Economic Highlights

New Delhi, 16 January 2009

Satyam: The Fraud Unravels

BANKS, AUDITORS, ET AL STAND EXPOSED

By Shivaji Sarkar

The Government’s decision to defer the bail-out package for Satyam is unmistakably appropriate. Apparently, it has recognized the fact that considering financial help for a fraudster is not a social, economic or ethical option. More so, when it recognizes the failure of different government mechanisms or instruments created by it such as auditors, regulators and banks.

The proposal for doling out about Rs 2000 crore to help Satyam out of its messy affairs was itself not a well-thought of move. A private sector company adhering to unethical standards as is evident so far and siphoning public money to serve personal ends of its promoters and CEO does not deserve any mercy.

A bail-out for such an organization is like rewarding a criminal. In simple economic terms it should be seen as privatization of profit and socialization of losses. In both the cases losses are of the people and the benefit is of law-breakers. The US Government’s decision announcing a huge package for erring companies has been the most unethical decision made by any government during the last 100 years. It has set a bad precedence for governments all over. Further, it has encouraged erring companies and their promoters to demand a share of public money forgetting that they have betrayed public trust.

Thus, it is time for serious deliberation on the legislation to amend the powers given to government for money bills. Possibly another law is required to debar the government from suo moto announcing any bail-out package for any organization without the support of two-thirds of the members of both house of Parliament. This is not a case of looking at the government with distrust, but preventing it from functioning either under emotion or pressure from lobbies.  

What Satyam has done is nothing new. It is not that the practices are not known in the corporate world. All companies resort to such measures. The extent varies. It has come to notice that Satyam had swindled away funds for its sister concern Maytas and even reportedly tipped off big institutional investors. They sold 2.45 crore shares between December 23 and January 5. Among those named in the initial investigations of the Registrar of Companies are ILFS Trust Company, Merrill Lynch, DSP Blackrock and Deutsche Bank. Each share was sold between Rs 146.66 and Rs 156.72.

It is not only the institutional investors, who made tons. Satyam CEO Ramalinga Raju and his associates reportedly garnered Rs 2065 crore over the past seven years by selling his company shares.

Reports indicate that about 10,000 salary accounts might have been created for non-existent employees and money siphoned off. It now also raises doubts about the actual number of employees working in the organization. The bail-out was primarily considered to help the workers. Now it is obvious that any package would have gone into more siphoning of funds. It could have also been utilized to help other shareholders.

It raises serious questions about the functioning of the labour department’s inspectors. Besides, it raises the question of rationality of hire and fire as also giving reprieve to the corporate from inspector raj.

Inflated fictitious accounts of Satyam were apparently created with an eye on the stock market. Healthier a company balance sheet is projected, the higher are its stock valued. High equity value also helps a software company subsisting on various contracted projects. No national or international contract is bagged merely on merit. Wipro, Megasoft and other such companies had given to World Bank officials its equities at initial public offer price – Rs 10. It simply meant they could sell that in the market, which most of them must have done, to earn tons. This again calls for having a fresh look at the functioning of the stock market.

This suggests that the stock market regulator, SEBI, is incapable of preventing fraud of most kinds, including the most-hated insider trading. It exemplifies that mere empowering an organization does not help. It needs to have necessary understanding and intelligence to function effectively. New York stock exchange fraudster Bernard L Madoff exposed that the US Securities Exchange Commission (SEC) lacked it and Satyam has exposed the competence of SEBI.

The role of banks, as in the Harshad Mehta scam, Ketan Parekh fraud and UTI bust, again remains suspect. At least three foreign and three private sector Indian banks, as per its auditor Pricewaterhouse Coopers, had helped the company create a non-existent Rs 5361 crore cash hoard. A wayward corporate is only expected to function in awry manner.

The motivation of banks in aiding it remains a mystery. The methodology of the banks, which are supposed to follow universal prudential norms, is also questionable. Has their regulator, Reserve Bank, failed somewhere? Or is the banking process so complicated that nothing can remain transparent? Creating fictitious funds is a novel way of swindling. Lehman Brothers also had adopted some similar techniques. The Satyam saga indicates that banking system in the country needs to be thoroughly revamped. Each bank requires intense scrutiny of their functioning.

So far nobody had expected the banks to give false deposit certificates. It is intriguing as to how could the banks could keep their account books “clean”. Then again, if these were unclean then how nobody could detect these?  

Does it mean that not only Satyam’s auditors but banks’ auditors too are functioning in a manner they are not supposed to? The role of Chartered Accountant firms has become suspect. Enron, Worldcom were aided by the CA firm Arthur Anderson. Frauds in CRB Bank, Global Trust Bank, Lehman Brothers, AIG were kept under wraps by their auditors.

The recent frauds in the US by CA firms have occurred despite the stringent Sarbanes Oxley Act, the Public Company Accounting Oversight Board. It has been advocated that India also follow these norms.  But the law here is extremely lax. Even the Serious Frauds Investigating Office, that is supposed to probe Satyam, is not an independent body and functions under the limitations of the Companies Act. For fudging accounts the penalty for a company is Rs 5,000 fine and or two years imprisonment. The CA firm can get away with a fine of Rs 10,000.

Would it make any difference if the provisions are made stringent? Possibly not, says Joshua Ronen, professor of accounting at the Stern School of Business in New York. He suggests a different system for employing CAs for corporate auditing. As long as they would remain dependent on the corporate for their fee, the CAs would not be able to function independently, Ronen says. So should we continue to expect more and bigger corporate frauds at the expense of poor investors?—INFA

 (Copyright, India News and Feature Alliance)