatwas prosperous, stable, secure, not only of prosperity realizedthatthe attainment required

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humaneffort butalso theaccumulation of capital, whichwas notpossible without thedevelopment ofaccounting methods. s Vision: statedhis vision Kautilya Kautilya [pp. 120-121] thus: Thekingdom shallbe protected thecapital byfortifying andthetowns at thefrontiers. Thelandshould notonly be capable of sustaining the [native] but population also outsiders in [whentheycome intothekingdom] timesof calamities. It shouldbe easyto defend from [attacksby] enemiesand strong enoughto control It shouldhaveproductive land neighboring kingdoms. from saline uneven land, (free swamps, rocky ground, . terrain and deserts as wellas wildand [unruly] groups ofpeople).It shouldbe beautiful, with beingendowed arableland,mines, timber and forests, forests, elephant richin cattle. It should notdepend goodpastures [only It shouldhavegoodroadsand waon] rainforwater. It shouldhavea productive witha terways. economy, widevariety ofcommodities andthecapacity to sustain a highlevelof taxation as wellas a [large]army. The shall be [artisans people predominantly agriculturists andcraftsman], devoted towork, honest, loyalandwith masters andservants [6.1.8]. intelligent realizedthattherewas a largegap between his Kautilya ideal economy and thatprevailing in 4th century B.C.E.. His liesin anticipating thepossible thatmayarise genius problems in eliminating sucha gap and devising to resolve them. policies to Kautilya, itwas themoral well as (as According duty enlightenedself-interest) ofa king to increase prosperity, judicialfairnessand national and he constructed a complete consecurity; framework and measures to achieve ceptual suggested practical these Thelevelofabstract in The achieved objectives. reasoning Arthashastra wasunique for itstime. Arthashastra was written in Sanskrit. Now,fortuKautilya's translations are available. It matnately, many English hardly ters which translation is used,becauseall areaccurate. Kangle's ofTheArthashastra is considered the [1972,PartII] translation mostauthentic but is somewhat in and pedantic, adhering to theSanskrit lacksclarity in someinstances. strictly language, thetextual [1992]improves Rangarajan clarity. Two examples illustrate the differences between the two translations. reference to the Sanskrit First, [1.19.34] original Shloka Arthashastra. (stanza)inKautilya's [Part II, p. 47] Kangle translates thisas: "Inthehappiness ofthesubjects liesthehapto thesubjects his pinessofthekingand in whatis beneficial

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totheking, is notbeneficial What is deartohimself ownbenefit. Itstransis beneficial butwhatis dearto thesubjects (tohim)." of his sublationbyRangarajan [p. 149]is: "In thehappiness He shallnot in their welfare hiswelfare. jectslieshishappiness; as benthatwhich consider as goodonly pleaseshimbuttreat Second, theorigito himwhatever eficial pleaseshissubjects." Its translation Arthashastra. nal reference [2.1.16]in Kautilya's by Kangle[PartII, p. 56]: "For,a kingwitha smalltreasury and the country swallows peoplethemselves." up the citizens thus:"A Kingwitha depleted [p. 253] translates Rangarajan and thecounofthecitizens eatsintothevery vitality Treasury is used;but translation in this Kangle;s paper, Occasionally try." are based and interpretations to a largeextent myobservations and introduced on theversion translated, edited, by rearranged, but translation are from this The references Rangarajan. page ones are also provided to theoriginal references (to illustrate, The Book One of of Fifteen Arthashastra). [1.15]means Chapter surMuchcontroversy DateandAuthorship ofTheArthashastra: WestofThe Arthashastra. thedateandauthorship rounds Many itwas notwritten that thehypotheses haveadvanced ernwriters authored scholars B.C.E. and thatmany the4thcentury during are advancedon the basis of it. Most of these hypotheses - thefrequency like words ofuse ofcertain analysis 'stylometric' of ca (and) and va (or) whichvaryamongdifferent parts The - and thefact in thethird that it is written Arthashastra person. and bookto rigorously hisentire Mital[2000]devotes Recently, and evidence methods statistical the examining meticulously He [p. suchhypotheses. to test used,particularly byTrautmann, of ca in use the the difference that shows "This also finds 90] Mital andnoton authorship." andva is basedon subject-matter are botharbiused byTrautmann thatthemethods concludes toprove and often and inadequate contradictory therefore, trary hisclaims. whether thewriting Other critics, question style, analyzing The Arthashastra. of The author the sole was writing Kautilya that from at least in ancient India,was quitedifferent style, of the basis the "On Mital [pp. 22-23]notes, today. prevailing view is the third in the of person, expressed opinions Kautilya of work is not the it that Hillebrandt forward Kautilya by put but of a school,and this is also the opinionof Keithand tooegotisto avoidlooking ButKanesays:"Inorder Winternitz. in the third views their writers ticalancient perput generally son."

