The Satyam Computer Services saga of inflated profits and cash balances, as revealed by its outgoing chairman B Ramalinga Raju on Wednesday, represents the first major case of an accounting fraud in India, something that was so far seen mainly in the developed markets.
India has experienced a number of scams related to the securities market, such as the Harshad Mehta scam, the Ketan Parekh fraud and various IPO scams, but this sort of continuous window dressing of the balance sheet over a number of years is something India Inc would take time to come to terms with.
Experts acknowledge the entire episode, which went unchecked for at least seven years, reveals the gaping holes in the accounting and auditing regulations prevalent in India. Concerns are also emerging that the current norms do not lay much emphasis on the audit quality, which to an extent is buttressed by the absence of an independent audit review of companies. ?Apparently, it looks like the first such case,? Ved Jain, president of the Institute of Chartered Accountants of India (ICAI), the country?s apex accounting regulator, said.
?In the last three decades, I haven?t seen such an accounting fraud of this scale,? Jain told FE. He said the any chartered accountant involved in the fraud would not be allowed to practice. ICAI will also seek an explanation from Satyam Computer’s auditors, PricewaterhouseCooper on the financial fraud.
Corporate affairs minister Prem Chand Gupta said the ministry has asked ICAI and the Institute of Company Secretaries of India to look into the role of the auditors and company secretaries involved in the case. Vishesh Chandiok, national managing partner at the audit firm Grant Thornton said the Satyam scam presents an opportunity to look at structure of the audit profession. ?There is clear lack of focus on audit quality as the key issue by the ICAI. The lack of an independent external audit review is a significant structural defect in our financial regulation. No requirement for audit firms to take out professional indemnity insurance is another big gap.? He also suggested a joint audit mechanism, wherein books of accounts are audited by at least two agencies.
Former Sebi chairman M Damodaran cautioned authorities against giving corporate governance and rating awards to companies before they actually prove that they are practicing the same. Satyam Computer bagged Golden Peacock Global Award for excellence in corporate governance for 2008. ?I have always said don?t give a corporate governance award too soon. But people have been in a bit too hurry to give both rating and corporate governance awards,? he said.
Pradip Kanakia, national head of markets at KPMG said Sebi should implement corporate governance norms separately. ?The financial health of companies and corporate governance can be improved if Sebi can implement the corporate governance code through a separate enforcement cell. The Satyam case is definitely a one off as far as corporate frauds are concerned. It will not trigger more such frauds. In fact company management, representatives and auditors will become much more careful and diligent while releasing balance sheet figures,? he said.