Thus spake Nirmalya Kumar

Satyam: Not yet India's Enron

18 Jan 2009, 0040 hrs IST, Nirmalya Kumar

The Satyam fraud has attracted daily full page coverage in

international newspapers. This is unfortunate from India's

perspective. With every brand there is a dominant narrative. India's narrative, so positive until summer, suddenly seems to have taken a turn for the worse. The economic slowdown and fall in the stock market was the start, but the

terror attack in Mumbai and Satyam have turned the tide. The narrative

in international circles has switched from the growth potential of

India to the risks of doing business in India. Of course, this does

not imply that India is not seen as an attractive market. It's just

that the pricing of Indian risk has been significantly altered.

It's always easy to blame the government for being slow to respond to

the events and letting Raju be free for several days after admitting

to the fraud. Similarly, while the independent directors bear

responsibility for approving the Maytas deal, one cannot really blame

them for accepting audited accounts. The checks and balances failed.

Still, a crisis can be used as an opportunity to build the brand,

provided it is handled appropriately. On the other hand, a mishandled

public response can cause more damage than the problem it addresses in

the first place. Remember, Bill Clinton or Three Mile Island?

Previously, i have identified the 'four Cs' of crisis management:

being candid (accepting failure), contrite (assuming responsibility),

compassionate (showing concern for those adversely affected), and

committed (to solving it). Let the readers decide whether Nasscom,

through its president Som Mittal, who has been all over the press

making statements, has demonstrated any of the four C's. The more

serious issue is with the Institute of Chartered Accountants of India

(ICAI) and PricewaterhouseCoopers (PwC), a firm that i worked for in

the early 1980s.

The response of ICAI and PwC has been most disappointing for

international observers. The rule that only the partner is liable is

ridiculous. ICAI observed that if found guilty, individual auditors

could face a lifetime ban, but no action could be taken against PwC by

ICAI. This rule seems to be a rather convenient one - similar to the

self-serving and ridiculously low levels of compensation for articles

that was set by ICAI. Why would one pay the PwC level fee if the only

liability guarantee is that of an individual partner?

As an investor or an independent director, our only assurance that the

books are not cooked by the management is the guarantee of the

statutory auditor. This is why the more reputable auditors get higher

fees. One can perhaps envision the income statements being manipulated

to report enhanced profits. Usually, Indian companies loathe doing

this since it means paying higher taxes. In Satyam's case, this was

irrelevant as IT companies have managed to badger the government into

giving them a tax holiday. But cash and deposits being manipulated to

the extent claimed are a totally different animal. And to imagine that

only one or two employees knew of this is hard to believe unless

Satyam had no internal controls in place.

How could the cash and deposits have been manipulated? PwC made the

situation worse by saying "The audits were conducted by

Pricewaterhouse in accordance with applicable auditing standards and

were supported by appropriate audit evidence." Really? Despite

following PwC auditing standards, the firm cannot reveal fictitious

cash balances and deposits. Wouldn't it have made more sense to say we

are reviewing our auditing standards as we missed the boat here? And

if they have any evidence to the contrary, "client confidentiality" is

not the best curtain to hide behind. Soon, PwC may not have any

clients to be confidential about.

If international investors and clients of IT companies cannot be

assured about the audited accounts, then they will ask for a risk

premium when doing business with India. This is where calling it

India's Enron is misplaced. Enron's manipulation of derivates off

balance sheet was highly sophisticated, and difficult to penetrate.

Here we are talking cash and deposits. Furthermore, the fact that the

top executives ended up behind bars, the auditing firm went bankrupt,

and the employees lost all their pensions demonstrated that there were

high costs for everyone involved. This gives investors assurance that

while fraud can occur, there are teeth in the laws and substantial

costs for fraud. Is PwC India going to go out of business?

The writer is co-director, Aditya Birla India Centre at London

Business School. His book, India's Global Powerhouses, will be out in