The Hindu : Business : A confession that set Indian corporates aflame

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A confession that set Indian corporates aflame

K. T. Jagannathan

The Satyam episode must bring the focus on appointment of auditors

CHENNAI: Corporate fraud has the uncanny knack of revisiting us. We have seen it happen on the global front. Enron, WorldCom and Arthur Anderson, all were big names. Yet, they went bust in front of our own eyes. Even as 2008 was drawing to a close, Lehman Brothers went bankrupt.

The torch-bearer of free economy, the U.S. Government, had to hurry into rescue the beleaguered AIG (American International Group), much the same way it did to two big mortgage lenders — Fannie Mae and Freddie Mac. A short trip down memory lane would be enough to discover the history of Bear Stearn!

Nearer home, we had seen the big names such as Harshad Mehta, Ketan Parikh and Bhansali rise and rise only to fall flat. We are now witnessing it yet again. This time around, it has thrown up an unlikely villain. None would have imagined even in their wildest dreams that Ramalinga Raju of all would deliver such a damning blow to the image of India in such a stunning manner. A confession of a corporate shenanigan of gigantic proportion by Raju in a letter to the Securities and Exchange Board of India (SEBI) has set India Inc aflame. It would take more than a huge effort to douse it.

After his suo motu admission of fraud, Raju has gone incommunicado. Was he done in to admit to fraud, cornered as he was by hard evidence? Or, did he do it on his own volition?

The fast unfolding Satyam imbroglio has also revealed the ugly facet of the co-characters in the entire drama. More than anyone else, the statutory auditors PricewaterhouseCoppers (PwC) came out very pathetic in this instance. The auditors and independent directors are there to play the watch-dog role. Here, they appear to have ended up playing the silent partner role. It is hard to comprehend that auditors of repute such as PwC and men of eminence (independent directors) were such simpletons to be sweet-talked into silence by a single man, who has volunteered to announce to the world that he was indeed the only villain in the aSatyam enterprise.

Controversy is not something new to PwC. It has been under scanners in the Global Trust Bank episode. And, who can forget its Enron connections.

It is difficult to assume that statutory auditors of its stature could innocently gobble up whatever is supplied to it and affix its stamp silently without asking even a question or two.

The Satyam disaster must bring the focus sharply on the appointment of auditors. Though there is a laid-out procedure for appointment of auditors, even a lay person knows that, more often than not, they are, in fact, ‘nominated’ through a ‘legal process’ by the management (nay, the owners). Ipso facto, the auditors often turn very friendly, and forget their lawful role.

The functioning or malfunctioning of the audit committee must also be investigated. The committee comprises a few independent directors and functional officials/directors.

The audit committee examines the accounts before it goes to the board for approval. In the wake of Satyam disaster, the term independent directors need to be defined in a water-tight way so as to allow independence in practice. The post-event resignations can in no way demonstrate their independence. What were they doing as Raju ‘cooked up’ the books? Since Raju had admitted to ‘cooking up’ numbers for a long period, any suggestion that he could have done this for long without others noticing sound very strange, to say the least.

Post-confession, knives are out against Raju. In the entire episode, Raju cannot be a lone villain.

There are others. A thorough and unbiased investigation alone can identify the rest.

Who are the co-conspirators who embolden Raju to either inflate or siphon off such a huge amount without let or hindrance for several quarters. As the story unfolds with all its ramifications, a few suggestions may be in order.

For all index-based companies, let the due diligence be carried out by independent chartered accountants appointed by the Registrar of Companies; fix responsibility on independent directors; and make verification of even proxies mandatory in the case of resolutions which allow a company to deviate from its main business.

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