090111_satyam Is Far From The Truth

 

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By Sure esh Kr Pram mar It is being quoted as the biggest fraud in n the history y of corpora ate India. Sa atyam, (whic ch in Sanskrit means th he Truth), a company with an n excellent record r in CS SR activities s, is now in the dumps d beca ause of the greed g of its promoter and a Chairma an, Ramalin nga Raju. The discredited Ra amalinga shocked the nation n when n, in a letter, he h revealed that his com mpany had been falsify ying the accountts for the pa ast seven ye ears. Accord ding to Ram malinga, the com mpany’s bala ance sheet had include ed nearly 1..5 bill rupees non-existen nt cash and bank balan nces, accrue ed interest and mis sstatements s.

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Office Job b Stressful Job by Frixedairwa ave

The sta atement cau used public uproar sinc ce Satyam had h earned the reputattion of being a respons sible, people-friendly compan ny. Its two foundations f s, the Satyam m Foundatio on and the Byrrraju Founda ation, along with its tw wo Institutes s, the Emerge ency Researc ch Institute and the He ealth Manag gement Institute e, have been instrumental in setting up innov vative community progra ammes prov viding relief to several thousands t of peop ple in India.

where ind dicated. Copyrightt of Deviant Art visuals remain with the e authors/artists.

 

How and why did it happen is now a question haunting the minds of most people. Suresh Neotia, Chairman, Ambuja Cement Foundation, in an article in the Financial Chronicle states, “the greed and desire of joining the elite club drove Satyam’s promoters to build its market capitalisation much beyond its realistic value. One possible reason for overstating profit may have been to increase the market cap of the company. This is easy for an IT company since they are not taxable on account of export and, hence, there is no outgo of tax on unearned income.” There is considerable concern over the fact that year after year, for several years, the company’s accounts were verified and certified by PriceWaterhouseCoopers (PWC), one of the Big Four international audit firms operating in India. Says Neotia, “The Big Four gobbled up most of the Indian auditing firms and created a mirage in the minds of the investing public, financial institutions, banks and the government that the company’s integrity was in the safe hands of established auditing firms.”

Money for? by Ferruh

There was no cash in the company’s banks and yet the auditors went ahead and signed the balance sheets saying that the money was there. They even signed off on the non-existent interest that accrued on the non-existent cash balance! Auditors are expected to do bank a reconciliation to check whether the money has indeed come or not. They check bank statements and certificates. In an attempt to wriggle out of an ugly situation PwC has claimed that the audit was conducted in accordance with applicable auditing standards and was supported by appropriate audit evidence. Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities.

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PricewaterhouseCoopers in a statement has stated, “Over the last two days, there have been media reports with regard to alleged irregularities in the accounts of Satyam…. Price Waterhouse are the statutory auditors of Satyam. The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others. “The Institute of Chartered Accountants of India has served a show cause notice on PriceWaterhouse asking them to submit balance sheets of Satyam Computer audited by it in

 

the last five years. According to the President Ved Jain, “action against CAs, who audited the accounts of Satyam Computer, can be expected, if found guilty”. There is a clamour for strong action against the audit firm including a ban. CAs found either negligent or party to the fraud could face a life-time ban on practicing, Jain said. An Arthur Andersen fate awaits the auditors. While the PwC faces the fire the role of the independent Directors, a statutory requirement under Sector 49 of the Listing Provisions, has also come under considerable criticism. The Board included such high-profile directors as Harvard professor of business administration, Krishna Palepu and independent directors, Mangalam Srinivasan, a management consultant and advisor to Harvard’s Kennedy School of Government; Vinod Dham, called the “father of the Pentium chip” and now executive managing director of NEA Indo-US Ventures in Santa Clara, California.; M. Rammohan Rao, the dean of the Indian School of Business in Hyderabad (ISB) and former Cabinet Secretary T R Prasad, among others.