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evidence bethere exists no direct against Kautilya Today, ofTheArthashastra, norevidence that itwas ingthesoleauthor the4thcentury B.C.E..Theindirect notwritten evidence, during of TheArthassuch as the writing styleof varioussegments either thedateofitswriting is insufficient to challenge hastra, orKautilya as thesoleauthor.
PossibleReasons forthe Neglect of The Arthashastra: Kautilya's

referred to and revered textwas very widely by scholarsfor after itswriting. more thana thousand years Ray[1999,p. 119] from themany authors likeAsvaghosa, observes Kalidas, "Apart Dandinand others who wereconversant Bana, Visakhadatta, withit,we have references to it and quotations from it right and Charitravardhana in the14th downtothedaysofMillnatha and 15thcenturies A.D. It mayhave lost muchof its validity withthe establishment of the MogulEmpireand particularly with theadvent oftheBritish rule." It is remarkable that TheArthashastra survived theactivities ofsomeoftherulers ofIndia.Thefact that thetext was written in Sanskrit did notfacilitate itsdissemination. Thework resurfaced in 1904 when a manuscriptwas handed to Mr. theLibrarian at theMysore Government Oriental Shamasastry, Library.

KAUTILYA ON THE SCOPE AND METHODOLOGY OF ACCOUNTING Theuse ofscience is thesight Sutra, oftruth [Kautilya's Subramanian, p. 83]. academic accoun[1989]observed: Cushing "Contemporary tants havenotdeserted butthey havein a fundamental science, sense deserted The majority of the researchin accounting. academic today's leading accounting journalsappliesthe research of economics and within theinstiparadigms psychology tutional of He called this in aca crisis setting accounting." and that one of the to resolve it is to counting suggested ways redefine the of He "Acconcluded, simply scope accounting. be in redefined scientific terms as the science that counting may to and the economic of attempts explain predict performance individuals orgroups for the utilization of economic responsible resources." to Kautilya, and By contrast, according explanation arethekey for in accountprediction goals anyobjective inquiry scientific conmethods, ing. This means that by applying accountants do not abandon rather temporary accounting; they

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its original statusand are prepared restore to realizeits full potential. Book 15 ofTheArthashastra contains 'The justone chapter, Methodof Science'but surprisingly it deals exclusively with is placedat theendrather than and interestingly, methodology ofthework. It contains thebeginning somestylistic rules ofthe findin 'University of ChicagoManualof kindthatone might Historians or thestyle Journal. But guideofAccounting Style' a hypothesis, a other rules aremore suchas, stating substantive, to prove and a verbal it,a conclusion (non-technical) reasoning It is notclaimed, thatit has thesorecommendation. however, describedby Backhouse[1997, Chapters3-7], phistication 1]. [2003]orMattessich [2000, Chapter Godfrey-Smith The content ofKautilya's work indicates thattheprerequiof the discipline of accounting alsitesforthe establishment used in India 4th B.C.E.. existed Kautilya ready during century and subtraction summation fractions, operations, percentages, disand combinations and evenpermutations quiteextensively, He not of arithmetic. a developed only playing deepknowledge forpreparing rulesbut also theprocedures peribookkeeping and performing and budgets odic incomestatements indepenof theexistence also supports Ifrah's dent audits. [2000]findings disa in arithmetic to therequired support separate capabilities in the periodunderstudy. He [p. 434] ciplineof accounting fifth of the "Before the B.C.E.,then, writes, century beginning of the written forthe creation all the necessary "ingredients" hadbeenamassed bytheIndianMathematiplace-value system cians." did not see the need forseparating accounting Kautilya of the fromeconomicsand believedthat any demarcation acHe considered be would between them arbitrary. boundary he of economics. an By contrast, explicpart counting integral discias separate Political Scienceand Philosophy treated itly role of that the the fact This view is supported by plines. in embedded economic to be considered was policy. accounting as thetrueoband prediction' 'explanation perceived Kautilya the and appliedtheseto analyze ofa scientific inquiry jectives wealth. He creation of on the of various applied policies impact relatto inquiries andimplicitly, bothexplicitly these objectives, that conclusion to the This leads byKautilya ingto accounting. of domain the within and rightful lay explanation prediction accounting. on theImportance methodically of Wealth: Kautilya Kautilya

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the importance approachedeconomicissues by first explaining of wealth and then suggesting policies forits creation.He [p. a wealth,does not getit even after 637] observed"Man,without hundredattempts.Just as elephants are needed to catch elephants,so does wealth capturemore wealth.Wealthwill slip thatchildishman who constantly consultsthe stars. away from The only[guiding]starof wealthis itself; what can the starsof to Kautilya,wealthcomplethe skydo [9.4.26-27]?"According labor productivity) in creatmented humaneffort (by enhancing whichin turncreatesmorewealth. ingprosperity, ecoKautilya [p. 149] added, "In the absence of fruitful nomicactivity, bothcurrent and future are prosperity growth in A of destruction. can achieve the desired danger king objectives and abundance of riches by undertaking economic productive He advanced the that the pur[1.19.35-36]." activity hypothesis suit of productive activities was the key to stabilization of the in thefuture. current incomeand itsrapidgrowth Incentives to EncourageCreation in thePrivate Sector: of Wealth all possiblemeans of creating wealth.He sugKautilyaexplored in the prigestedmanypolicies to encouragecapital formation vate sector.For example,he [p. 231] recommended (i) Tax Holishall be days: "Anyone who bringsnew land under cultivation from of agricultural taxes fora pegranted exemption payment riod of two years.For buildingor improving facilities irrigation fromwaterrates shall be granted[3.9.33]." (ii) Full exemption Protection of PrivateProperty Rights:Kautilya [p. 121] wrote "Thewealthof the stateshall be one acquiredlawfully either by inheritance or by the king'sefforts [6.1.10]." He [p. 231] added, "Waterworkssuch as reservoirs, embankments and tanks can be privately owned and the ownershall be freeto sell or mortLoans: He [p. 179] recgage them[3.9.34]." (iii) Concessionary ommended, "[On new settlements]the cultivatorsshall be granted grains,cattleand moneywhichtheycan repayat their convenience [2.1]." (iv) DutyFreeImports: Kautilya[p. 238] sugitems at his the ChiefController of that, discretion, gested"Any Customs,may considerto be highlybeneficialto the country from duties." (such as rareseeds) [2.21] are to be exempt import on theFactorsRelevant to Creating Wealth: Kautilya Kautilya[p. stated: 255] The following are themeans of increasing thewealthof the State: ensuringthe prosperity of state activities; welltriedpolicies;eliminating theft; continuing keeping

