Editorial: Preventing another Satyam

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Updated: April 10, 2015 11:06:52 AM

New Companies Act fixes many potential concerns

While the special court finding all 10 accused in the Satyam scam guilty brings closure to what was probably corporate India’s biggest scam, the important thing is the alacrity with which the government acted, on all fronts. For one, after superseding the board, the government quickly facilitated Satyam’s sale, ensuring the company or its employees did not unduly suffer even if the court case dragged on for years. If Satyam was India’s Enron moment, the government didn’t disappoint either when it came to formulating legislation to try and prevent another Satyam—certainly, it never came about as fast as the US’s Sarbanes-Oakley Act (SOX) following Enron and WorldCom, but when the next Satyam takes place, it won’t be because the government didn’t try to plug as many loopholes as possible.

One of the obvious problems in Satyam was that the board, and the independent directors on it, were oblivious to what was happening in terms of the fake bank balances and the fictitious clients that Ramalinga Raju had created; and the special court has made it clear the firm’s auditors were complicit, not blind. The new Companies Act—with 7 schedules, 29 chapters and 470 sections—has tried to address all issues since it was finalised with Satyam as a backdrop. Apart from the compulsory rotation of auditors and audit firms—an audit firm can only be employed for two terms (10 years) and an auditor can only be there for one (5 years)—there are serious penalties for cooking the books which include the entire firm (not just the individual auditors) getting debarred, apart from the possibility of class action suits and prison sentences. As for the boards including the independent directors, they have been given a lot more powers and, along with it, greater accountability. Directors have been charged with the responsibility of ensuring accounts are cast honestly and the key to this is the role of the audit committee which has the power to investigate any matter referred to it by the Board and has the option of hiring outside consultants for this purpose as well. The audit partner, and the audit committee, are not responsible for preventing fraud, but their job is to continuously review internal controls and risk management processes. The audit committee also has to examine related party transactions—a convenient tool for siphoning off funds in many cases—with a toothcomb. Over a period of time, it is likely fraudsters will find their way around the best of rules and institutional checks, but the Companies Act has certainly tried its best to put these in place. Moving quickly to stem damages and then to enact laws that try to fix systemic loopholes—that’s the big learning from the Satyam episode.

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