This is a fundamental issue of trust and faith which has been shaken

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Satyam: A cleverly crafted scam
Published on Wed, Jan 07, 2009 at 13:56 Source: CNBC-TV18

...one bad apple does not mean that everything in the basket is rotten. Having said that will it shake investor’s confidence?

Absolutely and unequivocally yes, more than anything else that has shaken investor confidence. This is not one crooked stock broker scamming investors by leading them up and getting a line of finance from a bank, it is one of the country’s biggest companies; it is an index stock with a several billion dollar marketcap, it was thought just a few months back as one of the beacons of Indian IT and today the promoters come and said, everything that I shared with you was a complete scam.

Do you think this will have no repercussions? Absolutely not, that would be too simplistic an inference to draw. I am finding it difficult to articulate what one should after looking at the scale and magnitude of this scam which has played out, where the promoter in five pages has just blown the biggest scam going in this country and has submitted himself to the forces of law...

Who do you believe now?
Satyam is a company which is listed on the New York Stock Exchange (NYSE); this is an index company, quarter after quarter it announces numbers which we take as gospel and we do a lot of analysis, every analyst does on whether margin slipped a bit and wage hikes happened and now you know that none of those numbers existed then who do you believe? Do you believe auditors, who are supposed to be looking at these companies?

This is a fundamental issue of trust and faith which has been shaken. One can forget about the Satyam stock much that we feel very bad about Satyam shareholders that is one company. Here you stand the risk of actually losing your faith and trust in the system, which is supposed to be policing the numbers which you have faith and trust in. What happens to the auditors? This is a company which is not a fly by night small company, it is listed on a global exchange, global investor – they are supposed to be following US GAAP norms etc and quarter after quarter they keep blinkering all their investors and none of us find out till the promoter one fine day decides to confess.

Could there be more companies doing these kind of thing? What are the auditors doing? How will we ever know? You and I cannot be looking at going into and checking the bank accounts of Satyam and what they earned in a particular quarter or not. At some level there has to be an implicit code of faith that we believe what is posted on the walls of the exchange but today we cannot. So what are these people doing – these auditors and tax consultants and even rating agencies, how have they conducted themselves over the last two-three quarters. It is absolutely appalling.

[Raju confesses: Why and how of the Satyam con Since about seven years, we wanted to show more income in the account to avoid others from involving in company affairs and any other possible hostile takeover situation, and hence, manipulated the balance sheet to attract more business and show unavailable amount as available cash in hand.This process continued for the last seven years and margin amount shown got increased much more year after year. Moneycontrol » News » Business]

[Does one bite the hand that feeds it? It’s a time tested phrase that lies at the very heart of the Satyam scam and the systemic flaws that allow such frauds to be carried out, undetected... All independent directors or auditors are not unscrupulous. But there is an obvious conflict. Perhaps these things aren’t spoken about as it is a system that works mostly, with the odd scam here and there. But for my money, a new system needs to be thought about. Else, you’ll simply be hoping that those you trust are not crooked. And that isn’t good enough.

These bodies must get their bread buttered by the people they are trying to protect against fraud. Investors, not company managements or promoters. Is it so difficult to devise a system where auditors and rating agencies are paid by the ‘users’ of the information they dish out? I doubt it. Leaps of faith HT 11 Jan 2009 Udayan Mukherjee is Managing Editor, CNBC TV18]