Satyam highlights emerging market risks

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New York: A vast accounting scandal at Satyam Computer Services may increase investor nervousness about weak corporate governance and oversight in emerging markets.

Satyam founder and chairman Ramalinga Raju admitted on Wednesday to inflating Satyam's reported cash and bank balances by over 50 billion rupees ($1 billion), but little is known about how widespread the problem is and things could get worse if other frauds are uncovered.

The scandal, which is being dubbed by some analysts as "India's Enron" and compared to Bernard Madoff's alleged $50 billion Ponzi scheme in the United States, comes at a bad time for emerging markets.

Benchmark emerging equities are down 52 per cent since the beginning of 2008 as investors fled risk and hopes of a "decoupling" from a slowdown in developed markets proved mostly unfounded.

"It's got to shake confidence. And it is compounded in my mind by what I already call the fear complex that exists around all global markets," said Lesley Hand, a partner in accounting firm KPMG LLP's forensic practice.

"The thing you don't know here is how far reaching this is," Hand said. "I don't know if it will be long, long-term. But you let another shoe or two drop and I would say it would be way worse."

Raju's revelation came after days of turbulence at the Indian outsourcing company that began with a botched attempt by Satyam to buy two infrastructure companies in which management held stakes.

Satyam's shares fell nearly 80 per cent in India and dragged down Bombay's main benchmark index 7.3 per cent.

The Securities and Exchange Board of India, the markets regulator, has already ordered an investigation into Satyam, and the scandal could lead to investor lawsuits in the United States targeting various parties, from the company's directors to its auditor, PricewaterhouseCoopers.

PWC has said it is examining Raju's statement and would not comment further.

"One of the frustrating things about accounting issues is that it is often difficult for sophisticated investors or even outside directors of the company at issue to detect them," said Michael Young, a partner at law firm Willkie Farr & Gallagher, who has written a book on financial fraud. "That's why accounting problems tend to take almost everyone by surprise."

RISKY ENVIRONMENT

The scandal underscores the risks that come with investing in a market with not enough regulatory oversight and protections.