Investigators looking into the fraud that has been called India’s Enron have found a “maze” of about 300 companies related to Mr. Raju that were used to “siphon” as much as $1 billion in cash from Satyam, said a senior official involved in the inquiry, who was granted anonymity to discuss developments in the case.
A New York Times report indicates a simple answer to what happened to Satyam’s missing billion dollars – larceny. The performance of the company – revenues, margins – were not systematically overstated over many years as Ramalinga Raju claimed they were. Instead, the promoters were stealing. This simpler explanation is something I have suspected all along.
Ironically, if this is true, this is good news for Satyam. On many fronts.
If this is true, the circle of tainted people in the management of Satyam could be small. Overstating revenues, margins is much harder to carry off without many other senior people in the management being complicit. On the other hand, stealing from the company bank account could have been carried out by the Rajus and the CFO only with just a couple of other people in Finance suspecting something but never knowing for sure. The auditor is another matter altogether – the Partner was either involved or grossly negligent.
If the circle of tainted people is smaller, that is good. New management will not have to do a purge. Which can not just be hugely demoralizing, it can wash away all institutional knowledge and context and making it difficult for new management to carry out simple, routine tasks. It’ll be like going and living in someone else’s house without the hosts and without any instructions on where to find what.
Satyam has a healthy business – not one with declining revenues and 3% operating margins as Ramalinga Raju claimed they were. If the new auditors can quickly establish this, this will be the best thing going for Satyam. They will be able to raise capital or even sell themselves as a healthy, going concern. Customers won’t be worried that Satyam can’t pay its employees who will leave them stranded without any support to their systems.
The larceny scenario will be easier to deal with for the auditors. If they are reasonably satisfied that there was no over-invoicing, they can concentrate their efforts on verifying the bona fides of the parties who received money from the Satyam bank account. It is likely that they might be able to publish restated accounts, faster. If there is one thing that all stakeholders require – shareholders and customers especially – it is a quick resolution to the question of what is the true state of Satyam the company. A long drawn out process will force customers to switch vendors to eliminate any risks to business continuity. It also allows the board to hire a new management, who will also have the same question.
The way the Indian authorities have handled the situation so far deserves a lot of credit. Senior officials and pols have all made public statements on their resolve to get to the bottom of the matter. The Rajus and the CFO have been arrested. A new board with impeccable credentials is in place. New auditors have been appointed. In fact, even this leak to the New York Times is masterful – it allows a new theory to be out there to compete with Raju’s confessional letter – before the auditors and investigators have completed their task and they can issue an official statement.
If there is one thing that I can’t fathom is the kid gloves the authorities are using in dealing with PwC and the partner involved. Why should the ICAI only investigate the PwC partner? Why shouldn’t the police be conducting a criminal investigation? The worst that the ICAI can do is to suspend the partner’s license. That seems like a rap on the knuckles. Also, why should PwC India not also be on the hook? I believe the regulatory environment in this respect is too benign. Not enough to deter accounting fraud which we all know is rampant in India, if not to steal from shareholders (which also happens often enough) but certainly to cheat on taxes. As a contrast, in the Enron case, the FBI went after Arthur Andersen and subsequently shareholder lawsuits brought the whole accounting firm down.
A lot of people, including myself are skeptical about whether the authorities will follow the trail of the money and get it back. When there is this kind of money involved the trail is bound to lead to some powerful people and their Swiss banks. Will Satyam be able to get its money back? Will these powerful people be brought to justice?
We’ll have to wait and see.