Wednesday, January 07, 2009

Of frauds and scandals - Wrong thing at a wrong time

It wasn't a premonition that made me write about Satyam yesterday. But it is a demolition that has made me write today. Satyam, one of India's strong IT firms has reported fraud. Fraud of the first kind. Reported cash where there was none, and reported under exaggerated spending figures. Wait, it got worse. This has not been a trend of the past year or two, but of the past 10 YEARS! And the worst part is - PWC audited them and Satyam was ranked one of the top 50 companies of all time in corporate governance. Well, a rude shock indeed.

When the world is reeling under a credit crisis, stock markets are spiralling to hitherto unknown depths, the mayhem is spreading to other sectors after affecting manufacturing and housing, unemployment in the West keeps augmenting, general investor sentiment is to hoard cash under the mattresses, the world needs some strands of hay to cling on to! Unfortunately, now, since freely flowing credit has dried up, all the skeletons are coming out of the closet, much like the bones on a riverbed can be seen during a hot summer as the river dries up! First - Bernie Madoff - a classic 'iski topi uske sar ' story. Remorseless profiteering, using unfair means. Now, Satyam, whose woes began with a crazy diversification of stockholders' money into a family enterprise finally leading up to the opening of the ugliest can of worms India has ever seen since Harshad Mehta.

This has loads of implications and repercussions. India has a rather strongly regulated banking sector. So, India was spared the debilitating effects of the credit crisis the world now faces. IT and IT services are India's main USP. But India is still a young nation. We haven't even reached a 3 digit figure for years after independence. So, facing fraud in the sector that in a way differentiates India from other emerging markets is, tough and sad to say the least. Investor and client sentiment would decidedly begin to spiral down. Where can India then move to find its elusive economic stronghold?

So much for India. A bigger repercussion according to me, is the dent on the credibility of the Big 4, at least in India. Auditors are historically feared by all firms, big or small. Now, if a huge auditor has not noticed anomalies for not one, but 10 years, its like the 'Dark Ages' all over again. Who do we believe? Madoff has sparked off fire on the SEC in the US. Will Satyam cause ICAI to re-visit its processes? Must SEBI also stop resting on its laurels and begin to ensure that the prices of stocks are truly aligned to the core competence of the listed firms? But then again, will an over-reliance on external governance result in contrived growth on account of controls based on extreme caution and suspicion? Will this eventually turn the whole world RED?????


Subbu said...

Sathyama, naan onnum pannala. Avaraa thaan ellathaiyum othhukitaaru. Vendaam nu sonnen, aana avara ketkala. Enna panna. Avaroda kashta kaalam. :-)

Anonymous said...

Financial Crime or Fraud is very much prevalent in India and especially in the Banking sector. The credit crisis that has happened is a classic case of window dressing the fraudulent accounts booked during the cheap credit period to show astronomical growth rates in the Net earning Assets, as credit losses and reserves today. The definition of fraud is maligned to suit the needs of the financial institution and show shareholder value in investing in the same. The financial institutions that have gone down, have so because of a high proportion of fraudulent accounts in their portfolio. Banks and fin institutions know the mess the books are in and hence have used credit as a shield to hide the frauds. In fact most of the senior management in banks know the mess they are in, yet they turn a blind eye to it, as they were the ones who had ignored the same during the cheap credit phase. With regards to auditors, this is not the first time such a fiasco has happened. Arthur Andersen was a classic case of auditors turning a blind eye to inflated accounts. However, they got blown out of business as the issue happened in the US. As for India, nothing will happen to either Raju or PWC--because of the simple fact that the regulators themselves are prone to fraud and corruption. Did anything ever happen to the perpetrators of the stock market scams? Or the PSU Bank fraud scams? Answer is NO and neither will it be different this time around.