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Credibility under threat

Even as investigations at different levels are going on at Satyam to determine culpability in the massive accounting fraud, it needs to be examined how corporate governance could be brought to so total a collapse. Going by Ramalinga Raju’s self-incriminating statement, it was possible for one or two individuals to bypass all the checks that exist in any reasonably well-run company and doctor the financial statements over as long a period as seven years. There were ce rtainly few outward indications of things going so very wrong. Satyam, the fourth largest exporter of IT services from India, was among the relatively small number of companies that took pride in going that extra mile to meet even global standards of governance and financial reporting. It was among the first Indian companies to list its shares in New York, thereby subjecting its financial performance to a closer scrutiny in an advanced market. It was also among the earliest to adopt the latest accounting standards and restate its accounts according to the requirements of U.S. regulators. Despite the recent controversy over their roles, the independent directors on the company’s board were people of exceptional calibre drawn from academia, the IT industry, and government service. An internationally renowned accounting firm served as the company’s auditors. In all respects, Satyam, until the scam surfaced, seemed to be a model of good corporate governance.

That is why its subsequent fall has been particularly shocking. For the sake of restoring credibility in the Indian corporate governance structure, it is important that the government, SEBI, and other regulators as well as the new board of directors convince the country and the outside world that the Satyam debacle is an isolated case. Publicly listed companies are bound by the provisions of Clause 49 of the listing agreement. The clause requires that independent directors constitute one third or half of the strength of the board, depending on whether a company has a non-executive or an executive chairman. It is incumbent on the board to set up a qualified and independent audit committee, a shareholders’ grievance committee, and a compensation committee. The Indian Companies Act also lays down principles for corporate governance. However, these rules and regulations have not helped to detect, leave alone prevent, the major fraud at Satyam. It therefore becomes all the more necessary for the authorities to send out a clear message that transgressions will be dealt with under the law without any hint of softness. Greater coordination is necessary among the different investigating agencies to ensure that the guilty do not escape.

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