Opaque beacons
The fraud charges against the Hyderabad-based Satyam Computer Services – India's fourth-largest software firm – has shocked international businesses, rattled India's stock market, jolted regulators and displaced confidence in India's booming IT sector. On 7 January 2009, Satyam's founding chairman, B Ramalinga Raju, revealed that his company's accounts had been falsified to the tune of some INR 50.4 billion in non-existent cash. India's Company Affairs Minister Prem Chand Gupta claimed the Satyam case to be nothing more than an "aberration". But the fact is that, in addition to Satyam's board of directors, the auditors, analysts, investors, as well as India's financial regulators, the Securities and Exchange Board of India (SEBI), were all found to be sleeping on the job. Meanwhile, the role of Satyam's auditor, PricewaterhouseCoopers (PwC), is under serious scrutiny, to try to discern exactly how it could have flubbed so badly on its responsibilities.
In fact, the warning signs for this debacle had already been apparent. When Satyam made a move in December 2008 to buy two other companies – Maytas Infrastructure, Ltd and Maytas Properties Private, Ltd – established and controlled by Raju's sons, financial stakeholders protested, arguing that the Maytas's core business interests of infrastructure and real estate had lost a major proportion of their market value during 2008. One of India's most respected public-sector administrators, E Sreedharan – known as the 'metro man' for his successful completion of the Delhi Metro and launch of similar projects in other Indian cities – had likewise sounded a public warning against the move. According to Sreedharan, Satyam was ill-equipped to execute the project, and pointed to doubts that had been raised on a number of pertinent points – competence to bid, execution capabilities and doubts about delivering on schedule.
The Indian stock market is now rife with fears that there might be several other companies in which promoters have been getting away with fraudulent accounting. If an auditing firm with the reputation of PwC can let such a situation transpire at Satyam, then other firms audited by the same company should now be subjected to the scrutiny of India's financial regulators. The Satyam fraud reveals that none of the regulatory and relevant government bodies were discharging their duties to the required level, and also throws up several unanswered questions: What, for instance, was the Securities and Exchange Board doing, anyway? Also, why did the banks not regularly inspect Satyam's accounts and assets over the past seven years? Are the Department of Company Affairs and the Company Law Board guilty only of omission or also of commission? Was not the Institute of Chartered Accountants of India running checks about the ways in which auditors on its payroll were carrying out their statutory duties?
The roots of this predicament also lie in how Indian IT companies report their incomes. It has become common practice for these companies to present non-standard data to their investors, such as trainees' billing rates per hour, the geographical mix of the client base and percentage of revenue earned from the top 100 clients, among others. Although helpful to some extent, this sort of data actually makes the operations of these companies opaque, and investors and analysts find it difficult to see through the fog.
As is apparent, many in India are now worried about how this latest scandal is going to impact on the country's IT industry, in addition to the decline it will lead to in investor confidence in India's corporate governance. At a time when world economies are reeling from the fallout of the global financial crisis, this latest news comes as a major shock to India's economy. The country's IT and BPO sectors – which for the past decade have been considered the beacons of India's economic growth – will face this crisis with significant apprehension. As well they should: the perception that these sectors are exemplars of corporate governance is already being widely questioned. The next few weeks will reveal the extent of Satyam's irregularities, as well as the government's and industry's ability to carry out damage-control and corporate-sector reform. They must be able to rise to the occasion precipitated by the lack of satya at Satyam, and to clean the stables of Indian industry.