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


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.