Column : Truth after Satyam

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: B Ramalinga Raju, Chairman, Satyam Computer Services informed all of us that his company’s cash and bank balances were overstated to the extent of Rs 5,040 crore as of September 2008. Operating profit for the quarter ended September 2008 was overstated by over ten times—it was not Rs 649 crore as announced by the company but a puny Rs 61 crore. Profits have been inflated for several years according to Raju.

Why should we believe him now? For example, he states that the inflation of profits is limited to only the standalone accounts of Satyam and not the subsidiaries. But, if someone confesses to having lied for several years, why should one believe that the crime was committed only on the parent company and not on its subsidiaries. Again, if there was no money in the company then how would the acquisition of Maytas be paid for? Chairman Raju explains that payments could be delayed and then probably when Satyam’s problems are solved all would be well. But how would Satyam’s problems be solved?

The Chairman’s statement raises more questions than it answers regarding the management of Satyam. It also raises questions regarding the role of the Board and regarding the role of the auditors. It raises questions on the efficacy of the institutional framework on which public companies function.

Satyam could boast of one of the best Boards of Directors. It has six non-executive directors against only three executive directors. The non-executive directors include globally acclaimed academics, engineers and bureaucrats. The Board is clearly erudite and is as well-equipped to ensure good corporate governance as one can get it to be. It is also well-paid. Each non-executive director is paid Rs12 lakh per annum for his services and Prof Palepu was additionally paid a neat Rs 79.5 lakh as professional fees. So, if the Board was competent and well-paid to do its job, why did it fail to do so? If we assume that the independent directors were not co-conspirators then, the only conclusion one can draw from the Satyam case is that independent directors are incapable of stopping the company’s management from indulging in fraud and deceit. They cannot blow the whistle because they cannot see the thief at large.