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strict control overgovernment employees, increasing trade; avoiding agricultural production; promoting and calamities; and retroubles exemptions reducing missions andincreasing cashincome [2.8.3]. misuseof government and Obstruction, property falseaccounting servants lead to a reby government duction ofwealth [2.8.4]. With no distraction, thepeoplewillbe fully involved willbe an increase in inthework inthefields andthere thesupply oflabor, andliqcommodities, money, grain uidstothetreasury [2.1.33-35]. tothetreasury can be anyinternal or He added, "Calamities of reducing the revenue. actionwhichhas the effect external Financial health can be affected bymisappropriation bychiefs, falseaccounting and of taxes,scattered remission collection, before therevenue reachesthe and tribes looting by enemies [8.4.49]/' Treasury to Kautilya Two observations are in order. First, according to the creation of couldbe a seriousthreat 'falseaccounting' was central to coreeconomic this wealth. Second, poliwarning and labor fiscal to economic cies relating management growth, He discussedeach of thesemeans of creating management. loss by developing and theneedto prevent wealth accounting methods. and ara mixed recommended FiscalPolicy. economy Kautilya He ethithe active role for a explored government. by very gued in the the level of wealth to maximize avenues callypossible on of the limits He was aware sector. placed governments public taxation. to raiserevenue [1971,p. 72] sumSpengler through as follows: fiscal marizes policy Kautilya's and expenditure, of taxation discussion apKautilya's in with traditional doctrine, gaveexparently keeping taxation Indianprinciples: to three poweris pression orexcesnotbe felt tobe heavy taxation should limited; One ofhis should be graduated. sive;and taxincreases and seemsto havebeen thecollection mainconcerns in suchwaysas to buildup the ofrevenue expenditure of the economy. capacity revenue-yielding permanent and of little While he manifested knowledge taxshifting incidence,he emphasizedthe long run, cautioned in theshort too heavy taxation run,and noted against in a ruler couldnottaxat hispleasure, that particularly could flee where frontier taxpayers disgruntled regions countries. toneighboring

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thisfunctional betweenthe rate of inrelationship Incidentally, of tax revenueis now expressedin come tax and the magnitude theDupuit-Laffer curve. on theImportance ofFinancialHealth:KautilyaemphaKautilya sized heavilythe financialhealth of the state and understood thata sound treasury was a prerequisite to accomplishing other on the depend first goals. He [p. 253] stated,"Allstateactivities a King shall devotehis best attention to it. Therefore, Treasury. A Kingwitha depletedTreasury eats intothevery of the vitality citizensand thecountry [2.8.1-2]."In fact, accordingto Kautilya on [p. 147], a King should begin his day by receiving "reports He [p. 145] added "Artha defense,revenueand expenditure." (sound economics) is the most important;for, dharma and kama are bothdependent on it [1.7]." He [p. 255] continued"If and expenditure are properly looked after, the Kingwill receipts in financialdifficulties not findhimself to [5.3.45]." According a must the financial therefore, Kautilya, king carefully manage affairs ofthestate. and Prediction: bothprevenExplanation Kautilyarecommended tiveand remedialmeasuresto deal withnaturaldisasters. He [p. oftheprosperity ofthecountry, a 116] asserted:"In theinterests in should be the of calamiking diligent foreseeing possibility ties,tryto avertthembeforetheyarise, overcomethose which to economic activity and prehappen,removeall obstructions ventloss ofrevenue to thestate[8.4, 8.5]." It maybe notedagain that Kautilyaconsideredthe prevention of loss of revenueas crucialto economicprosperity. Kautilyaon the Evaluation of a Policyand the Anticipation of of Variance: Analysis Kautilyadid notknowhow to measurerisk or separate the total variation (in the dependent variable, wealth)into explainedand unexplained(random) components. into issues relatedto riskare revealedin However,his insights his work.For example,he was aware of a risk-return trade-off and riskpremium.He [p. 619] stated"As betweenland dependenton rain and land withflowing water[i.e. a river], a smaller tractwithflowing wateris preferable to a largerdrierone because withflowing whichis alwaysavailable,theproducwater, tionofcropsis assured[7.11]." He [p. 426] suggested an interest rate of 120% and 240% on commercialloans involving highly travelthrough forests and by sea respectively [3.11]. Incirisky dentally,this indicates that capital was in short supply in

