Satyam: Merrill Lynch knew

One of the recurring questions from yesterday’s shock revelations at Satyam was the nagging feeling that someone must have known what was going on. Late last night I started to see reports indicating that Satyam’s investment bankers Merrill Lynch knew what was going on. According to The Times of India:

There’s intense speculation as to what finally triggered Raju’s confession of wrongdoing. It’s clearly more than coincidence that it came hot on the heels of investment banker DSP Merrill Lynch’s letter to the company on Tuesday evening terminating its days-old agreement with Satyam to advise it on strategic options because of “material accounting irregularities’’

PwC issued a blunt statement this morning claiming that:

“The audits were conducted by Pricewaterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence,”

In the meantime, BusinessWeek is reporting that Raju has disappeared. The burning question remains. What did Merrill’s manage to uncover since 27th December, 2008, the date of its appointment and 6th January, 2009 the date of its resignation that PwC didn’t find over several years acting as auditor? This one has a long way to play out. In the meantime, I leave it to readers to ponder on debates around Indian corporate governance:

According to him [Jayant Rama Varma], the governance issue in the Anglo-Saxon world aims essentially at disciplining the management which has ceased to be effectively accountable to the owners. But in India the problem is different. Here it is of disciplining the dominant shareholder and protecting the minority shareholders.

Related articles by Zemanta

• Financial Scandal at Outsourcing Company Rattles a Developing Country
• Satyam Shares Plunge on Scandal
• India IT boss quits over scandal

My Diigo Bookmarks 01/08/2009

• Adventure of Strategy: Castles of Cards

  Solid list of things that firms should be thinking about for their own survival

  tags: strategy

• FT.com / Companies / Telecoms - Telefónica wins €350m Deutsche Post contract

  Bringing down data costs eh? What about for consumers? No apparent moves there.

  tags: telefónica

• GM’s Regulatory Run-Ins = Taxpayer Money Pit at Emac’s Stock Watch | Fox Business

  This is the sort of thing that is going to annoy many people and often leads to knee jerk reactions.

  tags: GM, regulation

• FT Alphaville » Blog Archive » Merkin to step down as GMAC chair

  Wow - when the shit hits the fan, it sure flies. And these days: sticks

  tags: merkin

• First Annual “Fraudies Awards” Recognize 2008’s Clueless Corporate Scammers

  Given what we’ve seen the last year, this is a good one. If nothing else it will make you smile. I hope.

  tags: fraudies

• FOLLOW FAIL: The Top 10 Reasons I Will Not Follow You in Return on Twitter

  This works for me as well.

  tags: twitter

Posted from Diigo. The rest of my favorite links are here.

Innovation in billing: the lawyers are eating our lunch

First up in the ABA Journal, Morgan Lewis announces it is ditching the billable hour. Well sort of. It’s de-emphasizing the billable hour as a component driving bonuses for its staff. I’m sure its associates will be delighted, especially when you note that the bar starts at 2,000 hours pa. Given that US lawyers are used to billing in 6 minute increments, that’s a heck of a lot of time on the job just to get to 2,000 hours. When I was in practice, we reckoned to be lucky to get 1,400. It was a good reason for dropping that measure because you were always clock watching instead of concentrating on what needed to get done.

Then comes the Wall Street Journal Law Blog where:

Evan Chesler, a Cravath lifer and the firm’s presiding partner, has become the most recent high-profile lawyer to call for the end of the billable hour. In the upcoming issue of Forbes, in an article called “Kill the Billable Hour,” he writes: “The billable hour makes no sense, not even for lawyers. If you are successful and win a case early on, you put yourself out of work. If you get bogged down in a land war in Asia, you make more money. That is frankly nuts.”

That’s fighting talk and in the following interview, Evan provides plenty of solid reasons why he thinks this way and the challenges that face his firm. Rather than spoil the fun, just hop over and check it out.

I’m thinking that Ron Baker and the folks down at Verasage will be hopping with delight. As always, with these things, there is a tinge of sadness for me. When am I going to hear about the professional accountants getting with the program? C’mon guys and gals - the lawyers are eating our lunch on a bunch of issues. It’s embarrassing.

