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
April