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.
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.