Satyam: Oops, Our Bad

Hot on the heels of an article that argued that state regulation of India's financial sector stopped a similar bubble from being created in India as was created in the U.S. (though I still say the jury's out), we have yet more word from NYT that neoliberalism-as-an-actually-existing-system is not exactly a magical land of privatization fairies and anti-corruption dust sprinkled upon the ordinary investor, let alone the median-income (poor) Indian:

NEW DELHI — Satyam Computer Services, a leading Indian outsourcing company that serves more than a third of the Fortune 500 companies, significantly inflated its earnings and assets for years, the chairman and co-founder said Wednesday, roiling Indian stock markets and throwing the industry into turmoil. The chairman, Ramalinga Raju, resigned after revealing that he had systematically falsified accounts as the company expanded from a handful of employees into a back office giant with a work force of 53,000 and operations in 66 countries. Mr. Raju said Wednesday that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed in assets for its second quarter, which ended in September, were nonexistent. Revenues for the quarter were 20 percent lower than the 27 billion rupees reported, and the company’s operating margin was a fraction of what it declared, he said Wednesday in a letter to directors that was distributed by the Bombay Stock Exchange.

Set aside the fraud issue for a second, which is more an issue of political and corporate culture, regulations, and ideology:  What does this all mean?

Summary: 
Satyam CEO takes people's money, says if it wasn't for you meddling kids, they would have gotten away it.

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What it means for me is that

What it means for me is that someone at PWC royally messed up. I am an ex auditor and everything Mr. Raju mentioned in his letter should have been caught during the audit. What shocks me is the blatant nature of this, at least in Enron, there was some creativity with shell corps etc. I don’t think this is an exception than a norm as were worldcom, Enron, Madoff and other cases.

I wish you were on my facebook page. A facebook friend had good commentary on "new india" vs. "old india" as overly simplistic memes. Anyway, what the "norm" is in Indian business in the formal sector today vs. business in other poor countries vs. other places is a bigger question than I can tackle :)

(1) CITU statement. New

(1) CITU statement.
New Delhi, January 8: Centre of Indian Trade Unions (CITU) reiterates that the Satyam Computer Services Ltd. fraud has once again exposed the hollowness of the much-hyped corporate governance in a free market economy. CITU demands that Government should take punitive action immediately against the corporate scam-star, the Board of Directors, the so-called Independent Directors, and the Auditors, who are responsible for the trauma, being faced by 53000 workers and a huge number of small retail investors.

CITU points out that the Satyam fraud is not an isolated case in an inadequate regulatory mechanism but highlights the collusive mismanagement of public fund by the nexus of Private Corporates, Auditors and independent directors backed by the Government. M/s Price Water House & Cooper (PWC), the auditor of Satyam was also the auditor of Global Trust Bank, which collapsed in 2004 and then bailed out by a PSU bank. CITU strongly apprehends than an independent scrutiny of the balance sheets of the companies which are being audited by M/s PWC and other trans-national audit firms, would bring out skeletons in the cup board of corporate misgovernance of similar fraudulent nature. Keeping in view PWC's client list of 50 Corporate bigwigs in India, including number of top IT companies, GMR, LANCO, United Breweries (UB), Reliance Power, Simplex, Max India etc., CITU demands that the monopoly of PWC and other trans-national auditors should be immediately curbed and PWC be blacklisted.

Along with other corrective as well as preventive regulatory measures to protect the interest of million of workers, employees, retail investors and public money, CITU demands that the Government should take immediate steps to constitute a National Audit Board to regulate and scan the audit of the listed private companies. The Audit Board should have similar power and duties that the C&AG have for the audits of PSUs.

(2) CPIM statement.

The Central Committee of the Communist Party of India (Marxist) now in session at Kochi has issued the following statement on the Satyam Fraud issue.

The shocking revelation of an over Rs. 7000 crore fraud by the promoters of Satyam Computers has shown that Indian big business has started emulating the worst corrupt practices of their counterparts in the advanced capitalist countries, especially the US. It is indeed outrageous that Satyam was given the “Golden Peacock Global Award” for Excellence in Corporate Governance! The Satyam Chairman B. Ramalinga Raju has admitted that the company has been manipulating its balance sheets for years to show inflated profits and under reporting liabilities.

Such fraudulent corporate behaviour, as the Enron scandal in the US in 2001 had shown, is motivated by the greed to increase the share prices and market capitalization of the company. A former Enron CEO is currently serving a 24 years prison term and Enron’s accounting firm Arthur Andersen had to be dissolved for being complicit in the scam. The urge to quickly become rich, motivated fraudulent reporting of profits by the top Enron management, since higher profits led to higher share prices and resulted in higher individual net worth for the managers. Such corporate frauds have been encouraged by the process of deregulation and financial liberalization, which has made company managements obsessed with their stock market valuations. The UPA Government must learn the proper lessons from this episode and desist from further emulating the failed system of the US. Corporate regulations need an overhaul in India in order to discipline big business.

