Satyam & lies
By Aditya Pradhan
An Indian SME owner maintains two books of account—one which is full of under-invoicing and depressed figures meant for his wife and the IT department, and the other which is full of inflated figures meant for his mistress. Ravi Mohan, MD & Head of South Asia, Standard & Poor’s tells this joke quite often whenever he addresses seminars on corporate governance. Satyam would now qualify to be a SME unit after its market capitalisation eroded post-Ramalinga Raju’s confessional scandal. What makes Satyam scandal so different from the earlier financial scams is that it is not just about the promoters. There seems to be incontrovertible evidence of foul play by auditors both within the company as well as independent firms which are amongst the world’s most renowned ones, banks and top executives. On the sidelines politicians of all hues are shadow-boxing to bring their rivals down.
Though many in media tries to draw an analogy with the Enron scandal in the US, there is one big difference. The US Securities and Exchange Commission (SEC) officials had actually confessed during the inquiry proceedings in the open court that they could not understand and decipher the complicated financial statements submitted by Enron. That was not surprising for Indian journalists as the power purchase agreement (PPA) signed between the government of Maharashtra and the company was admittedly way beyond the comprehension of Maharashtra State Electricity Board officials. At press conferences Ms Rebecca Mark, the then chief of Enron would tire journalists with formulas and calculations which revealed nothing. Till now no official in Satyam or outside has made a pretext of complicated accounting systems and practices for the oversight. It is yet an open and shut case of forgery and deliberate non-disclosure.
The media and stock analysts have also got to take equal blame for the Satyam scandal because it was their job to unravel the truth. The fact of the matter is that few media houses have employed enough staff analysts and reporters to go through every annual report with a fine comb cover to cover. That way Indian media houses are much less capable than their western counterparts to find the truth in listed companies which have millions of investors.
The way Pricewaterhouse-Coopers has been saying that they had to depend on the data provided by Satyam officials while scrutinising the company account books reminds one of the scandal in the 1990s wherein top LIC officials were taken for a ride by a lawyer consultancy firm in a real estate deal. The LIC officials had bought a plot of land to build residential flats in Mumbai for their life after retirement. But the land owner had sold the same plot to two other parties earlier. Then it got mired in a legal tangle. When the lawyer firm was asked about its dereliction of duty as they had given a free-of-encumbrances certificate on the plot to the LIC officials the lawyer firm made a startling disclosure. It said that they depend on the documents provided by the land-owner and nothing else for issuing free-of-encumbrances certificate. It was incumbent on the LIC officials to check up municipal records to ascertain if the plot has any other claimant. In case of the external auditors of Satyam it is not just a case of dereliction of duty. It is like the police colluding with the culprits to share the booty.
We shouldn’t be shocked, rather we should be amused, if several more corporates with large work force declare delinquancy in the wake of Ramalinga Raju’s disclosure. It is not the current downturn which forced Raju to resort to cooking up books, rather he started the window-dressing when there was a boom in the software industry. His calculations went wrong, according to reported revelations in the media, when he bought land at high cost along with his partners. He could not liquidate it when there was a slump in prices.
Though his partners gave up their holdings he alone prayed for better realisation. But the inevitable is taking too long to come as land prices are still in the dumps. The trail of money from the software giant to Raju’s real estate venture will ostensibly be proved. It’s just a matter of time. But many foreign investors might get unnerved by the callous behaviour of various parties involved in the scam. It is also inevitable that sweet-heart deals between the auditors, top executives and promoters will be unearthed during the investigations. It is shocking that this went on for nearly 28 quarters. Quarter after quarter Satyam top officials sat at analysts meets with poker face glibly talking about their great performance and giving guidance on fantastic growth prospects. Investors lapped it up as they were not able to separate the chaff from the wheat. For them every top ranking software company was an Infosys and every promoter of these companies was a Narayan Murthy.
The fact that Ramalinga Raju could not cover up the losses of the conjured-up numbers in Satyam books even during the boom period makes investors, especially the foreign institutional ones, to ask if Raju had been able to turn the tide during the boom period the scandal would have never surfaced. Rather Raju would have become a hero in the software industry whose vision, foresight and the intrepid decision-making would have become case study material in management schools.