there more Satyams out there
By Sushma Ramachandran
The confessional letter written by Ramalinga Raju in the first
week of 2009 about the massive fraud perpetrated at the country's
fourth largest software company, Satyam, has opened a Pandora's
box. The scam by Raju and his family could ultimately emerge
as the mother of all corporate frauds in this country as even
the initial investigations are revealing all kinds of manipulation.
The story of greed will rope in many players apart from Raju
and his family members as clearly this level of fraud needed
many more associates to continue over a period of six or seven
years. The reputed multinational accountancy firm, PricewaterhouseCoopers
(PwC), has already fallen in the police net with two of its
leading executives having been arrested in Hyderabad. As the
investigations continue, there is no doubt more big fish will
get caught in this complex web of intrigue woven by Raju.
Shocking as these revelations are, one must pause for a moment
and have a look at the overall state of corporate governance
in the country. Veiled hints have been thrown by industry
representatives that this may not be the only company that
is manipulating accounts for the benefit of the public.
It is well known that even some of the largest corporates
in the country have set up many shell companies for purposes
of investment. These companies operate in the stock market
at the behest of their parent companies, though ostensibly
there is no link between them. There has never been any concrete
proof of manipulations or scams though there has always been
speculation in corporate circles about these companies.
But the Securities and Exchange Board of India (SEBI) does
not seem to have taken the initiative to delve deeper into
these issues even though many of the parent companies play
a major role in determining the movement of the stock markets.
It is also tacitly acknowledged and accepted that family-owned
concerns operate on an ethical code different from that of
professionally managed companies. Of course, many family businesses
have professionalised their managements over the years like
the Goenkas and some segments of the Birlas. In the past,
however, it was one of Indian industry's worst kept secrets
that the 'lalaji' companies, as they were known, had developed
fudging of the accounts into a fine art.
The scenario changed drastically after economic reforms were
launched in the 1980s and 90s. A liberalised economic environment
led to the rise of many corporates being set up in a professional
manner by first generation entrepreneurs. Sunrise industries
like computers and software were among the sectors where such
corporates stole the limelight. HCL and Infosys were among
this lot and the rise of Satyam seemed to be a mirror to these
success stories of the software sector.
In fact, the idea that Satyam could be like any of the "lalaji"
companies of the past would have been pooh-poohed as Raju
had built up an impregnable public image of being yet another
Narayanamurthy or Azim Premji. No wonder then that warnings
issued by people as eminent as Delhi Metro chief E. Sreedharan
or former finance secretary E.A.S. Sarma about the possibility
of Satyam being involved in fraudulent activities was never
taken seriously by the authorities.
What has made the Satyam issue even more grave is the involvement
of a highly respected accounting firm like PwC in the whole
affair. Incidentally PwC is already being probed in some other
cases including that of the Global Trust Bank. The Institute
of Chartered Accountants of India is understandably shaken
over the affair which has cast a pall over this entire sector.
But it has also recognised that the auditors of the scam-hit
company have not done their job. If they had, it would not
be possible for Raju to have hidden the fact that the company's
profits of Rs.7,000 crore/70 billion ($1.43 billion) were
non-existent. It is thus high time that SEBI and other regulatory
agencies like the Registrar of Companies investigated accounting
practices not just in Satyam but the whole host of other corporates
that may still be doing "creative accounting" and
thereby defrauding shareholders.
Right now, the new board of directors is struggling to keep
the company afloat and ensure that the thousands of employees
are not thrown out of work. On this aspect, it must be pointed
out that even the number of employees is now being doubted
with some media reports indicating that the head count may
be about 40,000 rather than the 53,000 officially on the rolls.
In any case, the numbers are large and the new board of directors
has brought about a collective sigh of relief with their announcement
that salaries will be paid on time.
It is to the credit of the new board that they are trying
to act as swiftly as possible while allaying the fears of
the employees. Boston Consulting Group has been brought in
as a management adviser which is likely to give some support
to the new directors who have a gigantic task on their hands.
Apart from dealing with employees, they also have to give
a comfort level to the many customers who have decided to
retain their loyalty to the firm. Simultaneously, they are
evaluating prospects of selling off the company to the several
While the future of Satyam and its employees hang in the balance,
the larger question of the credibility of the IT sector is
creating unease among most of the key players. Infosys, for
instance, is trying to highlight greater transparency by providing
details of its bank deposits to its directors. There is a
growing apprehension that the spotless reputation of such
corporates will be affected by the Satyam scam. Their fears
are to some extent justified as both domestic and foreign
customers are bound to view the Indian IT sector with some
suspicion after the Satyam scandal.
A tremendous initiative to highlight the high standards of
corporate governance in this sector will be needed. Indian
industry as a whole now needs to introspect and ensure that
the levels of corporate governance are raised dramatically
so that more such scandals do not smear its name in future.
In addition, regulators like SEBI and the Registrar of Companies
are not blameless and need to act more aggressively against
all kinds of manipulation that is even now continuing in many
segments of the corporate world in this country.
(29.1.2009-Sushma Ramachandran is an economic and corporate
analyst. She can be reached at email@example.com)
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