Satyam : The End of Innocence

DQI Bureau
New Update

The saber rattling between India and Pakistan has been intense these last two

months, with Indian diplomatic coercion finally looking like itll crack open

the forces across the border. The Indian media has proved to be a strong ally to

this diplomatic offensive, ensuring that Pakistan-bashing (totally justified)

features prominently in prime time viewing or in newspaper headlines. In such

extraordinary times, and considering the gravity of the situation, it would have

needed a news of extremely serious magnitude and gravity to share the same

space. And this is what precisely the January 7 confessions of Byrraju

Ramalinga Raju and the subsequent Satyam fiasco has done.


After all, this was an extraordinary situation: while the debates on whether

the confessions pertaining to getting on to a tiger and not knowing how to

get off were indeed the result of conscience could go on, more important is to

assess the implications and set about trying to rectify the situation. While

Dataquest has analyzed threadbare both the long-term and short-term implications

for Indias much vaunted software services sector as well as the possible fate

of the 53,000 existing employees (the numbers are doubtful like most other

figures emanating from the Satyam stables), there are still a few more critical

issues that need highlighting, and possible rectification measures discussed.

Regulatory Fiasco?

While most analysts rule out mass scale withdrawal of businesses from Indian

IT services companies, what is likely to happen is that the evaluation process

of Indian providers will be expanded now to include a higher level of financial

scrutiny. This is something which Indian companies (especially the larger firms)

have not been subjected to so far, and they need to be prepared to respond to

this scrutiny. The Wipro-World Bank fiasco could be an example of this; the moot

point here is that even if a top notch company like Wipro could be affected, the

tier-2 and -3 services firms must gird their loins much more tightly for this


The impact on investor confidence will be much more significant than the

impact on client confidence. Ask any global business or financial analyst and

the answer is clear: I would think twice now about buying India, Inc shares. I

would not think twice about engaging an Indian service provider, though I would

probably ask more detailed financial health and viability questions. As

expected, all players have already begun to reassure customers and investors.

Many feel that client confidence will not be materially affected, provided our

regulatory bodies like SEBI or for that matter the Ministry of Company Affairs

respond maturely and expeditiously. Nonetheless, at least in the immediate term,

every provider will be scrutinized much more closely. Partly as a result of this

closer scrutiny, the general industry image and credibility will be maintained,

although international competition will certainly feel encouraged.


Thankfully, a positive start has been made by the government with the

formation of a three member board consisting of HDFC chairman Deepak Parekh, ex-Nasscom

president Kiran Karnik and ex-SEBI member C Achuthan, men of impeccable

integrity and reputation. This board will select ten members as well as pick the

new CEO and CFO for beleaguered Satyam. However, critics point out that the

board will find it difficult to select people of necessary credentials, because

any competent person would now hesitate to associate himself or herself with the

Hyderabad company. And the alleged attempt by the government to include people

like Narayana Murthy or Azim Premji or Ramadorai has been ruled out owing to

conflicts of interests.

Many observers are even skeptical about the regulatory turn of events likely

to take place. For one, this is an unusual challenge, where the Indian and US

regulators will simultaneously try an Indian company. The pitfall of this could

be the fact that if the objectives of investigations in both countries are

different, outcomes could also turn out to be different, and that might signal

not just a corporate tangle but more serious diplomatic jostling. The fact that

in India an amendment of the 1956 Companies Law has been languishing for ten

years could trigger this situation. The amendments permit greater responsible

self regulation by companies, which the government now feels should be removed.

But the new law would also give Indian shareholders more rights such as

permission to sue auditors, Price Waterhouse in this case. While the auditor

issue itself needs much greater scrutiny, the fact is that with class action

suits already instituted against Satyam in the US, what will happen if Raju

receives different sentences: will we open a proverbial Pandoras box with

issues like extradition? Or, in a more likely scenario, a US court sentencing

him while the trial in India is still going on.

The role that SEBI would have, is still divided under two schools of thought.

For some, there is not a possibly major role for SEBIs side, which has been

keeping a close eye on Satyam recently owing to the financial irregularities.

Notably, SEBI has termed the disclosures as an event of horrifying magnitude.

Capital market experts point out that though empowered to govern market-related

manipulations, the ball would rather be in the court of the Ministry of Company

Affairs or ICAI rather than SEBI in the case of Satyam. This case will probably

invoke laws of fraudulent practices and is more of accounting manipulation. The

role hence would be of company regulators as SEBI is related to only disclosure

norms pertaining to the market. However, there could be scope of broad

contraventions with regards to section 49 of the SEBI Act, which, in particular,

talks of corporate governance and has to be strictly followed by all companies

listed on Stock Exchanges.


R Ramalinga Raju:

the beleaguered Satyam chief

Et Tu, PwC?

And while the moral turpitude of Raju and other top honchos of Satyam like

CFO Vadlamani are regularly debated, the role of the auditors, Price Waterhouse,

have rightly come under the scanner. A serious crackdown on auditors is very

much on the cards. Questions like how could the auditors possibly not have seen

the quarter-by-quarter fraud are on everyones lips. The same question is put

forth by most legal experts. What were the auditors doing, more so in the case

of a misappropriation of this proportion? Hopefully, the IRFS or International

Finance Reporting Standards that is due in India in 2011, and has been met with

pleas of extension and exceptions on grounds of its being a costly affair, would

get a renewed boost now.

But in the more short term one needs to investigate the role of Price

Waterhouse. Whatever official statements they might give out, most auditors

concur that it would be impossible for an auditing firm of PwCs reputation to

overlook the important step of ratifying cash positions against bank statements.

And when, going by Rajus confessions, there has been a discrepancy of over Rs

300 crore in the closing and opening balances of bank statements. Price

Waterhouses playing it safe now by claiming it followed applicable auditing

standards do not cut much ice and there is bound to be questions of a total

failure of professional ethics.


If Price Waterhouses collusion is proved, the ICAI could even suspend the

firm. Unfortunately, this could be a serious possibility, since it is unlikely

that a fraud of this scale could only have been done by Raju alone: there are

4-5 items mentioned in Rajus letter that would require at least 200-250 entries

in the books, and how this could pass muster is the moot question. If Price

Waterhouse deliberately ignored them, thats serious enough, but even if it

could not catch Satyams doctoring of bank accounts or did not cross-check

statements with due diligence, that also throws bad light on their competency.

The fall of Enron took Arthur Anderson along with it; Satyam is definitely a

disaster of Enron-esque proportions; will PwC go the Arthur Andersen way?

The situation indeed looks similar on many counts, especially after Price

Waterhouse has now shot off a letter to BSE and addressed to the new Satyam

board, stressing that their audit reports for the audit period June 2000 to

September 2008, should not be relied upon. Now just mentioning that they have

made a mistake after all the damage is done does not absolve PwC of its

responsibility. The firm has handed over the blame to the then Satyam

management, saying that it placed reliance on management controls over financial

reporting, and the information and explanations provided by the management, as

also the verbal and written representations made to them during the course of

their audits. If a reputed firm of global auditors take everything at face value

and do not even bother to do simple cross-checks it does raise serious

questions. No wonder then that its not just Raju, the noose seems to be

tightening around PwC too.

Rajneesh De