Future by Andycap

In a statement Rammohan Rao, who chaired the December 16 meeting when the controversial agenda favouring Maytas was passed, claimed that he had “absolutely no prior knowledge” about the fraud in the company. The functioning of the independent directors has raised questions about their role and efficacy.

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Securities Exchange Board India rules require Indian publicly held companies to ensure that independent directors make up at least half their board strength. Clause 49 of the Listing Agreement of the Stock Exchanges lays down the guidelines for the composition of the board including the number and qualities of independent directors, remuneration of broad members, code of conduct and the constitution of the various committees, disclosures and suggested contents of the annual reports. According to Corporate Governance experts ,the definition of “independent director” in India is limited as compared to the NYSE rules and UK Combined Code guidelines. There is a feeling that while ‘independence’ is increasing, ‘true independence’ has yet to be fully established. Most independent directors on company boards do not express dissent very forcefully since they are unsure of how their criticism will be taken.

 

A majo or weakness s in Indian corporate c g governance is that it allow ws the appo ointment of independent directors s who are old d friends or associates of management or of contro olling shareh holders. A recent r study y has revealled that 90 perr cent of companies ap ppointed ind dependent directo ors using re eferrals from m the CEO o or chairman n. There is a de emand that the selectio on of indepe endent directors should d not be leftt to the promoter group but a nomination comm mittee. Perso onnel with h high levels of integriity, and who o truly independent and functio onal/busine ess expertis se should be e appointed d. While independen nt directors face criticis sm for theirr lack of indepe endence, ex xperts claim m that they s suffer severral inabilities. For one, independe ent directorrs do not ha ave adequatte time to sttudy agenda papers nor are they privy to in nformation other than what is made available e to them by the compan ny. Money Money Money y by Ivy046 1

Richard d Rekhy, CO OO of KPMG India in a recent article in the Financial Chro onicle has sa aid, “Deliberrations in board b meetings are bas sed on the agenda a papers that are e sent to dirrectors possibly y a day or two before the t meeting g. Very few go g through the agenda a, as very litttle time is given n to them to o peruse the e implications of each proposed re esolution. T The minutes s that accomp pany the age enda are drrawn more than t a montth or two affter the prev vious board d meeting g, which are e confirmed d in the subsequent me eeting. Very y few directo ors are able e to rememb ber the deliberations of o the previo ous meeting g and the minutes m are c confirmed straighttaway, exce ept for a few w minor gra ammatical or typograph hical errors.. Seldom do o indepen ndent directtors reject minutes m bas sed on the fact f that the ey aren’t tru ue to the discussions held. Rekhy has h suggestted that independent directors d sho ould be equ uipped with appropriatte tools/procedures to t seek obje ective inform mation for decision-ma d aking purpo oses. They should s spend more m time in understan nding the va arious busin ness operattions, comp pany’s contrrol environment, cultu ure and the impact of these eleme ents on the financial nu umbers. “To gain n an in-deptth understa anding, inde ependent diirectors nee ed to conduct various nonn executiv ve sessions s on a one-o on-one basis s with the middle m level manageme ent, internal auditors and exterrnal auditors s. Independ dent directo ors also need to continu uously evaluate if manage ement is subject to any y direct or indirect pres ssures, whic ch may forc ce it to misreprresent resullts of busine ess operatio ons. He sug ggests that Independen nt directors work as a sin ngle cohesiv ve unit. Dire ectors need to understa and that the ere is a need to continuously perform m their role in an objective manner throughou ut their tenu ure. Their responsibilitty and loyalty should be with w the stakeholders and a not tow wards the ma anagement//promoter. Stung by b the fraud the SEBI ha as begun to o re examine e the variou us provision ns in Clause e 49. Reports s indicate th hat the Boarrd will soon present a concept c pap per revampiing Clause 49 4 to provide e more powe ers to indep pendent directors and strengthen disclosure norms.◊

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Suresh Kr Pramar is the Edito or of CRBiz.