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India.Therewereno usury laws to regulate interest Kautilya's rates at that time. bothhuman "Events, Similarly, Kautilya [p. 554] stated, the world its Acts ofGod and providential, [and affairs]. govern and whose originis unare thosewhichare unforeseeable If thecause is knowable and henceforeseeable, itsoriknown. If an act ofGod results in [helping] theachieveginis human. it is good fortune; it is mentof one's objective, otherwise, action which increases one's misfortune. [Likewise,] anyhuman it is a bad policy is a goodpolicy; wealth otherwise, [6.2.6-12]." containsthe following This statement regression implicitly model: W = X + e [1] = X = exogW wealthis the dependent variable, Where, or whichmaybe used to createwealth variables enouspolicy init,e = random theactsofGod. error, prevent anyreduction forfinding thecauses used theword"knowable" Kautilya for theability to andtheword "foreseeable" wealth that promote that It maybe noted ofthevarious theimpact policies. predict the phrase'if the cause is knowable and, hence,foreseeable' can be exbelievedthatif something impliesthatKautilya is not it.In practice, that one should be able to predict plained, out that Hahn For 10] [1984, p. points example, possible. always occurthey are able to explain whilescientists earthquakes why their occurrence. cannot predict "Acouncilor orminisKautilya [p. 120]stated, Additionally, ofthestate, bornin a be a native rank should terofthehighest havebeen He should andcontrollable [bytheking]. family high to foresee in all theartsand havelogicalability trained things. enerHe should be intelligent, dexterous, eloquent, persevering, firm in and adversities to endure and able brave, bold, getic, He should be nor fickle. be neither He should haughty loyalty. in others or enmity hatred and notexcite amicable [1.9]."The a for foresee to 'the hiring ability things' requirement logical sincethis'forward is ofinterest or a minister councilor looking' rational oftherecent is thecornerstone behavior human expecrevolution. tations of scientific showsthattheapplication analysis Kautilya's and of the to 'explanation objectives accomplish methodology that innoHe contended in is embedded accounting. prediction' ofcontributions. methods maketwotypes in accounting vations suchas writthat hisanalysis First, justlikeinnovations implies and the electric computer dynamo steam-engine, printing, ing,

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techare a general-purpose innovations accounting microchips, whole the of the which efficiency improves nology (GPT) economy(see Lipseyet al. [1998a,b] fora discussionon GPT). of accountingmethods Second, he understoodthe importance fraudand thus conloss of revenueby detecting in preventing me elaborate on these wealth. Let to the creationof tributing themes. Importance of Accurate Measurement of Profits: Kautilya 2000,pp. 32, 67, 73] in his Sutrasadvancesthese [Subramanian, "Fortunefollowshuman effort. Prosperity depends hypotheses: Intellectdepends on education."Kautilyawas on the intellect. allocationof resourcesdependedon apaware thatan efficient which were criticalto enof profits, measurements propriate and linked He economic production-patterns growth. hancing not He to only emphasized profitability. trade-patterns expected but also insisted fordirection of expectedprofits the estimation on strictadherenceto the prescribeduniformstandardsand It seems thathe realof actual profits. accuratemeasurements and accuratemeastandards ized thatin theabsence ofuniform resourcescould notbe alloofeconomicperformance, surement - measurement or inadvertent errors(whether cated efficiently mal-allocation of resources. to the led deliberate) and Economic Performance: Kautilya, Production-Patterns of the concept of value added an awareness revealed Kautilya wherenet returns were highresources and suggested devoting rice was that he argued est. Accordingly, best, veggrowing etableswere the nextbest and sugarcanewas the worst.He [p. to grow being sus230] explained,"Sugarcaneis verydifficult ceptible to diseases and requiring much more expenditure [2.24]." Similarly,while discussing the protectionof crops He [p againstcalamities,he would protectthe ripe crops first. 231] argued,"A loss of [ripe]crops is worsethan a loss of seedlings,because, with growncrops, the labor put in is also lost [8.2]." and Trade-Patterns: Kautilya[p. 237] stated: Profitability of State Trading shall ascertain The Chief Controller of a tradingoperationwith a foreign the profitability method.The price of the country using the following and the price country goods to be sold in the foreign in exchange to be realizedon the goods imported likely Fromthegrossmargin, all expenses, shallbe estimated. as described below,shallbe deducted:

