The unprecedented and shocking revelation that for over 7 years, a major Company in India listed in several stock exchanges including NY Stock exchange had been defrauding the investors with an inflated reporting of profits to the cumulative extent of around US $ 2 billion (or more) is a matter of concern for all Indians.
Dubbed as the “Indian Enron”, the incident in which Mr Ramalinga Raju, the Chairman has given a written confession about the overstatement of profits consistently has opened up several questions on the ” Role of Regulators in Corporate Governance”.
There is one set of observers and journalists who are harping on “When Raju will be arrested?”, “Whether his personal assets would be seized?” etc. While all this may be relevant, what is more important for the public now is
a) How to salvage Satyam as a company from the effects of this scam?
b) How to prevent the scam have adverse impact on other IT companies and the Indian stock markets?
c) How to prevent recurrence of this type of incident in future?
Late in the night today (9th Jan), Mr Ramalinga Raju is reported to have surrendered to the Police in Hyderabad. In another surprising move, the Government has superseded the Board of the Company and has announced that 10 persons will be nominated by the Government to the Board.
However, the stake holders namely the Shareholders and employees who have been the real sufferers in the incident are not sure if these moves are likely to benefit them.
Shareholders have lost almost their entire investments as the shares dipped to around Rs 20 in the stockmarkets. Whatever be the measures taken to salvage the company, it is unlikely that the share prices recover toÂ a decent level in theÂ foreseeable future.
Employees are also unsure what the takeover of the Board means. In the last two days, there were some internal discussions by the employees to make the company viable by various means which included a voluntary cuts in the salary etc. The employees had also taken steps to get the support of their major clients and there was a faint possibility of employees taking over the management of the company and trying to turn it around.
However, with the Board now having been superseded, the initiative of the employees has also taken the back seat.
From the business perspective, if the current business of Satyam can be preserved, it may be possible to bring the Company back to profit making levels. However, there is the lurking liability of the UPaid case amount to around Rs 4000 crores which may manifest in the next year. Hence any strategy to turn around the sick company to health has to cover a possible loss of around RS 12000 crores. Also the top notch employees are bound to shift to other companies may be along with their customers.
Under the circumstances,Â it is almost impossible to salvage Satyam as Satyam.Â All that the new Board may be able to do is to delay the inevitable. Investors therefore will lose their entire investment in the Company.
With the fall of the share price to near zero, the impact on the Stock Market is also unavoidable and the investor sentiments are likely to be so shattered that the impact will be felt by other companies particularly in the IT sector.
In fact, the impact of Satyam debacle on the Indian stock marketsÂ could be more damaging than theÂ so called global recession.
A large number of employees particularly at the junior level will find it difficult to find alternate employment and this will affect a number of freshers whose jobs will be taken over by the exiting lower level employees of Satyam. The impact on the job market will therefore be alsoÂ devastating.
On the other hand, those brother companies who absorb key Satyam employees and use them as a leverage to take over the key client projects are likely to benefit.Â
As regards the future steps to be taken to prevent recurrence of such events, it is necessary for the Government to initiate actions against two of the regulatory agencies who are directly responsible for the fiasco by their dereliction of duties. The first is SEBI which failed to see through the falsified financial statements. We may admit that SEBI may not have the necessary expertise to analyse the financial data submitted to them but still the need to develop such an expertise at least for the future has become imperative.
However the highest responsibility for this fraud must be ascribed to the auditors of the Company whose primary task is to ensure a fair presentation of the accounts. The auditors were hand in glove with the Company in the commission of the fraud and its’ continuance over 7 years. Penal action is therefore necessary against the auditors namely PWC have come out as accomplices in this fraud and its directors as well as individual auditors.
A large gathering of Chartered Accountants who assembled at Hotel Ashok today in Bangalore for a seminar expressed their grave concern on the loss of credibility of the profession and urged the ICAI to initiate strong action against the erring auditors both the firm PWC and the individual auditors involved.
TheÂ participants Â suggested that action should be taken immediately to suspend the auditors and the institute should not delay the process for any technical reasons. Many of them felt that there was a need to change the regulations to ensure that auditors in big companies should be given a three year term and there after other firms should take over by rotation so that the promoters cannot exercise undue influence ton the auditors.
It was also suggested that the institute should introduce a whistle blowing policy where complaints should be lodged with the institute if something fishy is smelt in any company. Participants raised pertinent questions with the CFOs of Infosys and Wipro who were present in the meetingÂ if they had not smelt that the profits of Satyam had been overstated since they had a better understanding of the market realities in the IT field.Â
The meeting had actually been organized to discuss the new International Financial Reporting Standards and the participants felt sceptical that any such standards mayÂ be of much helpÂ to improve the quality of audits unless there is exemplary punishments to auditorsÂ for Satyam like incidents.
The Satyam scam therefore is likey to leave its impact on the functioning of the chartered accountants in India and hopefully suitable steps will be initiated by ICAI to reduce the possibility of such instances in future if not eliminate them. At the same time, it is imperative that the erring members of the institute should be barred for life since lesser punishment would not be a fair punishment for the damage they have caused to the Indian economy, the thousands of employees and shareholders.