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.

Most independent directors (including this author) know the futility of their involvement on company boards. So, then why do they risk their reputations? Most independent directors are not really independent. They are friends. And a place on the Board is more of a gesture of friendship than an invitation to howl. Others are retired civil servants, bankers, etc. Independent directorship is a good way of these gents remaining engaged after a worthy stint in the professional world. But, by the time they retire most of them are well past their ability to spot a fraud or to pick a fight against a wrong. The reputation risk at the end of a career is perceived to be much lower than in the midst of a growing career. Then there are the academics who are keen to learn how the real world works and see if it works as their theories and models predict. So, it is a good learning curve for them as they sit on the audit committees. I do not intend to be a sceptic, but, it is intriguing that one does not hear of any major activism on the Board save for control between warring (family) shareholders.

Independent directors simply do not add value in so far as corporate governance is concerned. They are benign at best or fools, at worst. But, what does one make of the auditors? Unlike independent directors, auditors make a living out of auditing the books of accounts of companies. A failure on their part to spot frauds is not pardonable. In the case of Satyam, the auditors, Price Waterhouse, have given a clean chit to the company for its accounts for the year ended March 2008. They have certified that the financial statements do give a true and fair picture of the financial performance and status of the company. They have been the company?s statutory auditors for the past nine years. They should know. But, now the question is: did they know the truth and were they co-conspirators, or were they incompetent. Either way, it is one more part of the edifice that holds the modern system of doing business that is crumbling against the power of management frauds.

Auditors are often consultants and this better-paying job compromises their responsibility as an auditor because what they audit is often the result of their own (or that of their sister concern?s) consultancy. Auditors have successfully resisted attempts to bar them from consultancy. They, along with companies, have also succeeded in resisting attempts to necessarily rotate auditors every few years. In India, they have even failed to consolidate into larger firms to gain the size that is necessary to deal with the pressures of business. What the independent directors and auditors could not find, the markets have helped find. It was the objection of institutional investors to the merger of the two companies that led to the ultimate revelation of the accounting frauds. A possible solution is to increase the representation of large institutional investors on the boards of companies, do away with the concept of independent directors and tighten the accountability of the auditors.

The author heads the Centre for Monitoring Indian Economy