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For caravans: customs duty,road cess, escort taxpayable at military stations, ferry charges, charges, allowances and their assistants daily paidto merchants totheforeign andtheshare king. payable Fortrade usingships:all theaboveplusthefollowi.e.,thecostofhiring shipsand ingadditional charges: for the boats, journey. provisions tradewithsuchforeign counHe shall,in general, a profit; he shallavoidunprofittriesas willgenerate ableareas[2.16]. the It may be notedthatKautilyasuggested predicting forestimating and imports expected profit. pricesof exports intrade. factor for Thishe considered a critical engaging Methods as a Generaland Innovation in Accounting Kautilya to Kautilya, depended According prosperity Purpose Technology: and an efficiency on capital, (A). Thisin parameter manpower, methodsand general turndependedon properaccounting and political ethicalvalues,publicinfrastructure, knowledge, of private law and orderand protection stability (including in recent has theefficiency paramyears Only property rights). Hall and Jones Forexample, itsdue attention. eter(A) received levelsof prodo somecountries havehigher [1996]ask "Why capital,and humancapitalthan others?" ductivity, physical our answeris infrastructure, speaking, Theyfind,"Broadly the ofthegovernment, characteristics which we taketo include ideas maybe ofa country." and theclimate culture, Kautilya's function: production bythefollowing expressed Y = A (H, S, M,R) F (, L) [2] Product Y = Gross Domestic Where (GDP),H = knowledge, and S = political whichincludes methods, stability accounting = = R M ethical national infrastructure, values, public security, andL = manpower. = capital (toolsetc.), roads), (e.g., For science. labeled an imperial has been economics Lately, [1984]and Lazear [2000]pointout thatecoexample, Stigler suchas sociology, other has beencolonizing nomics disciplines and law 1991,p. xxiv]. [also science, Spiegel, political history, to issuesrelated analysis Kautilya appliedeconomic Similarly, ofreneging and to theproblem to legalmatters (nowcalledthe with in negotiating treaties time foreign problem) inconsistency to be an integral considered partof accounting Kautilya kings. could not colonize thataccounting thusimplying economics, when their werenotdeserting Accountants itself. purdiscipline

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of'explanation and prediction'. to suingtheobjectives According of accountingis scientific and its Kautilya,the methodology to redefine it. It is broad,thusmakingit unnecessary scope very therefore was used in apparentthatthe scientific methodology accounting long beforethe paradigmof double-entry bookkeepingwas popularizedby Pacioli. KAUTILYAON CREATINGTHE NECESSARY CONDITIONS FOR REDUCING FRAUD Theruler shouldavoid appointing personswho arefraudulent, dishonest, cruel,without enthusiasm, incompetent and cowardly[Kautilya'sRajanitisastra, Subramanian, p. 128]. Kautilya believed that prosperity requires the creationof wealth both in the privateand public sectors. He suggested manyeconomicpolicies to encouragethe creationof wealthin the privatesector.He also advocated minimizing government in orderto generatethe maximum spendingon administration Addisurplusforbuildingthe necessarypublic infrastructure. in his some such scheme, as, tionally, enterprises, liquor sales and gambling, wereto be managedby thegovernment. Kautilya thateach public enterprise be requiredto generatea prescribed maximumamount of profitwithoutcrossingethical bounds. accuratemeasurement of the economicperformance Therefore, of a public enterprise and the elimination of opportunities for of funds was misappropriation public by government employees deemed absolutelycritical.For these reasons, adoption of an format forbookkeeping and codification, and comappropriate with financial rules could not be left to the discretion of pliance individualenterprises. to solutions Kautilyaattempted develop to mitigate such problemsthrough uniform rules bookkeeping for recordingdata systematically and by advocatingfrequent and the adoption of independent audits to periodic reporting reducesystem failures. He suggested incentive-based compensation mechanismsto reduce what we now recognizeas moral hazard problems. As notedbelow,the Comptroller-Auditor (one who was official), ultimately responsibleforfinancialmatters, was required to be knowledgeable, efficient and incorruptible. realized that the fiscal health of the TreasurydeKautilya not on an pended only developing economicallysound policy thatincreasedthetaxablecapacityof the economythrough economic development, but also on honest and efficient financial He was quite concernedabout the possibility of management.

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servants. He listed 40 posfraudulent accounting bygovernment cheat and considcould siblewaysin which corrupt employees He [p. 281] stated, eredthatit was noteasyto detect cheating. in water is to know whena fish as itis impossible "Just moving to findout whengovernment it, so it is impossible drinking incharge ofundertakings servants [2.9]." misappropriate money to knoweventhepathof "Itis possible He [p. 283] continued, servants in thesky butnotthewaysofgovernment birdsflying income." whohidetheir (dishonest) primary goalwas Kautilya's thescopeofsucheventualities. tominimize as wellas deto possible inadvertent He provided insights the which decreased errors or irregularities, liberate accounting losses He believed thatrevenue revenue of publicenterprises. Accordfailures and moralfailures. couldbe causedbysystem sources ofsuchlossesas: inadthepotential he identified ingly, colvertent errors, accounting, deliberately deceptive recording loss in to misappropriate lusion amongemployees revenue, and mostimdue to in-fighting among employees; productivity are onlyas good as the thatprinciples he observed portantly, them. whopracticed people to dealwith theproblem measures three Kautilya suggested oftheexisting offraud. laws, First, peoplehaveto be informed to obeythemin theabsenceof proper sinceit is notpossible and extenHe codified information. (alongwithmodifications to Kautilya, the sions)all therulesand regulations. According as possible. and as comprehensive laws mustbe unambiguous which reduced an organizational heproposed structure, Second, he suggested ofinterest. conflicts thescopefor Third, longlists and rewards for thegovernment forcheating of punishments is nowdiscussed measures service. Each ofthese commendable inturn.
and be in Laws Must have Clarity, Completeness Consistency,

wrote Form: Written depends [p. 213]"Theruleofkings Kautilya have their and war even on orders; [written] peace primarily of enforcement thateffective in them roots [2.10]."He believed andregulations rules (no 'confusion'), completeclarity requires words and ofletters, or deficiency ness('is avoiding redundancy exand illustrative reasons, matter; quotations citing subject be in a and must andconsistency ('non-contradiction') amples'), that theRoyalScribe"Have He [p. 213]suggested form. written be quickin composiofall conventions, a [thorough] knowledge He shallalso be able to read tionand havegoodhandwriting. recommended andedicts documents [2.10.3]." Kautilya [clearly]

