The Satyam Misconception
Jan 19 2009
Where most people are getting it wrong is by calling it the "Indian Enron." Even I thought the same comparison on hearing about the confession the first time. And I think we were all wrong in it. When Enron scandal was investigated the CEO, Kenneth Lay was the one who went on fighting the case and the CFO, Andrew Fastow testified and pointed at all culprits including Lay. The accounting firm Arthur Andersen was one of the big five in auditing business. Both Enron and Arthur Andersen were forced to shut down.
Enron was trapped after investigations showed the whole scam. Where as in Satyam's case, the CEO surrendered before he can be caught. Securities Exchange Board of India (SEBI) had started inquiry in to the affairs of the company after it had to abort plans for Maytas acquisition. Surely given time they would have caught him. Merrill Lynch (now Bank of America) must have sniffed something wrong to back off from reviewing the company and has stayed away from media light. The CFO, Srinivas Vadlamani is blaming everyone but himself.
What Might Happen?
Raju was the blue eyed boy of the State and of the different ruling parties be it the present Congress or the previous Telgu Desam. The stage has been set for compassionate hearing because of his confession and his health. When a politician gets indicted instead of going to jail they often fall sick and then end up in hospitals. One would expect few cases in which some thing like this would happen but then its the other way round. This is amusing but a hard fact. So it will not be surprising if Raju too feels ill and then is shifted to a hospital. Since he has surrendered the lawyers will do their job. If the political masters’ don’t disown Raju then this case too can be stalled like Bofors, Fodder, or the way Gujarat genocide has never been solved properly despite media attention. This case too has the potential too join this junk list.
Now comes the part to deal with Price Waterhouse Coopers (PWC). There are many legal angles to it. But most importantly what has come up in the past few days is about the disclaimer that PWC has on its contract. Also that it has sent a letter to the new board that its auditing cannot be relied up on as the data it had received were false. Weren't auditors supposed to make sure that owners are not falsifying data? It is not that PWC will go unpunished, from current reports it seems that ICAI will cancel PWC’s license to practice in India.
Will it be a jolt to Investments?
Perhaps in the short run. But with global recession looming, it will be difficult pin point the Satyam debacle as the reason why FIIs are not coming. This may contribute to some extent but not to a very large extent. The reason being India is evolving just like the rest of the countries and it’s cheaper compared to the developed nation with lots of talent. Besides if Madoff can run a ponzi scheme so can Raju.
Corporate governance laws will improve with this incident. As far as justice is concerned, that will have to be done by the market or let’s call it the free market. Shareholders of all companies will have to make sure they don’t get audited by PWC be it in India or in any other country. This measure will ensure psychological safety. It will also leave a strong message for the auditor community.
On investors part they would have to deal with Satyam the way they think is the best. The good part is that the company was not being run on loss nor did the founder walk away with the money. Profits are there though not as much as stated earlier. Therefore, the potential is there to still keep its image as a major player in IT industry. Although the government has intervened to set things right or rather a bail-out from the sidelines but that may not be the best thing to do. Many would say what cant he government do from the sidelines? well for starters provide liquidity from PSU banks, maybe hand over some of its contract. But these things will not help in the long run. Rather let the investors sit together and come to a unanimous decision. Ultimately it will be the market that will provide the business then let the other half called investors take the decisions.