Satyam Next Steps

India’s regulatory authorities have made a great start on the Satyam accounting fraud scandal. The two bodies that would have regulatory oversight over such a situation – the Ministry of Company Affairs and SEBI – are both playing this on the front foot. The Raju brothers the CFO have been arrested and remanded to judicial custody. The Satyam board has been sacked and very quickly a new board is being assembled. So far so good.

As I have said before here and here, the fact that the Satyam fraud scandal has occurred is unfortunate in many ways. But India can completely redeem itself in how it handles the aftermath of the scandal. There are crooks in every corner of the world, so you have to expect them to be in corporate India as well. However, how the regulatory authorities and the justice system deals with them and the situation, is what matters.

Here is what I would like to see happen as the investigation proceeds:

Cast the net wide

Regardless of what Ramalinga Raju says, this was not carried out by just a couple of members of the Raju clan. There are people in the Finance department of Satyam and at PriceWaterhouseCoopers who are complicit. Who actively perpetrated fraud or turned a blind eye to it. If you are the auditor, turning a blind eye to fraud is no different from committing the fraud.

To snare all the fish, big and small, involved will require hard work – following the trail of money will be one. Shake down a few people who may be lower down on the totem pole in order to turn them into material witnesses. I expect a lot of the money to have disappeared into cash, but there will be places where it moves from electronic money with an audit trail into cash, which won’t leave a trail. That’s where you need to shake down the recipients. I am not an expert in this area, but my sense is that if this ‘follow the money’ hunt falters at any point it will be because of political pressure. After all with money of this magnitude, it is unlikely that some of it didn’t find its way into the pockets of politicians. And that brings me to my next point.

Carry out the investigation transparently

To the extent that it does not jeopardize the investigation, let the investigating authorities be open with the public on the investigation. This will allay any fears that the investigation is being compromised to protect people. Unfortunately, India’s current reputation is such that the average observer is going to be a skeptic. Only transparency and a quick, clean investigation can fix that.

Turning the wheels of justice faster

If found guilty, I expect everyone involved will get the maximum sentence allowable for the offence, just given how large the fraud is and the damage done to shareholders. But the legal process in India is notoriously slow. With the public uproar about this case, I hope we will see justice done in 1 to 2 years and not a decade.

Disgorging ill-gotten gains

If the Rajus get a jail sentence and are let off in 5 years, but nothing of the missing billion dollars is recovered, that would be a shame. We have to get the money back. If that means getting the Income Tax authorities to raid people who are suspected to be involved in tracking down the money, that’s what will be required. Al Capone, a mafia boss in the prohibition days in the US was never convicted of any of the crimes he committed, except one – tax fraud.

Regulatory review

I am no expert in the Indian securities and company regulations, but as the times change, as new ways to defraud the public emerge, any regulatory framework needs to evolve with it. It’s not a question of more regulation or less regulation, an argument that will go on forever in the US between Democrats and Republicans. It’s about the evolution of a set of laws and regulations over time to meet a changing environment.

For instance, why are auditors’ liabilities in India limited to the Partner concerned only? Does the firm not exist as an entity? Does it not train its employees on risk management, ethics and a code of conduct? Does it not rotate partners on an account? Does it not insist on peer reviews? If the answer to all this is yes, then the firm should be held accountable. If not, it is rather dangerous to let it continue in this manner.

Why are Indian auditors protected from foreign competition? So they can use the brand names of the global accounting firms, but not be subject to their risk controls? I say let them come in. Let the accounting firms be few and large. They might be able to invest more in training and controls. Even if it doesn’t result in changing behaviour, at least it’ll give Indian shareholders a bigger balance sheet to go after when they sue the global accounting firms. Nothing works like fear.

I spoke to a friend of mine who has done audit work in India in the past. It is quite common – more the rule than the exception – that auditors actively help the promoters bilk both the shareholders and the government on taxes. The way to change this culture is to give it a nice, big shock. The Satyam case is an opportunity to do just this.

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3 Responses to Satyam Next Steps

  1. Krishna says:

    There is not much difference in audit practice and processes, be they Indian or foreign. Underlying accounting principles are same everywhere. In fact, Indian accounting standards figure among the best. Foot note entry for stock options (instead of expensing them outright), out of balance sheet investment vehicles have long been allowed under foreign regimes but never under Indian accounting standards – something that insulated our banks from going under as opposed to serial bank collapses elsewhere. Minor variations are there only in presentation of accounts (as in US GAAP, IFRS, Indian GAAP), grouping and classification under different heads, rates of depreciation, tax treatment, provisioning etc depending upon requirements under local regulations – as can be easily reconciled from one to other. Managements will follow prudent practices and sweep less under the carpet if they realize shareholders have a hawk’s eye. Like they say, every subject gets the king he deserves; Cut to our times, every shareholder gets the auditor he asks for and crafts his own financial destiny in the process.

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  2. Krishna says:

    Auditors swear by their fiduciary obligations towards shareholders (it’s the shareholders that appoint auditors in general meetings as per law), but remember, it’s the management that cuts the check – hence they are less inclined to embarrass managements. Auditors, Indian or foreign doesn’t matter; they all belong to the same tribe. It’s for the shareholders to get activist and throw out the auditors that wink and nod. Satyam was not an ingenious scam, huge balances in current accounts quarter after quarter with accrued interest not being reflected in cash flow statements could've easily been questioned. But they just chose to ignore and paid the price. Or as one would suspect, the partners were silenced by the largesses doled out by the management, not just Raju…

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    • Vasu says:

      Checking bank balances is a very simple check that is carried out routinely during any audit. There was a total of about 5000 Crores under cash and bank balances of Satyam's Sept 09 results of which 3200 crores were in long term fixed deposits – again very easy to check – just get confirmation from bank or look at statements. I find it hard to believe the auditors did not do this basic check. Or were they given forged statements ?
      Could it have been possible that money – all of it was indeed there as of the audit in the bank as per books but was later withdrawn and carried home in gunny bags ?? if that is possible then there is a lot more mess to it than thats out so far…

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