Column : Phony capitalism

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: died of a heart attack. And true, the Enron accounting fraud was eventually uncovered.

But it went on undetected for several years and Enron isn’t the only one. One can add Worldcom, Adelphia Communications Corporation, Global Crossing, Tyco,

Peregrine Systems, Fannie Mae and Freddie Mac to the list, not to forget Bernard Madoff. CEO excesses (perks, stock options, size of golden handshakes) in the US receive a lot of attention. However, countervailing pressures in the US are also greater. First, there are instances (IBM, Kodak, Honeywell) of CEO-removal because of shareholder intervention. Second, some institutional investors (California Public Employees’ Retirement System or CalPERS is the most obvious) have succeeded in improving corporate governance. Third, there has been legislative response, such as through the Sarbanes-Oxley Act of 2002, incorporating establishment of a Public Company Accounting Oversight Board. Given our own home-grown Satyam, that’s indeed the point. Globalisation is also about greater and freer cross-border flow of ideas. Therefore, innovative worst-practices in accounting fraud are also easily learnt. Can regulatory system adjust as fast? If one is making the point that one shouldn’t tar all Indian companies with the Satyam brush, that’s a valid and limited point. But as with Enron, will it lead to greater regulatory oversight, especially on accounting and auditing?

There is an additional point too. There have been straws in the wind earlier. In 2006, World Bank informed the US Justice Department that Satyam might have been involved in bribery and in 2008, suspended Satyam from bidding in future contracts. And even earlier, in a dispute going back to 1997-98, a UK Appeals Court found Satyam guilty of fraud, forgery and intellectual property right violations. Corporate integrity isn’t an issue limited to accounting fraud alone. Why wasn’t this information disseminated widely? To paraphrase from Ramalinga Raju’s letter, the tiger was being ridden for a long time, without attempting to get off, for fear of being eaten. “None of the board members, past or present, had any knowledge of the situation in which the company is placed.”