The revelation this week of major financial fraud at leading Indian IT company Satyam Computer, has been characterized as India’s Enron and prompted dire warnings it will inflict serious damage to the country’s surging IT sector and its portfolio of international companies who have outsourced business processes to it. Both assessments have merit. There will be short-term damage. Foreign investors who may have bought in to Satyam via its listing on the New York high-technology exchange NASDAQ, will certainly be worried.
But in the long-term, far from being a disaster, the Satyam debacle may prove a watershed that will bring better corporate governance and as well as regulatory oversight to Indian companies. No market has ever grown up without scandal. Satyam inflated revenues almost certainly because, though billed as India’s fourth largest IT company, its management was simply unable to keep up with the stellar growth of rivals. Rather than admit failure, they fixed the figures.
This is, therefore, a wake-up call. It is as N.R. Narayan Murthy, founder of Satyam’s larger rival Infosys, says undoubtedly a failure of corporate governance. Business history has demonstrated that in boom times when companies are growing fast, prudential controls and proper regulatory compliance can fall by the wayside. No doubt disgraced Satyam Chairman Ramalinga Raju, who has admitted the irregularities, hoped new business would be won that would in the end allow the gaping hole in the accounts to be filled. But with the international downturn came an end to strong new business flows and thus nemesis. The only point to Raju’s credit is that he has admitted the fraud and said he is prepared to take the consequences.
But it is not just the standards of corporate governance that need to be tightened, perhaps even to the exacting levels of the US Sarbanes-Oxley legislation. The Satyam fraud took place over a number of years, yet neither independent auditors, nor regulators spotted what was happening. Neither can escape responsibility for what has occurred. Since unlike most of Enron’s cheating bosses, Raju has admitted his guilt, the opportunity exists both at his trial and at the independent enquiry that must also be held, to discover how auditors and regulators were fooled and failed to spot years of financial irregularity.
There must be no attempt to save reputations in this investigation. A lot of people clearly got it wrong, through ineptitude, inadequate monitoring processes or perhaps even criminal complicity. While it is right that some individuals should pay with their jobs, it is more important that the lessons be learned and every effort made to ensure that there would not be another Satyam. It may even be that inadequate auditing and regulation has permitted other companies to report false figures. These too should be exposed. There should be no cover-ups. The greatest danger to Indian companies, not merely in the vibrant IT sector, comes not from the unmasking of Satyam’s fraud but from any failure to deal robustly with all the shortcomings that allowed it to happen.
