Why the fraud did not come out before
Fraud at Satyam II
Let's now discuss on why a fraud of this magnitude did not come out, in the earlier years, till one fine morning, Mr Raju decided to be honest and spill the beans.
a.
PwC,
the
auditors,
seem
to
have
completely
goofed
up,
in
terms
of
their
audit
procedures,
vis-À-vis
Satyam.
While
I
would
not
ascribe
any
direct
involvement
from
PwC
in
this
fraud,
at
this
point
of
time,
it
does
look
like
that
PwC
being
one
of
the
best
known
and
respected
international
audit
firms,
they
did
not
follow
the
basic
procedures
in
conducting
the
audit.
It
is
quite
possible
that
they
might
have
relied
on
documents
or
information,
especially
as
those
related
to
the
bank
deposits,
etc.,
which
were
forged.
But,
to
continuously
give
a
clean
chit
to
a
Company,
which
was
actually
facing
an
acute
cash
shortage
despite
getting
copious
inflows,
is
in
my
view,
a
gross
dereliction
of
duty.
PwC's
Hyderabad
team
was
also
involved
in
the
Global
Trust
Bank
accounting
scam
in
2004
and
following
the
failure
of
PwC
to
report
the
accounting
irregularities
in
GTB,
RBI
had
to
ask
Oriental
Bank
of
Commerce
to
acquire
GTB.
PwC's
Hyderabad
Office
is
in
the
dock,
once
again.
To
continue
to
certify
even
bank
deposits
which
never
existed
is
surely
a
major
blot
on
PwC's
credibility.
While
the
ICAI
can
conduct
its
own
investigations
into
the
Satyam
fraud,
it
seems
clear
that
PwC
has
erred
in
a
big
way.
It
remains
to
be
seen
whether
PwC's
other
MNC
clients
would
review
their
audit
engagements
with
PwC,
in
the
aftermath
of
this
accounting
fraud
and
PwC's
failure
in
reporting
this.
I
liked
this
particular
one
which
appeared
in
caclubindia.com.
Price
Water
House
took
"Price"
and
"water"ed
down
their
audit
report
and
"house'd
the
crime
with
"cooper'ation
of
all
in
the
game.
That's
Price
Water
House
Coopers,
honey.
Another
issue
which
would
need
some
attention
from
the
investigators
is
the
fact
that,
PwC
,
as
auditors,
have
been
paid
very
high
fees
by
Satyam,
as
contrasted
to
what
Satyam's
peers
like
Infosys
have
been
paying.
Some
inferences
would
need
to
be
drawn
from
this
fact.
b.
What
is
the
role
of
the
Institute
of
Chartered
Accountants
of
India
or
the
ICAI?
One
hopes
that
the
ICAI
in
a
fast
and
fair
manner,
in
the
instant
case.
Surely,
we
don't
want
a
repeat
of
the
role
played
by
the
ICAI
in
the
GTB
scam….
The
ICAI
is
still
investigating
the
role
played
by
the
infamous
PwC,
even
after
five
years
the
scam
was
reported.
The
ICAI
would
need
to
understand
that
the
stakeholders
would
lose
trust
in
the
CA
community,
if
it
doesn't
act
fact.
For
ensuring
fairness
in
its
probe,
it
would
be
a
good
idea
for
the
ICAI
to
ask
CAs
from
PwC
to
resign
from
its
Central
Committee,
pending
the
completion
of
the
probe.
This
would
send
a
strong
signal
to
the
world
at
large.
And,
for
Heaven's
sake…
the
ICAI
should
complete
its
probe
within
a
reasonable
period,
of
say,
six
months,
and
take
a
final
call
on
the
license
given
to
PwC.
Of
course,
the
Satyam
case
is
unprecedented
and
there
is
no
comparison
with
the
GTB
fraud.
Which
means,
the
ICAI
has
to
tell
the
world
that
it
means
business?
Further,
the
ICAI
should
do
a
complete
re-think
on
its
decision
to
go
in
for
IFRS
in
the
next
two
years.
The
IFRS,
as
I
understand,
is
more
about
accounting
standards
and
disclosures
unlike
the
US
GAAP,
which
talks
about
the
right
way
of
accounting
transactions.
