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Sunday, January 11, 2009

The Mithya of Satyam; aka the Satya(m) of a Mithya!!!

Mithya --> Illusion

Satyam --> Truth (also, the name of the now infamous IT company)

It was with great disbelief that I heard the story of Ramalinga Raju's confession. In fact, till I read it, on the web, I didn't really grasp the enormity of the fraud. Now, his confession has showed us the 'Satyam' behind a number of 'Mithyas'. What are they?

Till recently, almost all write-ups on the economy and business environment had repeatedly pointed out that we have great / impregnable systems and checks in place and the absence of any major scandal after Ketan Parekh's proved that. Who could have guessed that a gigantic one was taking place right in front of us, without anybody knowing about it? It's next to impossible that the auditors and key finance personnel in the company could not find this out. Just the CEO & CFO managed to pull it off and that too for a number of years? No way, I'd say.

The fiasco showed us, again, that auditors, if not all of them, are hand-in-gloves with the perpetrators of frauds. However tight the auditing guidelines & accounting standards, if one is creative enough, fudging is incredibly easy. To find gaps, given the current technological advances in book-keeping & complex business processes, auditing professionals need to be highly skilled; we have a long way to go in this respect. Revenue recognition norms, especially for those firms in service industry, need a relook.

With Enron went Arthur Anderson; will Satyam episode lead to black-listing of PwC, given that it was already under the scanner for its role in the failure of GT Bank? No chance, if one were to look at the utterances from ICAI functionaries; they say action will be taken only against the partners and not the firm. Yours truly once had a great deal of admiration towards this firm; no longer it remains. A valuable lesson is that, being big is not a guarantee against failure; in fact, as you grow in size, stronger measures to manage operational risks are to be put in place.

Independence of independent directors is to be ensured through new means. One feels that, for companies which fulfil certain criteria in respect of their assets / market cap, SEBI should be the body which appoints independent auditors, so that, the independence is fully ensured.

Listed companies carry an aura of transparency with them, and subsequently, lower risk premia are attached to them. It is assumed that fear of a market backlash will prod them along the path of self-regulation. Raju's confession tells us that it was his fear of such a backlash and takeover attempts that made him cook up the figures! That is a direct barb at the short-termism of market participants. In fact, one is tempted to say that we are living from quarter to quarter. The behaviour of markets soon after the announcement of quarterly results is too wild nowadays; the stock is battered, even in case of growth, if the growth is not as per analysts' predictions and no thought is given to the long-term prospects of the company. Such an obsession with the Qn figures needs to be restrained.

One's heart goes out to those investors who bought into the Satyam stocks on Jan 7, before the story broke. Who will compensate them [that is, the ones who have not yet exited], as well as others who invested in shares of other companies and suffered losses from the market meltdown that followed?

What needs to be done now?

  • Speedy investigation, trial & justice
  • Tighter regulation
  • Revamp of audit practice – it's time competition is brought into the auditing profession; the ICAI's monopoly over the same is not good for the profession and the country in the long-term [yes, I'm an interested party here; but that does not dilute the logic of this line of thought].

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