Omkar on Satyam
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TOP ARTICLE | A Wake-up Call
9 Jan 2009, 0010 hrs IST, Omkar Goswami


For the last 48 hours, everything about an inappropriately named
company called Satyam involves incredulity, indignation and
schadenfreude. Incredulity by all: How could the promoter B Ramalinga
Raju cook the books by a staggering Rs 7,000 crore without the
management and the statutory auditors being in the know? Indignation
by corporate India and the press: the former for Satyam having
tarnished its name, and the latter against those who were sleeping on
the bridge. And schadenfreude (malicious enjoyment of another's
misfortune) is from the press: glee at a fat cat drowning, a big-four
accounting firm running for cover, and exalted independent directors
caught in flagrante.

I empathise with all three emotions, though the schadenfreude is a bit
over the top. Satyam's fudging of accounts is not something to be
gleeful about. It has tarnished the image of corporate India at an
especially difficult time. Also, none can claim, "I told you so".
Until Satyam tried to purchase Maytas, nobody criticised the
performance and corporate governance of the company. Raju was a voice
of the new India. Let's humbly admit that we were all duped by the man
hugely and comprehensively so.

The size of Raju's scam is humongous. Focusing on the major swindle is
enough to understand what he was trying to do. That has to do with
Satyam's cash and bank balance which was inflated by Rs 5,040 crore as
on September 30, 2008. In Satyam's September 30 balance sheet, the
cash and bank balance was Rs 5,361 crore. Subtract the Rs 5,040 crore
fudge, and you get just Rs 321 crore. Recall that Satyam had proposed
to buy Maytas for $1.6 billion (or Rs 7,700 crore), financed out of
its cash. But it didn't have the money. So, what was the play? Get the
Maytas assets into Satyam, delay paying cash to Maytas and, in the
meanwhile, shore up Satyam's balance sheet with valuable
infrastructure assets. In Raju's pathetic confession, "The aborted
Maytas acquisition deal was the last attempt to fill the fictitious
assets with real ones."

The game was up once the institutional investors thumbed down the
acquisition. Raju desperately needed suitors to purchase Satyam to
fill the gap between real and fictitious money which had "attained
unmanageable proportions". It appointed DSP Merrill Lynch to do
match-making. And Merrill's team found these discrepancies, forcing
Raju to confess.

Raju couldn't have rigged the books on his own. You can't overstate
cash and bank balance by Rs 5,040 crore, or quarterly revenues by Rs
588 crore without participation of the CFO and, at the very least,
negligence of the CEO. If you were the CEO of a company whose revenues
shot up by an unanticipated Rs 588 crore, wouldn't you ask, "Where did
that come from?" And if you didn't, what should one infer?

The most amazing aspect of the case is PricewaterhouseCoopers (PwC),
the dog that didn't bark. Like Andersen in Enron, PwC failed as a
statutory auditor whose task is to certify that the accounts are 'true
and fair'. The cash and bank balance scam is damning. From the
articleship days, auditors swear by the need to verify a company's
cash and bank balance. How could this be inflated by Rs 5,040 crore
leaving PwC clueless? When DSP Merrill Lynch figured it out in a
trice? Clearly, either the CFO fabricated documents on banks'
letterheads, or rigged the company's enterprise reporting software, or
PwC didn't dig deep enough. PwC's apparent errors in omission are too
glaring to be countenanced.

Here's my initial take on the post-debacle scenario. First, Satyam as
we know it is history. It will be well-nigh impossible for Ram
Mynampati, who has taken over, to steer the company to a safe harbour.
And it will be a while before anyone shows an active interest in
buying a company riddled with falsified accounts. That's a shame for
which Raju is entirely to blame. His hubris made him the terrible
destroyer of all that he created and grew. To think of the fate of
53,000 lost souls who struggled day and night for a company whose
promoter cheated them so outrageously brings rage and tears in equal
measure.

Second, PwC's goose is cooked. US shareholders will slam class action
suits, and the Securities and Exchange Commission will pitch in. If it
is very lucky, PwC will be severely fined, lose many clients, have its
Satyam audit partners punished, and become a shadow of its former
self. Otherwise, it may fold like Andersen. Not by actions in India,
but in the US.

 

Third, like the post-Enron era, this could prompt a rash of new
directives and rules from the SEBI and the ministry of company affairs
(MCA). I hope not. India's problem is not of inadequate laws; it is of
grossly inadequate enforcement. Let's not have more over-regulation
and under-enforcement. Fourth, one hopes that SEBI and the MCA will
collaborate to take swift action and confer exemplary punishment on
the guilty. India needs to show the world that it can punish the high
and mighty, and do so quickly.

Finally, while one recognises that independent external directors
can't do much if the internal or statutory auditors don't blow the
whistle, the Satyam episode is a wake-up call to all of us who serve
on boards. Independent directors must focus more on their companies be
more diligent, deeply question proposals, speak their mind and take
outside counsel. Understand the management's perspective, by all
means. But never forget that you are a fiduciary of the shareholders.

The writer is a Delhi-based economist and columnist.