Wednesday?s admission by B Ramalinga Raju that Satyam?s books were cooked for years poses several questions that are problematic not only because they affected a company of the size of Satyam?s and stain India?s IT sector, but because they point at systemic lapses relevant for much of India Inc?star companies and average players alike. Where does board responsibility stop? What were the auditors doing? Why were there no whistle-blowers like Enron in this case? Given that this happened nearly eight years after Enron and after all the resulting talk and legislation of corporate governance all over the world including India, have we really learnt anything? Can Indian and foreign investors trust any institution of corporate governance? Most importantly, and perhaps the hardest to answer, how deep and wide is the rot?
In my last column I had pointed out why the Satyam board may have messed up on the Maytas deal on December 16 even when acting in good faith. It is quite possible that they had actually come to know then that this was the only way to, as Raju puts it, ?get off the tiger?. If so, the individual board members, particularly the independent directors have failed the shareholders and the public for not having disclosed this information at that point in time. Raju, of course, has gallantly absolved everyone else in this mess, but at this point, I doubt anybody takes his words seriously. If on the other hand they did not know that the books were being fudged, why not? What was the audit committee doing? Should its responsibility end with just asking the auditors if they have any concerns or are they expected to probe deeper? Clearly it is not the committee?s job to examine the auditors, but if it is that easy to pull the rug before their eyes, does this committee really have any significance? In any case, Clause 49 defines the role of the audit committee as ?Oversight of the company?s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.? One may quibble about what can be ?reasonably? expected of it, but it cannot escape untarnished for failing in its most important fiduciary responsibility.
That brings us to the subject of auditors and the whole issue of disclosure and accounting standards in India. Just like independent directors, auditors are expected to examine people who hire them and hence the same issues of incentive misalignment arise in both cases. The area of accounting disclosures in India has a major paradox.
On one hand, Indian accounting standards require companies to disclose more items than most countries in the world. Using a commonly accepted framework that focuses on disclosure and liability requirements as well as the quality of public enforcement of the regulations controlling securities markets, only two countries in a sample of 49 countries?United States and Singapore?have a higher score than India. As for liability standard, only four countries score higher. On paper, India?s accounting standards and disclosures are exemplary. In discussions with industry experts including the head of major credit rating agency I have found that many believe this is the true picture of transparency in India.
On the other hand, academic studies examining the real effects of accounting standards in India in terms of the extent of earnings management detected after the fact (through statistical analysis of reported earnings) have consistently ranked India at the bottom of the pile in terms of disclosure. So India Inc discloses volumes and reveals little about itself. Case in point: the lien on Satyam?s cash may have remained invisible to auditors. This should suffice in giving an estimate of the worth of our accounting figures.
What is in store for Satyam in the future? Doom is on the horizon as it will require an unimaginable level of customer loyalty to stick to Satyam now, and little to entice an acquirer. Price Waterhouse may well go the Arthur Andersen way. For the fraudsters including Raju, let justice come in an exemplary manner with the necessary speed. As for the rest of India Inc, let us hope against hope that this was just one rotten apple.
The author teaches Finance at the Indian School of Business, Hyderabad