There
has
been
so
much
emphasis
on
disclosures
now
that,
it
has
become
extremely
difficult
for
auditors
to
check
the
genuineness
of
transactions
of
corporates.
Most
of
the
time
that
auditors
spend,
is
on
ensuring
compliance
with
the
numerous
accounting
standards
and
disclosures.
I
must
confess
that
the
auditor
has
no
time
to
check
the
veracity
of
the
accounting
figures
given
by
the
Managements
and
this
is
perhaps,
one
of
the
reasons
leading
to
the
Satyam
disaster.
ICAI
needs
to
realize
that
the
30+
accounting
standards
that
it
has
imposed
on
corporate
have
still
not
been
able
to
prevent
an
accounting
fraud
of
this
magnitude
and
that,
a
lot
still
needs
to
be
done.
ICAI
should
also
look
at
ways
of
making
the
peer
review
more
effective,
at
least
for
large
listed
companies,
apart
from
of
course,
looking
seriously,
at
the
idea
of
compulsory
rotation
of
auditors
every
three
years.
c. What is the involvement of the operating team at Satyam? It is crystal clear that a fraud of this magnitude could not have been possible without the direct involvement of the top finance and accounting guys at Satyam. Satyam's interim CEO was drawing a salary in excess of Rs 3 crores per annum, unmatched in the IT industry. The role played by him and others would also need to be investigated.
Where does this leave Mr Srinivas, Satyam's CFO, a fellow member of the ICAI who till yesterday was the darling of the financial press? I can't guess, except to say that Mr Srinivas is in deep trouble considering the fact, he has had to independently testify the accuracy of Satyam's accounts to regulators in India and the US. Perhaps, the ICAI should also bring out some punitive measures for CAs who don't hold Certificate of Practice and are in full time employment. In my view, the finance team headed by the CFO and the Company Secretary of Satyam has not covered themselves with glory, in the entire episode.
d. Very importantly, what exactly has been the role of the so called Independent Directors at Satyam, who were supposed to protect the interests of the non-promoter shareholders? Most of us had believed, of course, naively, that the concept of Independent Directors would help promote the cause of corporate governance, as was told to us by SEBI. The Satyam case clearly proves that the independent directors have completed failed to live up to expectations. One was rather amused to find the highly respected Mr T R Prasad repeatedly justifying Mr Raju and his team and it would be interesting to know what he has to say now. While I wouldn't take a view that the concept of having independent directors has completely failed, the fact remains that we cannot assume that things would be OK if a Company has independent directors.
Talking specifically about the role of the independent Directors, it is very important to understand how 'independent' they actually were, at Satyam. It is very concerning that, all the non-executive Directors have been significant stock options equivalent to at an unbelievable strike price of Rs 2- per share and apart from this, all the non-executive Directors have also earned handsome commissions during 2007-08, as reflected by Satyam's audited results. The following table shows the details for 2007-08.
Satyam's largesse to its Non-Executive Directors
No. of options | Commission (Rs) | |
V P Rama Rao | 10000 | 100000 |
T R Prasad | 10000 | 1133333 |
Mangalam Srinivasan | 10000 | 1200000 |
Vinod Dham | 10000 | 1200000 |
M Ram Mohan Rao | 10000 | 1200000 |
V S Raju | 10000 | 1133333 |
Krishna Palepu | 10000 | 1200000 |
The fundamental question that arises is… how can Directors who have options given at an un-believable strike price of Rs 2- per share (remember… Satyam's price zoomed to s 500- per share in 2007-08) and who receipts high commissioners be expected to be 'independent'. The scheme of giving stock options to the independent Directors, was perhaps, an intelligent strategy by Mr Raju to successfully implement commit his heinous crime at Satyam, with little resistance from the independent Directors, to whom, he was supposed to report to. It is amusing to hear some of the independent Directors say now that they were not in the know of things at Satyam. I am personally disturbed that highly respected people like Mr T R Prasad and Dr Ram Mohan Rao received stock options and the commission amounts from Satyam. My only hope is that there has been no direct involvement from any of the non-executive Directors of Satyam, in the fraud.
e.
There
are
several
fundamental
issues
which
have
arisen,
post
the
Satyam
revelations.
For
sure,
there
is
a
lot
of
issues
which
would
need
to
be
addressed
vis-À-vis
the
Indian
GAAP
and
especially,
the
accounting
standards.
