The full extent of the fraud at India’s leading IT company Satyam is yet to be assessed. Investigators have now discovered that the firm’s boss Ramalinga Raju, already shown to have inflated the company’s assets by some $1 billion, had also massively exaggerated the number of employees and was incredibly pocketing the pay of 13,000 workers who didn’t exist. It is now abundantly clear that “Satyam” which means “Truth” could not have been a more inappropriate name for the business.
There are still considerable fears that besides its mounting recessionary pressures, the reputational damage internationally to India Inc. will be severe. The question is very reasonably being asked if there are more unpleasant revelations to come out of the woodwork elsewhere, in what until a few short months ago appeared to be a surging private sector.
But the Satyam debacle has to be viewed in a wider global context. Fraud on a sometimes quite breathtaking scale has taken place even in mature economies with apparently seasoned regulations and highly esteemed auditing firms and processes. The US collapse in 2001 and 2002 of first Enron and then WorldCom came about following the exposure of mammoth financial wrongdoing that makes Satyam’s fraud look like a pickpocketing. There were two direct results of Enron and WorldCom.
The first was a root-and-branch reordering of the international accounting firms who had apparently failed to spot falsified accounts over long periods of time. They were forced to shed their profitable consultancy arms because with their corporate advisory contracts, there was a clear conflict of interest when their core job was checking the figures were right. The second was the introduction of the tough new Sarbanes-Oxley (SOX) legislation for any company that wanted to list on a US stock exchange.
SOX compliance proved highly expensive. The biggest multinationals paid in excess of $10 million to consultants and auditors. In part by imposing corporate compliance processes for which top officials were directly responsible, SOX was supposed to stop fraud and give auditors the tools to expose it. But Raju’s Satyam was SOX-compliant. In hybrid form, its shares were listed on the high-tech US NASDAQ exchange in New York. It was also audited by the leading accountants PricewaterhouseCoopers (PwC). Yet neither of these turned out to give the level of comfort investors thought they had the right to expect. In short SOX has been exposed as flawed and once again questions are being asked about the effectiveness on international accountants in checking their clients’ books. PwC has since been fired as Satyam’s auditors.
The gloomy conclusion might be that determined fraudsters will always get away with it, for a while at least. The right response, however, is to go to the heart of the problem all along and ensure that absolutely all existing regulations are now strictly applied.