Related articles by Zemanta

• Killing the Billable Hour: One Op-Ed At A Time
• Rod Blagojevich: Bills, Bills, Bills

Innovation in audit oversight

I bet you never thought you’d see that as a headline. Neither did I but then Joe Weisenthal’s ‘Nuke the SEC’ post I started to think differently. Let’s start with Joe’s assertions:

First, we nuke the SEC. This isn’t really that radical. There’s precious little evidence that it does what it purports to — namely, protect investors. If anything, it protects investment managers and others from investors, who might suspect they’re getting ripped off. Sure, it can catch the occasional insider trading case, but they’re usually pretty obvious when you see a massive trade right before big news comes out.

Second, we stop letting companies hire their own auditors. Companies have little incentive to hire aggressive auditors. An auditor won’t get business by being a pain in the ass to the company it’s auditing. The game is to do the bare minimum that makes everyone happy. That state of affairs works fine in the boom times, but when the recession comes, the whole charade is exposed for what it is.

Finally, we make each listed company pay a fee to an independent auditing organization. Rather than hire the auditors directly, companies will pay some portion of their revenue to an independent industry body (like the SIPC or some such) that then hires auditors for its member companies. The auditor would work for this group, and it’s ability to get business year-on-year would be tied to its performance. Whiff too often? You’re done. No more work for you.

Joe bases these thoughts on the idea that corruption and conflict of interest are at the root of current regulatory problems, a concept with which I agree. Why should this work? In back channel discussions with my Irregular colleagues about the Satyam fraud, one of the things that emerged is that my colleagues were of the opinion that Satyam had previously enjoyed a solid reputation for ethical practices. This in turn should have meant it was well governed.

But as I observed, if the steady stream of frauds tell us anything, it’s that there is a human tendency to avoid doing the right thing when things start to go wrong and the pressure is on. It matters not that reporting cycles leave execs under constant pressure to meet analyst expectations. That is always going to be there. It matters even less that the current system of oversight is weak. In other words, you’re never going to put an end to fraud.

From the audit oversight, what matters is that the combination of vested interests, weak oversight, a lack of qualified internal supervision and inadequate training has led to a situation where the likelihood of detecting anything going awry is nigh on zero. There is no incentive to change because despite the weight of litigation lining up agains the major players, there is no appetite for root and branch change. That’s especially true when auditors can hide behind the eons old mantra that an audit is not designed to detect fraud.

Introduce a new system where the auditor will be actively penalized by a body that is disinterested in the outcomes of those audits and attitudes change rapidly. Some might see this is as a moving around of the deck chairs but I don’t see that as necessarily the case. For many audits, the next tier outside the Big 4 can do a perfectly good job, if they are given the opportunity. What’s more, auditors will be encouraged to be a lot more transparent about what they’re doing. So in the event that things go wrong, rather than hide behind client confidentiality as PwC is currently doing, they’d be playing to a different tune.

OK - this is only a stake in the ground designed to stimulate debate. I’m sure plenty will disagree with the details. But if free market America - or rather financial commentators in that country - are coming to the conclusion that radical change is required, then why argue? If, as some of my colleagues believe, the ‘governance’ edifice has finally crumbled, then something viable and DIFFERENT has to replace it. If as seems the case that India’s commentators are jumping all over the audit profession (which I’m sure is a prelude to considering the role of oversight bodies), then we all can’t be wrong.

Big questions are being asked around the world. They demand innovative solutions and not the sticking plaster of fresh PCAOB/SEC/ICAEW/ICAI…etc responses. Over to you.

Pic courtesy of Geek & Poke

Related articles by Zemanta

• SEC failed to spot Madoff fund’s ‘red flags’
• Satyam Shares Plunge on Scandal
• quis custodiet ipsos custodes?
• Small investors may lose out as Madoff prepares to reveal his assets
• SEC chief vows action on Madoff scandal

Next Page »