As somebody had rightly put it, Ramalinga Raju had, in one single stroke achieved what LeT (Lashkar-e-Toiba) could not in many years. He has marred the reputation of
How could one fool so many people? Satyam’s board had as many independent directors as it could manage – among them
I simply cant believe this.
I would not be surprised if, prior to letting the cat out, Raju (etc) had shorted Satyam shares or ADR and made a tidy amount of money. I would not be surprised if ICAI slaps its maximum fine (Rs 5 Lakh!?) and let PWC walk. The hands that should go up in a voting process could be tied up in partnership deeds involving PWC or its affiliates.
What tests my logic is how on earth an audit firm miss Rs 5000 Crore Cash/Bank balance? Did Satyam forge the bank statements? Even though they forged it and produced it for audit, what happens to 3rd party confirmation letters sent by auditors to banks? The banks are supposed to send the confirmations directly to the auditors.
How can you not verify an asset which makes up 80% of the balance sheet?
Every deed should have a justification or rationalisation. In order to understand it better, let’s put ourselves in Raju’s shoes.
One strong motive would be to avoid Satyam being a takeover target. Satyam’s reported OPM (OPM is one of the key yardsticks with which analysts rank similar companies. Higher OPM within the same industry is always the first thing that analysts look for. It indicates that the company can command premium pricing for its services.) was 24% while in reality it was 3% - as per Raju’s letter to the board. With a less than industry average OPM, institutional investors (makes up 88% of the total share holding) could dump the shares which would resulted in an increase in the float as well as a decrease in price. Perfect for a predator. Raju might lose his job. He could have been mortified by that thought initially. To protect that, he might have fudged the books, and as he himself has put it, “it was like riding a tiger”. Not an enviable position, of course.
Another motive is the greed for cash (which he denies in his letter). Maybe Satyam had 24% OPM and Raju had siphoned the money off and thought that by acquiring Maytas he could plug the hole at least for some more years. In that case, the letter to the board could be a red herring.
Another scenario could be this – Due to the real estate slump, Maytas was struggling and he had to do something which could save both. With that land bank on the assets side of the balance sheet and by revaluing it, he could plug the hole. He would, of course, not pay Maytas anything in cash because he had none.
Whatever the case maybe, the fact remains that the balance sheet has a big hole. Did the low margins cause the hole or was it plain robbery? By acquiring Maytas, who was he trying to save - himself or Satyam or Maytas?
“Creative accounting” is nothing new. Companies do it all the time. Take Jet Airways for example, in a lean quarter, it had switched its depreciation policy to come up with $180 Million extra profit. Similarly HCL tech recognised $80 Million revenue when rupee appreciated against the dollar but ignored the losses when the reverse happened. This was due to its large hedging positions. Ranbaxy refused to provide for $180 million losses on derivative contracts. Reliance communications did not recognise $80 Million loss on future FCCB conversions.
These practices are called “Creative accounting”. These companies are walking on a very thin line between the best practices and allowed practices.
But Satyam was not being creative. This is creation itself and Raju is the creator.
What a paradox! I mean name of the company.
6 comments:
Sathyam, Shivam, Sundaram....Welcome to the world of Blogging:-)
Timely article; very logical conclusions. Being a non-finance person, it was hard for me to find answer to the question ``How it all happened?''. You have given good pointers. :)
People were under the impression that audit records can be fully trusted while making investment decisions. I am wondering how an II will now evaluate a company before they decide to shell out their millions? Isn't it tough?
Do you think that this issue will affect the image of India Inc? And how FIIs look at India Inc in this light?
Is it that easy for a company chairman to forge documents like this all by himself? What about the other executives in his team? Or are they part of the play?
Let the truth be the ultimate winner, but not the "Satyam" or Raju & Team who cooked up the books. Being a responsible member of ICAI, I would like to share my bit in this blog.
PWC is not a baby or kid of 2-3 year age, even an office assistant who works in any audit office will look for the following details while they support the certification or assurance process.
1. Confirmation of bank balance with respect to direct balance confirmation and third party direct confirmation.
2. All aspects of material nature should be verified and valued with logical supporting and reasonable justifications.
3. When ever the auditor feels that the independence is questioned, he is having all the rights to deny the reporting or bring it to the notice of the audit committee.
4. There were independent directors in the board, what these people where doing in the board? Let me not go to independent directors; let us stick this discussion to auditors.
Now let us discuss the following:
3. I never felt that an amount which runs into millions will not form part of materiality, even though PWC would have felt it from their perspective of audit.
4. What is the justification for an audit firm of such repute while it spoils the confidence of general public in audited documents?
5. Most of the clients with whom I had a discussion with respect to auditors, are of the opinion that they are forced to choose one among the BIG 4 auditors, just as a compulsory requirement from their counterparts in other parts of the world? Now let this be a reminder for all those counterparts to ensure that it is the capability of the auditor to act independently and report independently that matters and not the brand of the auditor that matters.
6. Independence o the auditor is brutally killed and the big 4 auditor who is suppose to uphold the credibility of the audit community, intentionally molested the same. This cannot be spared.
7. LET THE AUDIT COMMUNITY OF INDIA BE ALIVE AND REGISTER YOUR VOICE TO ELIMINATE THESE EVIL FORCES FROM THIS UNIVERSE.
8. As my friend rightly put it, this is a thing which even the LeT could not achieve. So even more stringent actions should be considered against this group, let they be related to anyone or part of anyone, even lot of my friends are working in this organisation, but once you spoil the name, you are spoiling the name of the organisation. People who are part of this profession should understand that they are responsible for the credibility of their ellow members also, this ethical value violation cannot be spared
9. I believe in ICAI, for that if this is not happening, I am ready to surrender my certificate which will not have any credibility before the general public,if the guility is severly punished infront of the public, and should be eliminated from this universe once for all.
JIJIL
Yes Anil, its tough - and risky! Many financial planners recommend "100-Age" formula for investing. It simply means a 40 year old should only invest up to 60% of his total net worth in equities. Also, weightage of a single scrip in your portfolio should not exceed 10%. This will help in mitigating the risk to an extent.
Reagding image of India Inc, yes. In short term. Remember what happened in U.S - post Enron? They introduced SOX (Surbanes-Oxley) Act. As a face saving measure and to boost investor confidence, we may introduce a similar Act.
Lets look at FIIs now. For them, India is still an attractive destination. They just cant label India off with this incident. They will have to invest in India to get exceptional returns. But they will be more careful this time, thats all! The real trouble is in listing your ADRs etc in foreign exchanges. There India Inc stand to lose significantly.
The only negative I had read about Ramalinga Raju before these incidents happened was that he used to surround himself with incompetent people. Now I think maybe that was intentional and well-planned.
These forging etc (we still do not know if thats the case) is a team work. No one person can pull off anything like this!
Dey, as the protagonist -GK- suggests in the movie -Newdelhi- to have the first edition print of his own publication carry a unique and sensational news rather than not print at all, you have drawn a parallel, I feel. Good luck!
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