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thatthe Royal Scribe be one of the highestpaid (48000 panas) to emphasizeand ensurethatthe Royal Edicts were employees recorded.Kautilya[p. 215] wentso faras to suggest accurately off bothfeetand a hand or a 900 panas" forthe "Royal "Cutting Scribe deliberately writingdown wronglya Royal Edict, by omissionor commission [4.10.14]." Structure to MinimizetheScope for an Organizational Designing and Conflicts of Interest: Kautilyarealized that no fiCheating is possible in the absence of accurateand nancial management of two very completerecords.He proposed the establishment and managethe financial healthof offices to monitor important the state: the positions of Treasurerand Chief Comptrollerwellpaid, and in turnthey wereto Auditor. Bothwereto be very to note that and efficient. It is veryinteresting be incorruptible betweenthe Treasurer Kautilyadividedfinancialresponsibility Both were supposed to reportdiand the Comptroller-Auditor. to theking. rectly The Treasurerwas responsiblefor managingassets while and maintehandled:the construction the Comptroller-Auditor maintenance of Records,compilanance of the RecordsOffice, tion of rules, inspection, audit, and preparingand presenting to enfinancialreportsto the king. Thus Kautilya attempted and to limit the scope for accountability couragespecialization, conflicts ofinterest. shall be Accordingto Kautilya [p. 225] "The Comptroller of all fixed rules as well as the for the responsible compilation conventions used [2.7.3]." It appears thatin 4th century B.C.E. the application India therewere some accountingconventions, Auditor. the ofwhichweremonitored by Comptrollerin whichconflicts of Kautilyawas aware of othersituations interest could arise. He recommended that a king should appointadvisersand consultthemaccordingto the natureof the However, [p. 200] "No one who belongsto theside likely project. to be adversely affectedby the project shall be consulted he recommended an income tax on agri[1.15.46]." Similarly, culturalincomeand a kindof occupationaltax on non-agriculforincome-shifting to merturalincometo denyopportunities in cash, chants.He [p. 271] stated,"The tax shall be recovered, fromthose skilled in theirwork. Their offencesshall not be fortheyare apt to [evade the tax and] pretend thatthe forgiven, sales made by them were on behalf of someone else [5.2]." he was aware of the difficulty of collectionof an Apparently, incometaxon thenon-agricultural income.

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to Kautilya, labor LaborManagement Policy: Finally, according to fraud. Bookwere important reducing policies management tocompiling was notrestricted data,butalso tocorrectkeeping errors and to and reducing mainadvertent discouraging ing ensure fraud. audits tests could not that or Similarly, nipulation was conwere recorded all transactions Kautilya accurately. and of overstating cernedaboutthepossibilities expenditures offstate rerevenues by employees siphoning understating mixofmonitoring, recommended a judicious sources. Kautilya the needs,nature and good wages.He understood inspection For example, he [Subramanian, of workers. and aspirations avoidthecountry where there "Oneshould 2000,p. 108]stated no relatives or no meansof forwork, no activity, is no reward to Kautilya [p. 283] "Thekingshallhave learning." According menare, for ofHeadsofDepartments thework inspected daily, after fickle and,likehorses, being puttowork change bynature, for theking to supervise theHeads It was impossible [2.9.2-4]." werestationed at disbecausethey of Departments personally theking should tant locations. Therefore, wagesto payincentive work to and also gettheir theHeads ofDepartments inspected theChanhe prescribed reduce [p. 289]that Similarly, shirking. wouldbe paid 24000panas annually, cellorand theTreasurer in theirwork." Such a high to makethemefficient "enough an minimum to theyearly be compared reward should wagefor time. was only 60 panasat this which unskilled worker, shouldbe thaterrant individuals recommended Kautilya ofan intelligence service thecreation He calledfor disciplined. and punishing fair 'trials forapprehending violators, pursuing oftheir offences. andgravity on thenature theguilty, depending mixofincentive-based a judicious He recommended compensato reand appropriate tion, punishment supervision inspection, andshirking. ducecheating labormanage[1971, Kautilya's p. 74] summarizes Spengler ofcourse, was implicit, "His analysis, ment as follows: policies bethatindividual it rested notexplicit; upontheassumption economic in largemeasure couldbe controlled havior through when these werecommensurewards andpenalties, particularly Accordor discouraged. ratewiththeactionto be encouraged theeyes at economic issuesthrough looked while Kautilya ingly, fit rulesmust he was awarethat ofan economic administrator, userather thanrepress andfoster man'seconomic propensities economic ful activity."

