Lies, Damn Lies and Accounts

Wednesday, January 07, 2009

2009 could not have started on a worse note. S Ramalinga Raju, one of the torchbearers of Indian Outsourcing story admitted to his board of serious fraud, cooking up numbers and bloating the balance sheet and profits over a long period of time. Together with the ban by the World Bank for data theft, the botched Satyam-Maytas deal, this completes the cycle of bad news for Satyam. This is fraud of monumental proportions, at the very top of one of India's most successful IT services companies and can only be compared to what happened over at Enron. This is without doubt corporate India's biggest fraud ever.

That S Ramalinga Raju, one of India's most respected entrepreneurs could resort to such tactics comes as a blow to the image of promoter led companies in India. But more surprising is how he duped investors, regulators and his own employees consistently over a period of time. I deliberately missed adding auditors in that list. Auditors cannot be duped, auditors are not supposed to be duped. PWC, as lead auditors of Satyam were supposed to have caught these lies, but they did not. If they were complicit (like Arthur Anderson have been in the Enron crisis), then their image will take a blow and they too have to face the legal system in India and US (where Satyam is listed). But if they are not complicit, and have also been duped then it raises serious questions on their competence. Especially because, auditors are expected to do audit confirmation directly or indirectly, by checking with the company in question as well as other external sources like their bankers, customers etc. That such fraud of monumental proportions missed the auditors cannot be digested.

The fiasco comes as a blow to the Indian IT services and Indian companies in general especially since most are promoter led. Only now have companies which were started as entrepreneurial ventures or family owned businesses (or where promoters hold majority stake) are going in for professional managements, which is accepted the world over as a good way to avoid governance issues. Corporate Governance has always been a sticky issue in India, but to see a company that has been given an award for Best Corporate Governance to admit such wrong doing is not palatable at all. The role of regulators has been questioned by some of the media, but there is precious little regulators can do if CEOs lie through their teeth. Indian laws may be inadequate in this respect, but Satyam is listed on NYSE and hence is supposed to be compliant of SOX, but even with those checks they managed to getaway. This issue also tarnishes the reputation of Indian IT companies, since they have more often than not chosen to take moral high ground and endeavored to distinguish themselves from the manufacturing sector.

A lot of people have been let down by Ramalinga Raju, his family, Satyam investors (both in India and abroad), Satyam's clients, his board etc. But the people who would feel the most cheated would be Satyam's employees, those unnamed thousands who slog day in and out in an industry which is now facing the brunt of an economic slowdown. They now face uncertainty, tough questions (from their peers and most importantly their clients) and a tense few months ahead. Satyam might be prime target for an acquisition now, with its share price at an abysmal low, but the question is if anyone would dare buy a company deep in losses, straddled with a large workforce and uncertainty over engagements with new/existing clients. For Indian IT companies, Satyam would not be of much value add since it would be like buying more of the same, there is absolutely no difference between Satyam and other Indian IT companies in terms of engagements, process lines, domain expertise and geographical footprint. It will be a tough few months ahead. Hope Satyam's employees do not have to bear the burden of their top management's greed and inefficiency.

This unfortunate crisis proves that there are no holy cows in business. And there could not be a greater irony that the CEO and founder of a company whose name means Truth lied through his teeth.