April 01, 2016

Auditors, not Regulators, necessary for Higher Education

India has a glorious tradition in higher education that stretches back to the hoary antiquity of Nalanda and Takshila but today this tradition is under stress. We have too few colleges for our kids and most of these lack the infrastructure (“hardware”) or the faculty (“wetware”) necessary to deliver the kind of programs (“software”) necessary to be world class institutions. In an earlier article we had explored how inexpensive technology could address this problem and here we explore structural issues that may offer useful alternatives.

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There are different kinds of reasons why we do not have enough good colleges. In the case of government, or public-sector, colleges it is a combination of lack of money, mismanagement and political interference. Central universities and institutions are better off but they too are plagued by cronyism and inefficient use of money. Instead of creating multiple IITs and IIMs in far flung parts of the country we should have increased the seats, hostels and faculty at the existing institutes to create world class institutions. But then we have regional politics and lucrative cutbacks from civil construction! Ergo flood the country with new institutes without bothering to increase the effectiveness of the existing ones. Private sector investment in education is stuck between a rock and hard place - between the socialist obstinacy of not allowing profit in educational enterprises and the philanthropically challenged mindset of the Indian uber rich that precludes the kind of endowments that US universities enjoy.

This leads us to the third and final problem. Since one cannot be seen to be making profit from education, private entrepreneurs have to depend on irregular, backdoor techniques for making money and this allows “factory inspectors” of the license-permit raj -- in AICTE, UGC, MCI and elsewhere -- to take their illegal pound of flesh by approving institutes of dubious quality. This unholy nexus of unscrupulous investors and extortionary regulators operating under the malignant influence of the corrupt politician is too well known in educational circles to be described once again.

So is there any alternative?

Let us begin with some plain talk. Can government institutes be made more efficient in their usage of funds? Certainly, but that would be the subject of another article. Second, should we rethink our obduracy with not-for-profit education?  We could, but the philosophical issues are so divisive that we would end up with pointless polemics. So let us explore  structures that simply ensure that customers (students, guardians) get a fair return on their investment in education while vendors (faculty, staff) are adequately compensated for their effort. But the real challenge lies in executing this on a demonstrably not-for-profit platform.

Fortunately such a platform already exists in the form of a Section 8 company. But while anyone can create a section 8 company, a Gordian Knot of Indian red-tape ensures that it cannot be used to deliver educational services until it is allowed to do so -- or accredited --  by one of the regulators like AICTE, MCI or the UGC. That is where all good intentions flounder in the quicksand of venal corruption.

The fundamental difference between a company registered with the Registrar of Companies and one accredited with a regulator for the purposes delivering educational services is that the latter is hobbled by a host of additional restrictions, many of which are evidently questionable but cannot be formally challenged. These were designed to ensure that students are not cheated but unscrupulous operators get past these restriction using time-tested practices perfected  during the license-permit-raj. However honest operators are squeezed out and the net result is that students in India are denied quality education at an affordable cost.

So what happens if we remove all regulators, along with the need for any kind of academic accreditation, and allow Section 8 companies to offer educational services leading to an academic degree. In a free market economy, customers and consumers purchase goods and services based on their perception of value for money. Why can we not trust them to have the same wisdom while choosing educational services. If students and their guardians can choose between rival coaching institutes and private tutors on the basis of their perception of quality and value for money then why can they not be just as prudent in choosing the final college? Why would they need a nanny-state and its regulators to tell them which college is good or bad? The real challenge is of information transparency.

Investors choose stocks of companies based on the disclosures that companies make to the stock exchange. Customers choose consumer goods based on feedback received by word of mouth and through reviews. Students choose colleges based on word of alumni but also track key parameters like placement. This where we need to ensure that all Section 8 companies that offer educational services make additional statutory disclosures every year, of key operational parameters that, like financial statements, have been audited for credibility by auditors accredited with the Institute of Chartered Accountants.

However the nature of disclosures and the way the metrics are calculated -- the equivalent of the GAAP -- must be clearly defined. For example, the educational audit must disclose information in these eight categories :

Income from students against various heads like tuition, lab fees, hostel fees and from other sources like grant, donation or corporate services.
Expenditure on faculty, staff, laboratory, sports, rent, electricity, other services and bank interest.
Number, qualifications and experience of teachers along with the number of hours or days that each faculty actually spends on the campus.
Number and size of classrooms, laboratories, libraries along with list of equipment.
Placements in terms of number of companies, number and profile of jobs offered along with actual, non-inflated salaries.
Published curriculum and the contact hours that were delivered against each subject along with attendance records for each class.
Record of examinations conducted, scripts evaluated, marks awarded.
Statistical distribution of marks and the number of pass-fail students along with their marks and attendance records.

All these records must be available in any case and hence professional auditors would have no difficulty in verifying and certifying the same.

Can an auditor be bribed or otherwise compelled to give false certificates? This is possible, but given the long history of the audit profession in India and the fact that lakhs of crores of rupees of investors money is riding on the veracity of the statutory audit process, the possibility of this happening is low. Nevertheless we have to be prepared for situations like Satyam or Enron.

To operationalise this concept, we need an additional sub-section to Section 8 of the Companies Act that explicitly recognises colleges, or “educational” companies, as being distinct from other similar companies and hence are required to provide additional disclosures as explained above. Moreover it must specify a minimum contact hours and minimum duration for each category of degree, namely BSc, B.Tech, B.Arch, MBA, M.Tech, LLB. etc., based on current UGC norms.

Now the process of starting any college would be no different from registering a new Section 8 company with the Registrar of Companies. Just as the end of industrial licensing meant that no company could be barred from manufacturing any product, so would this new approach ensure that no college can ever be barred from offering any degree. But just as the registration of a company does not guarantee either the quality or the sale of its product, the registration of a college is no guarantee of either quality or enrollment. Students, like customers, are no fools, and if the RoC and the statutory auditors can ensure stringency in the disclosure norms, then students and employers will be guided towards the better colleges by the invisible hand of the free market. If some people are still fooled by certain colleges, then all we can say is caveat emptor -- because a fool and his money is soon parted.

So what would the erstwhile regulators like AICTE and UGC do? Instead of micromanaging the unnecessary regulation of colleges, they can be converted into pure funding agencies that will train teachers, fund the development of new programs and hand out research grants to deserving colleges and their faculty. For this they could have their own rating criteria against which colleges may voluntarily agree to be evaluated if they want access to public funds. This way, public money that flows into education will be utilized more efficiently.

According to the Aspiring Minds National Employability Report 2015, 80% of engineering graduates from AICTE / UGC approved institutions are unemployable. So do regulators add any value? Does the government have the courage to disband its educational regulators and bring in the Registrar of Companies as the only supervisory agency? Can we trust the Institute of Chartered Accountants to audit educational statements correctly and honestly? Can customers in India be duped by vendors even if they have access to detailed information about the vendor’s services?

Despite, and perhaps because of, stringent regulation in the education sector, India faces the paradox of a drought of skills amidst an ocean of people! Replacing regulator by auditors will unleash entrepreneurs in education who could convert people into talented resources.

This article first appeared in Swarajya.

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