Until today, I’m betting most professionals hadn’t heard of Satyam, despite they’re India’s fourth largest outsourcer. All that changed when chairman and founder B Ramalinga Raju sent a letter to the Indian stock exchange and shareholders holding his hands up to a massive fraud that includes $1 billion in fictious cash assets. When I first heard about this my jaw dropped. How on earth could a company get away with this? More to the point, where were PwC in all of this? Cash is one of the easiest assets to verify on the balance sheet and yet somehow this amount has vanished.
Some people are saying Raju has done the right thing by providing details of the mis-statements. Except that has not happened. Some aspects have been documented but the time period over which this occurred, the periods in question and the accounting that led to this hole are not explained. Henry Blodget parses references to pledged stockholding as part of the explanation for how around $1 billion came into the company but that’s something of a stretch as the numbers are going the wrong way. Here is a summary of what Raju admitted:
1. The Balance Sheet carries as of September 30, 2008
a. Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books)b. An accrued interest of Rs. 376 crore which is non-existent
c. An understated liability of Rs. 1,230 crore on account of funds arranged by me
d. An over stated debtors position of Rs. 490 crore (as against Rs. 2651 reflected in the books)
2. For the September quarter (Q2) we reported a revenue of Rs.2,700 crore and an operating margin of Rs. 649 crore (24% 0f revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% of revenues). This has resulted in artificial cash and bank balances going up by Rs. 588 crore in Q2 alone.
At the very least we can presume that there has been the classic billing/receivables fraud but even a cursory examination of these numbers and their explanation leaves any analyst scratching their heads. What we can say is that therre has to have been collusion at or near the top of the company for this ‘minor problem’ to have exploded.
Digitising Thoughts, a blog written by an Indian Chartered Accountant lays out some of the top of mind issues. I follow the logic and largely agree but I remain perplexed how Raju could have gotten away with it for such a long period of time. Our blogging friend also asserts that his experience of Indian audits are that they are conducted to the highest standards and therefore, the auditors must have been duped. While I am sure such statements are made in good faith, the amounts involved are just too big to have been missed by even the most cursory examination.
Our intrepid blogger strikes again:
One has to note that the Auditors Report required under the Indian Companies Act, 1956 is very different from the Auditors’ certificate as per USA and other country laws.
Under those laws, much of the responsibility on the accounts is shifted to the management. Interestingly, this report doesn’t specify any IFRS or IAS to be followed but simply asks auditors to look at all things that may require a scrutiny, which is FANTASTIC.
He then goes on to quote chapter and verse from Indian legislation on the topic but concluding:
Make your judgement if the auditors of Satyam would have completely ensure compliance of accounts with the above requirements?
That’s a question that’s on the minds of many people. But the ramifications run a lot deeper. Henry Blodget is blunt in his assessment:
PWC, how are you going to explain this Satyam thing? How is it possible for two people to produce enough documentation to hide personal transfers of $1 billion of cash into company accounts, along with massive faked revenues and expenses? Wasn’t there some attempt to reconcile subsidiary accounts with consolidated accounts? Why shouldn’t investors conclude that this was YET ANOTHER case of an “auditing” firm taking a single person’s word for something without doing ANY due diligence?
While you’re at it, please tell us why we should even BOTHER TO HAVE AUDITING FIRMS? If the only thing that auditors do is confirm that a company’s accounting arithmetic is accurate, why don’t we just save ourselves millions in fees and misplaced confidence and just admit that audits don’t mean a damn thing?
Francine McKenna and I spoke about this at length this afternoon. We are agreed that on the basis of the facts as we have them, PwC has a lot of explaining to do. Right now it’s on the hook for at least $3 billion in lost value and you can bet there will be a lawsuit to follow. How will it overcome the problem? Hack off another piece of its global network, the same as it did with Japan the other year? What does this say about PwC’s own governance procedures or ability to operate a global network of practices? In a Tweet conversation I had with James Farrar who runs point for CSR at SAP, we agreed this blows to smithereens any attempt at making ‘governance’ something that is credible in the public domain. Brian Sommer who is ex-Accenture and a fellow Irregular believes Satyam is unsaleable in its current condition.
Is this another nail in the audit coffin? Looks like it to me. For plenty more reading, check out the Zemanta links below.
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