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OTHER ACCOUNTING-RELATED PRESCRIPTIONS

As mentioned above, accordingto Kautilya,the level of net worthand its growthwere of criticalimportance.Therefore, statements of the revenuesand expenditures of public enterand of the state were prises budget required to monitorthe in He net wealth. the developed necessary apparatusand growth financialrules and regulations to achieve the goal of sound financial health.He devised a systemof bookkeeping rules and financialrules or codes of conductto manage the financialaffairs ofthestate. Maintenance of Recordsand Periodic Kautilyaon Bookkeeping, a format for'recording, Accounting: Kautilyadeveloped classifyon and data financial variables. He suggested ing summarizing' a comprehensive accountsforrevenue, approachto maintaining and net balances for each expenditures department. According to Kautilya,the Comptroller-Auditor would maintaindetailed accounts. He [p. 225] suggested"The Closing Day forthe AccountingYear shall be the full moon day of the month of theyearconsisting Asadha [June/ of 354 days (accordingto July], the lunar calendar) with a separate book for the intercalary month[2.7]." Financial Rules for Appropriate Conduct: Kautilya specified rules.On the propermaintenance of accounts manyaccounting he [p. 278] stated, "All accounts shall be maintained in the written withoutcorrections. Failure to properformand legibly do so shall be a punishable offence[2.7.35]." On the timely submissionof accounts he suggested, accounts [to "Day-to-day be submitted once a month]shall be presented before theend of the followingmonth and late submission shall be penalized the account officers "Not lie [2.7.26, 27]." He also instructed about the accounts and not tryto interpolate an entry as if it was forgotten shall be [2.7]." He [p. 279] added "High officials forrendering the accountsin fullfortheirsphereof responsible in them.Those who tell lies withoutany contradiction activity or make contradictory statements shall pay the highestlevel standard [2.7.25]." penalty It maybe added thatKautilyawas a realist.For example,he "The kingshall forgive a trifling offence and [p. 283] suggested, be contenteven if the [net] revenueis small [p. 2.7.41]." Since he [p. 281] reasoned,"Just as it is impossiblenot to tastehoney or poison thatone may findat the tip of one's tongue,so it is

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fundsnot to taste, impossibleforone dealingwithgovernment at leasta little bit,oftheKing'swealth[2.9.32]."

KAUTILYA ON THE ROLE OF ETHICS

is therootof happiness.Greedclouds the Righteousness intellect. Another's evenifit be husk,should not wealth, s Sutras,Subramanian,pp. 20, 46, be stolen [Kautilya 51]. to ethicalconducthave been discussedsince Issues relating He offered manyinsights, antiquity. Kautilyawas no exception. such as: no amount of rules and regulationsor auditingcan both character-building and actionunethicalbehavior, prevent orientedethical values are essential for a solid groundingin ethiethicsand in offering guidanceto practiceethicalbehavior, of law and orderand the cal behaviorhelps in the maintenance and creationof wealth,which promoteseconomic prosperity, and philosophyare the sources of ethical religiousscriptures two insights, which have a parvalues. However,onlythe first here. to accounting, are presented ticularrelevance and Magnificence of Conof Contracts Kautilyaon the Sanctity science: Kautilya used the word 'dharma' (which in general in personaland social conduct. means duty)and righteousness He [p. 107] describedthe basic ethical(dharmic)values as folto from lows: "Dutiescommonto all: Ahimsa[abstaining injury all livingcreatures]; cleanliness;freedom satyam[truthfulness]; from [1.3.13]." malice;compassionand tolerance was it important to adhere that not believed only Kautilya to the principlesof accountingbut those who practicedthem He [pp. 133-134]stated:"Some teachers shouldbehaveethically. say that oppressionby the Treasureris worse because he hafaultwith whateveris done and levies fines rasses by finding on the otherhand,cannot The Chancellor, [whichhe pockets?]. do much harmsince he is supervised by an [audit] bureau and can enjoy only what is legitimately assigned to him [8.4]." can onlyappropriKautilyawas of theviewthat"The Treasurer But theChancelintothetreasury ate whatis brought by others. and then he may collect the lor collectshis own revenuefirst king'srevenueor even let it go to ruin;he can do as he pleases withotherpeople'sproperty [8.4]." These statements implythatKautilyaconsideredthatindein eliminating pendentaudits were necessarybut insufficient He notedthatthe financialaffairs financialmisappropriations.