It
seems
to
me
that,
after
having
been
a
CA
for
more
than
20
years,
the
emphasis
of
the
accounting
standards
is
only
on
'disclosure'
and
not
on
what
should
be
the
right
way
of
accounting.
We
must
bear
in
mind
that
the
Indian
GAAP
and
the
GAAP
of
most
European
countries
are
more
about
disclosures
and
the
IFRS
is
no
exception.
On
the
other
hand,
the
US
GAAP
is
all
about
the
right
way
of
accounting.
Most
auditors
including
the
Big
4
firms
seem
to
be
more
focused
on
disclosures,
to
the
detriment
of
the
actual
facts
behind
financial
transactions.
A
paradigm
shift
is
required
from
the
ICAI
and
one
really
hopes
that
the
apex
body
of
CAs
lives
up
to
the
expectations,
post
the
Satyam
scandal,
failing
which,
the
stakeholders
will
simply
refuse
to
believe
the
audited
accounts
of
any
company.
For
sure,
the
Schedule
VI
which
deals
with
the
information
to
be
disclosed
in
corporate
balance
sheets,
would
need
to
be
expanded.
It
is
amazing
that
there
is
no
need
for
a
break
up
to
be
given
in
the
Balance
Sheet
for
bank
deposits
and
had
this
been
there,
the
Satyam
fraud
would
just
not
have
happened.
It
is
amazing
that
there
is
no
need
under
the
Indian
Companies
Act
for
any
details
to
be
provided
for
a
line
item
of
about
Rs
3,300
crores
of
bank
deposits.
One
fundamental
issue
that
crops
us
is…….will
a
compulsory
rotation
of
the
statutory
auditors
every
three
years
help?
Post
the
Satyam
fiasco,
I
strongly
believe,
it
would.
It
would
also
be
a
good
idea
for
the
compulsory
publication
of
the
internal
audit
reports
which
could
throw
up
frauds
of
this
kind.
f. We need to take a complete re-look at our systemic failures. It does us no good to compare with the US. We need to understand that in the US, there is a very clear demarcation between Management and Shareholders. Most of what happened in Enron and World Com was due to the wrongdoings of the Management Team to the detriment of the shareholders who are mostly drawn from the mutual funds, pension funds, etc. The case in India is very different. There is not much of a differentiation between shareholders and Management, as is the case with Satyam. Mr Raju was not only the head of the Management team but was also wearing the hat of the chief promoter of the Company. Unless we are able to break this link whereby, shareholders with as little a shareholding as 5% could still run the management of a large listed Company, we are going nowhere. Satyam is not an exception. Most of our large listed Companies are run or managed by people who have very little equity ownerships in the companies they run and surely, many of these people pursue interests purely from their personal point of view.
g. What is the role of the regulators? I would personally feel that, somebody like SEBI or perhaps the Department of Company Affairs cannot be blamed much, in the instant case. Of course, this is an eye opener and one would need to see how SEBI goes about, in its unfinished agenda of improving corporate governance in listed companies. SEBI should definitely re-look at its guidelines which allow listed companies to issue stock options and commission to its non-executive Directors including independent Directors. SEBI also needs to further tighten up its norms on Audit Committees, etc. It is distressing that, during 2007-08, there was a full fledged Audit Committee at Satyam comprising of four independent Directors. There was also a well staffed internal audit team and there were seven meetings during 07-08, in which the statutory auditors participated, in addition to the independent Directors and the Company's CFO, to discuss audit related issues.
h. Is the Satyam issue, then, just a tip of the ice berg? I would seriously say, Yes. If a listed Company with a promoter having 5% of the equity capital could do this, what about scores of other companies and especially, the unlisted/closely held companies? Surely, the Satyam issue would reinforce the need for better disclosures from the unlisted companies. Considering the fact that tens of thousands of crores of bank funds are used by these unlisted companies, there is a great need for more regulation in respect of published accounting data of these companies. For sure, there could a lot more of skeletons in the cup boards of many of these companies.
i. Will the Satyam issue raise questions on the credibility of published information by other listed Companies and especially, the IT Companies? It is clear that most other listed IT Companies would need to walk the extra mile, as Mr Narayanamurthy has very right put it, to re-establish credibility about financial information, post the Satyam fiasco.
Part III - Regulators should do a professional job