The CPI (M) demands that the Government take suo motu cognizance of the admission of guilt by the Satyam Chairman and immediately proceed against him. The concerned Directors in the Satyam Board and the audit firm Pricewaterhouse Coopers (PwC) must also be held accountable for the gigantic fraud, and strict penal action should be initiated against them. It is noteworthy that PwC partners were earlier indicted for fraudulent accounting after the collapse of the Global Trust Bank.

The CPI (M) calls upon the UPA Government to take immediate steps to safeguard the interests of the 53000 employees of Satyam Computers. Several departments and agencies including the Ministry of Corporate Affairs, SEBI, Andhra Pradesh Government and Mumbai Police have initiated probe into the Satyam affair. It is important to ensure proper coordination between the separate investigations and monitoring by a single Department of the Union Government. The entire fraud should be thoroughly and speedily investigated and all the beneficiaries of the scam brought to book.

What it means for me is that

What it means for me is that someone at PWC royally messed up. I am an ex auditor and everything Mr. Raju mentioned in his letter should have been caught during the audit. What shocks me is the blatant nature of this, at least in Enron, there was some creativity with shell corps etc. I don’t think this is an exception than a norm as were worldcom, Enron, Madoff and other cases.

Dr. One thing I realized

Dr.

One thing I realized early in my career while doing C.A is not to be surprised by anything you see in corporate India, I have gone to the office of company affairs to add documents to a file for a company we had registered, and I had to pay money to get the person to retrieve my file. I was told if I didn’t pay the money my file will be lost in a space with capacity to hold files for less than 10,000 companies registered in Delhi and Haryana but that was holding files for more than 70K companies
I had to pay money to get a rightfully deserved income tax refund for a client and I also know of small privately owned corporations that don’t pay any taxes year after year by booking fictitious expenses. I used to audit Crompton Greaves, which had a habit of booking sales at the end of the year to inflate numbers and show them as returns in first quarter, my team escalated it to the partner who dropped the issue after “speaking” to the CFO, that is why I mentioned on Sepia, that 9.9 out of 10 cases the auditors will not issue a qualified opinion whether here in America or in India.
The transparency of the facts in the Satyam case is mind boggling. Raju claimed this morning that it was going on for 7 years, I can’t understand, why there wasn’t an IT audit and why the statutory auditors not catch anything.

One thing I realized early in

One thing I realized early in my career while doing C.A is not to be surprised by anything you see in corporate India, I have gone to the office of company affairs to add documents to a file for a company we had registered, and I had to pay money to get the person to retrieve my file. I was told if I didn’t pay the money my file will be lost in a space with capacity to hold files for less than 10,000 companies registered in Delhi and Haryana but that was holding files for more than 70K companies
I had to pay money to get a rightfully deserved income tax refund for a client and I also know of small privately owned corporations that don’t pay any taxes year after year by booking fictitious expenses. I used to audit Crompton Greaves, which had a habit of booking sales at the end of the year to inflate numbers and show them as returns in first quarter, my team escalated it to the partner who dropped the issue after “speaking” to the CFO, that is why I mentioned on Sepia, that 9.9 out of 10 cases the auditors will not issue a qualified opinion whether here in America or in India.

Well that certainly sucks for investors :) Your experiences resonate with my limited experiences dealing with companies in certain sectors in India. What I found most annoying as a South Asian American upon moving to India was the extent to which it had been misrepresented by Hyatt journalism in the American press. What I find most comical now is that people think that somehow "corruption" can be magically erased or is not part and parcel of the whole system. The whole construct is weird - for something to be corrupted, it would have to first have been pure - I could be wrong, but I think markets are always dirty, and the cleaner image they get through legalized practices happens when there's the money to do that (i.e. not before industrialization).

In seriousness thouhg, how do these auditors get away with what they're doing? Is it because the auditors of last resort (whether it should be the government or someone else) have abandoned their raison d'etre, or is it something more nuanced?

I think it is because they

I think it is because they take on more that they can chew and the quality suffers. I was asked to audit a plant in my first year for the year end financial statements without a team, I had no idea about the nuances but the partner didn't care as he wanted clean audit reports that would not cause delays at year end as the plant was a part of the big set up and he would have to explain the delay to his national partners and so on. The funny part is that how easy it is for some people to just ignore the ethical way of doing thing for the sake of not being bothered.

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