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who was responsiblefor collectingrevenue of the Chancellor, was auditedbut could cause more finanfrom the countryside, who was not audited.He urgedthe cial loss than the Treasurer to individuals to appointincorruptible effort kingto make every such keypositions. Values: The and Action-Oriented Kautilyaon Character-Building considered ethicalvalues Plato and Aristotle Greekphilosophers as virtues, emphasizedthebuildingof a person'sgood character follow.Post et and believedthatgood conductwould naturally al [2002,p. 129] notes:"Moralvalues acknowledged by Aristotle includecourage,temperance, justice,and prudence.St. Thomas to values offaith, hope,and charity Aquinasadded theChristian virtuesinclude the list of morallydesirablevirtues.Additional and self-confidelity, integrity, compassion,generosity, honesty, trol." addressed the principleof virtueethics he While Aristotle of ethics.Kautilya did notdiscussanyaction-oriented principles to both virtueethicsand action-oriented referred principlesof ethicalvalethics.But he elaboratedonlyon the action-oriented and servant leaderfairness, ues, such as, thegoldenrule,rights, behavior is more wrote: He 83] [Subramanian, "Proper p. ship. in was well educated virtuous." than Kautilya being important thata discussionregardbut he thought Vedas and philosophy was beyond the scope of The ing personal character-building For example,he stated[p. 142] a prince "Should Arthashastra. teachand the threeVedas fromauthoritative learn philosophy ers,economicsfromthe heads of [variousgovernment] departfrom[not only]theoretiand the science of government ments, cal exponentsof political science [but also] frompracticing politicians." are in order.First,KautilyabelievedthatinTwo remarks in a child kept him ethical later in life ethical values stilling he workedas a public servant(a politicianor bureauwhether (or an accountant)in the privatesector. crat) or as a merchant in ethics,such as, thedevelopment ofthe Second,thegrounding self-interest one's look to follow conscience, beyond capacity was as important as learntowardothers, and showbenevolence skills. ingprofessional Kautilyaon Measuresto Improvethe Ethical Climate:Kautilya emphasizedthe creationof an ethical climatein the state and various measuresto enhance it. He argued that also suggested were necessary since nothing can be bureaucratic organizations

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without thembut was very about accomplished apprehensive thepotential for and thedifficulty ofdetecting such corruption He recognized that a goodsystem ofbookkeeping and practices. butnotsufficient to guarantee werenecessary ethical auditing In other an accounting no matter how words, method, practices. and creative' sound,wouldnot defeat 'aggressive accounting practices. several who Kautilya [p. 286] identified typesof officials A discussion cause loss to theTreasury. oftwotypes remight vealsthenature ofhis insights. to Kautilya, an offiAccording cial who causes loss maybe arrogant "abouthis learning, his he gets fromhighly wealthor the support placed persons" he getsfrom Thephrase [2.7.10]. 'support placedpersons' highly thepotential forabuse from undueaccessto highoffiimplies him cials.Similarly, an official "which maybe greedy, prompts or measures, or to makefalse to use falsebalances, weights assessments and calculations" [2.7.10]. Kautilyainsistedon before a person was hired. character references measures to theking to improve various Kautilya suggested "Aking endowed with the theethical climate. He [p. 121]stated: enriches theother elements whenthey idealpersonal qualities character arelessthanperfect [6.1]," [p. 123]"Whatever adding also come to have the same thekinghas, theother elements thehighest to Kautilya, a kingshoulduphold [8.1]."According hisleadership andnotbyhis andrulethrough ethical standards were the otherrecommendations proposed authority. Among sexual child lathe laws measures harassment, covering against ofan ethical codeofconduct. andtheestablishment bor, CONCLUSIONS framework anda set offered a complete conceptual Kautilya to economic measures ofconcrete development promote policy inaccountinnovations He specifically andfairness. emphasized of a with the accumulation methods capital, designing along ing for the set of rules and regulations reducing potential fool-proof character and promoting of an impeccable forfraud, building inThe economic ethical valuesto achieve prosperity. foregoing of aca dicates thatKautilya system developed comprehensive rules,periodicaccounting, bookkeeping counting, including and indepenof incomestatements and reporting preparation assess financial status. and audits tomonitor, dent manage of that the concluded Mattessich [1998] origin accounting inKautilya's Arthashastra found placeiton a parwith principles

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to the Pacioli's Summa. Kautilya'sothercontributions relating conditions the necessary of accounting, scope and methodology forreducingthe potentialfor fraudulent accountingand conof interest, flicts facilitating compliancewithrules and regulations,and therole of ethicshave been discussedin thispaper. It as an integral is claimedthatKautilyaviewedaccounting partof withinits righteconomics,placingexplanationand prediction of acthat the scope and methodology ful domain, implying encompassesmuch more than mundanebookkeeping counting of innovationin acand auditing.Kautilya's encouragement methodsmaybe comparedwithothergeneralpurpose counting in writing and printing. such as innovations technologies factorwhich to Kautilya,the major underlying According and creativeaccounting(which he calls 'false droveaggressive accounting')practiceswas excessivegreed.Kautilyaattempted moralpersuasionand legal to containfalseaccounting through of rules means. He concludedthat the successfulenforcement and regulations depended on theirunambiguouscodification. should be designedin a way structures Further, organizational With that in of interest. which limitedthe scope for conflicts of of two separateoffices the establishment mind,he suggested and Comptroller-Auditor. Treasurer Also,he proposedthe estabacof a reasonablycompletesystemof governmental lishment convenrules, accounting countingcomprising:bookkeeping tions, financialreports,periodic accountingand independent to increasecompliance. auditing ofvirtue ethicsand bethe importance Kautilyaunderstood his lievedthattheywere sources of joy and bliss'. He confined ethical principlesand to action-oriented discussion primarily oflaw advancedthemas essentialto themaintenance vigorously Acof economicdevelopment. and order,and to the promotion ethical be must set a to standards, a high cording Kautilya, king moral character and mustensure the persondisplaying highest thathis successorwas equally'noble'. beforePacioli's Summa,an Hence,morethana millennium to economic thecentrality ofaccounting Indiangururecognized in innovations and was accounting promoting development methods.
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