The truth beyond Satyam

satyam

If unintended oversight can be described as undesirable behaviour on the part of auditors, the Satyam affair can be termed as an example of what improper auditing can result in by way of, among other things, affecting the interests of hundreds of small investors.

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After all, the erstwhile chairman of Satyam Computer Services, B. Ramalinga Raju, has himself gone on record listing the financial improprieties committed by his company under his chairmanship which, even if one sees the entire issue in the most favourable light, implicates the auditors in that they did not perform their statutory task in the way expected of them.

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Since the total financial implications of the ‘deliberate’ messing up is of the order of Rs 7,000 crore, the enormity of the purported fraud is clear for all and sundry to appreciate, which places the auditors concerned in an even more unenviable position.

What emerges from the magnitude of the ‘fraud’ perpetrated by interested parties on the legitimate interests of unsuspecting investors, both big and small, in the company’s equity is that there is the immediate need to tighten up on the auditing standards currently in vogue within the country.

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Role of auditors

Admittedly, managements with ulterior motives will employ every permissible stratagem available to get through the audit-minefield unscathed. It is the business of the conscientious auditor to spot these strategies and enhance the process of good corporate governance by separating the chaff from the wheat, disallowing any and everything that harms the concept of good business practice and the interests of the investor in equity.

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The weeks ahead will tell the nation and Indian enterprise exactly what happened and how the fraud was perpetrated.

It is to be hoped that the auditors will get through the examination more or less unscathed, with no evidence whatever being unearthed of conscious complicity. Given the standing of the auditors concerned, their reputation would be plumbing the depths of professional shame if the findings are to the contrary.

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More important than this brand-specific impact would be the larger inference to be drawn about financial and corporate probity if the auditors are found to have had a hand in the deliberate messing-up of the books.

If the policemen themselves are found to be not above suspicion, Indian business enterprise, etc, would not have much to crow about in the world at large because of the indelible stamp of corruption it would be sporting.

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US, India comparison

There are some who will argue that if the US could have its Enron, why cannot India have its Satyam? The US economy is continuing to grow apace well after the Enron balloon went bust.

Using the same yardstick, it can be said that the Indian business scenario will also lumber on after the Satyam dust has settled. It can even be argued that unless an economy has one of these mammoth ‘improprieties’ it cannot be described to have come of age!

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All this may be acceptable but only up to a point, that point being determined by the extent of ‘corruption’ prevailing in the society concerned. The focus, therefore, shifts to a comparison of corruption prevailing in the US and India, a sphere in which there is not much scope for debate because of the easily demonstrable fact that corruption and bribery is much more rampant in our country than they are in the US.

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If this basic premise is accepted, the point can be made that there are many Satyams in the offing (a great number perhaps having already taken place without being detected), which cannot be said of the US in relation to Enron. Further, it is not only in the corporate sector that the cancer has spread.

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It has affected the stock market as well, the well-known instances of unlawful manipulation – beginning with the Harshad Mehta episode of the early nineties – being merely the peaks of the many such icebergs floating around in the economic landscape. There have been scams involving banks as well, not to speak of the sale of fake stamp paper, operations which have run into thousands of crores of rupees.

New fire-fighting approach

Since the potential for Satyam-like scams is rather rich, there is clearly a need for the authorities concerned practically to turn over a new leaf regarding setting up of systems that will prevent such occurrences. In the wake of Ramalinga Raju’s confessional letter, certain agencies have got busy trying to get their act together in the general attempt to probe what happened and over what period.

This is to be expected, but the point is that, since the malaise is endemic and has attained serious proportions, a totally new approach will have to be forged to control the damage that has already been done and will be done in future to the nation. In the wake of the November Mumbai outrage, laws have been passed to create new agencies to fight the menace of terrorism. It is not known as yet whether the new initiative will be productive, but at least there has been some acknowledgement that the laws already in place have failed to produce satisfactory results.

The time has come for the nation to adopt the same method with regard to economic offences. The regulatory and deterrence structure will have to be revamped and vastly strengthened, probably in a quantum fashion, which means that new agencies and institutions will have to be set up backed by a fresh set of laws that will make the risks associated with indulging in such activity much greater than they are now.

Police the policemen

This suggestion is likely to be dismissed as a knee-jerk reaction to a case of corporate fraud the likes of which are happening all the time. Admittedly, there is nothing new in the observation that company books have been dressed up and that financial malfeasance has been rampant since time immemorial, even involving the institutional checks and balances already in place.

Satyam has broken out today; in all probability many Satyams have gone undetected in past years. So, what is so special about Ramalinga Raju’s performance, one might ask.

The point of concern is that, given the gradual (perhaps rapid) deterioration in the prevailing standards of financial probity, Ramalinga Raju may soon be lost in a crowd of people belonging to the same tribe, which will certainly not be something the nation can be proud of.

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A new initiative will have to be taken to check the slide, the problem of course being the need to police the policemen themselves.

As the saying goes, ‘Quis custodiet ipsos custodes?’ (who is to guard the guards themselves?)

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