The Satyam Drama and Non-State Actors

The Satyam saga has rounded off a double whammy with the Mumbai attacks giving us our very own version of 9/11 and Enron in close succession. The magnitude of the fraud is jaw dropping but the mechanics remain unclear. Most in the industry find it inconceivable that this was going on for seven years with nobody outside of a few people getting a whiff of this. It is possible to cover up revenues and profits to such a large extent in a business which relies on trading or other form of non-physical revenue sources but to do so in a business as straightforward as billing people's time seems hard to fathom. If it was indeed so, then it was an extensive cover-up operation in collusion with several people and key stakeholders. In any case, a lot more should emerge in the coming days and months. But this is not about the anatomy of the fraud but the responses thereafter.

While it took a lot of flak for taking 4 days to arrest Raju, the Central government has surprisingly responded effectively and prudently. Speedily overhauling the board with eminent members has certainly restored stability and decelerated the flight of customers and employees at the very least. Whether Satyam has chance of surviving or being acquired is a different matter but then that is not the government's responsibility. Despite calls from the AP government and sections of the industry, the government has rightly ruled out any bailout or legal immunity for new management. While my heart goes out for Satyam employees, employment guarantee for highly paid white collar workforce funded by taxpayer money is stretching things too far.

While the government has done as well as it could have, it is the others - non-state actors - who have not covered themselves in glory.

Topping the list in my book is the ICAI. They have openly stated that they will take action against the partners but not Price Waterhouse. This even before an inquiry into the auditing failures has been initiated. So if it turns out that there was inadequate adherence to auditing procedures and standards at the firm, we are being told that the watchdog will look the other way. ICAI vice-president Uttam Prakash Aggarwal sounds like the Hyderabad police 4 days after Raju's confessional - “The institute can proceed only if we receive a complaint. Despite the public outcry, so far we haven’t received a single complaint — neither from banks, nor from shareholders”. The GTB-PwC accounting probe by the ICAI is continuing for over 4 years with no end in sight. Is the ICAI more interested in regulating auditors or protecting its members? Chances are that PWC will come out unharmed after 7 years of certifying the books in the biggest accounting fraud in Indian history. Another example that businesses can never effectively self-regulate.

Then we have the demand from potential acquirers that the government assume Satyam's liabilities as a precondition for acquisition. Henry Paulson's singular contribution to M&As will be that we will continue to be treated to this ridiculous demand from suitors of any failed enterprise. Acquiring a $2 Bn outsourcing business at rock bottom prices and no risk sounds like a bright idea provided you can find a sucker government to buy into it.

Among the FIIs, we have the curious case of Lazard acting like cry babies at not being granted a board seat and offloading their 7% stake in a huff. If this is indeed true, are we to believe that Satyam's valuations would be considerably higher if Lazard had a board seat? Whatever happened to the reasons for hiking their stake from 3 to 7% over the last week itself after the scandal broke out? Was Lazard pumping in cash to angle a board seat or there was a genuine belief that the investment could yield a return? Anyone with funds invested with Lazard should be terribly worried.

The Satyam fiasco has also severely dented the credibility of dime a dozen corporate awards being given out some of whom were conferred on the company for Corporate Governance. We have become a nation obsessed with lists and awards and every media outlet worth its salt has corporate achievement awards doled out in televised ceremonies with the sole purpose of driving TV ratings. The more the awards, the more questionable their credentials and value. It would make sense for India's best corporate names like Tatas, Infosys, Wipro etc to do an Aamir Khan and excuse themselves from consideration for these meaningless awards from media outlets and so called think-tanks. This should automatically bring the value of these dubious awards to nought.

We haven't surely seen the last of corporate scandals and it would be naive to assume Satyam is an isolated incident. In a country where anything can be forged for a price, cooking of books is common occurrence. Auditors, bankers and others work in cahoots to execute fairly well-oiled scams. So it should come as no surprise if many more come to light as they often do after every era of economic excess.