The Sordid Satyam Affair

Mr Ramalinga Raju has finally resigned. And he has admitted that over Rs 7,000 crore of cash and cash equivalents that are showing in the Satyam balance sheet do not exist. Shocking as the whole affair is, I wonder how many people were really surprised by the turn of events. In the past few days, it was apparent that Mr Raju was getting increasingly desperate. His brand name independent directors were deserting him. Banks were selling off the shares he had pledged, and he was about to lose control over his company. The fact that the cash was missing would have come to fore sooner rather than later simply because several big companies – both in the information technology sector as well as from outside the industry – were looking at Satyam as a prospective acquisition. The moment any of these potential bidders started their due diligence process, the fact that money had been siphoned off would have come to light.

But despite Mr Raju’s confession, there are too many unanswered questions in the whole affair. First, it is obvious that the profits, margins etc were being overstated for some time. The most obvious question is for how long was this fraud going on? And how many people were involved in it? To overstate profits and margins and other figures, you need the complicity of not only your finance department but also your auditors. And the involvement of many other members of the top management as well. You can’t do this as a single man operation. So who else was involved?

The second question is that while it is probably not too difficult to overstate margins or profits or revenues with the help of some fancy paperwork, how did they manage to make the cash and the bank balances disappear? Auditors are supposed to check these from actual bank statements etc. PricewaterhouseCoopers (PwC), the auditors to Satyam are maintaining a stony silence but at some point, they will need to explain to the relevant authorities about their role in the affair.

The third question is what were the brand name independent directors doing all this while? Surely at least one of these supremely bright men should have caught on earlier that things were going wrong. For all of them to miss the entire fraud until the stink over the Maytas acquisitions happened, makes one wonder whether having independent directors does any good to a company’s corporate governance at all.

Meanwhile, back to my initial observation – I wonder how many people were actually surprised by the fraud that has unraveled at Satyam. I would suspect that most financial analysts would not have been very surprised. I would also suspect that most veteran business journalists would not have been too surprised. And finally, I would be very surprised if any of Mr Raju’s peers would have been surprised.

My point is this. Sure there are companies in India that follow stringent corporate governance rules. And sure, there are companies in India that are squeaky clean. And I would even go out on the limb and say that the majority of companies, at least the publicly listed ones, are quite clean in their operations. But if you dig deep enough, you would find that there are other Satyams flourishing in the country. These Satyams have probably siphoned off smaller amounts of cash. Or their promoters have been cleverer than Mr Raju and evaded detection. Or they have simply been luckier. But they exist.