The Satyam saga and the right lessons
SUBRAMANIAM R IYER
The “Enron” of India — Satyam and its inverse Maytas, the political connections of Raju, the apparent failings of the audit procedures of PW — all of these will be a topic of conversation in 2009.
“Greed” is the driving force causing several corporate failures both in India and overseas. Money is invariably diverted to other projects including manipulation of share prices in listed companies prior to accessing the domestic or overseas capital market. In Satyam’s case too, in the eventuality of its ever being made public, we may discover that money has been diverted to the previously booming real estate market to encash, make personal windfall profits and then reverse the manipulation. The “risk of downturn” is not in the manipulator’s dictionary in boom time.
In the case of Satyam, major manipulations have been structured around cash and bank balances. It is standard accounting and audit procedure, including internal audit function, to make monthly bank reconciliations.
Technology, an abettor
We all get bank statements including fixed deposit receipts stating “This is a computer generated statement and hence does not require signature.” My peers in the audit world tell me that their efforts to get the bankers of clients to sign bank statements have largely been in vain. Satyam’s multi country bank operations, coupled with internal knowhow to generate its own “system generated” bank statements, receipts or confirmations, may be a cause of the audit procedures of even PW faltering. In corporates, inventory manipulation is standard operating procedure. BIFR is flooded with many financially sick corporates. They could also have been victims of greed in the managements and money could have been diverted or siphoned off illegitimately.
Boom time in the capital market creates pressure on the managements to “perform.” There is immediate peer pressure to enter the capital market at unrealistic valuations partly as SEBI’s guidelines permit free pricing. The favourite barometer of the capital market — the Earning per Share and the Earnings before Interest Depreciation, Taxation and Amortisation — were mantras for valuation spelt out by the bright-eyed youngsters from Mumbai to corporate India. Valuation of companies was reduced to simple arithmetic based on these multiples making all managements and professionals, valuation experts. Risk and many other factors propounded by Damodaran and other valuation experts were forgotten.
Corporate defaults
Market capitalisation became a major area of concern even for corporates who did not wish to access the capital markets. Imagine the pressure on Raju and other managements to meet the arithmetic requirements. Top and bottom lines had to be met even at the cost of paying income tax and dividends on /out of non existent profits and reserves. Corporate India is faced with tremendous pressures in 2009.
Existing manipulations to satisfy the capital market, the compounding problems of losses on account of derivatives and futures positions, the obligations on unlisted companies into which PE Investments have flowed to list besides dealings with the beleaguered West and Japan which may lead to stuck receivables will all result in increasing the risk of corporate defaults in meeting obligations to lenders.
The small investors are victims of stock market oscillations as they invariably invest when it is at the peak, fail to exit when the market starts dropping thereby losing 65-70 per cent of value. What is the answer to this malady affecting the corporate sector? No new regulations please — better quality implementation and compliance will help. Free pricing of shares must be tagged with ethics of honest reporting, including financial forecasts. Banks must monitor corporate performance more closely. Market analysts and all financial professionals including auditors must be ethical in their actions and reflect on their actions at a macro and social level.
To sum up, the period ahead is likely to be tough on all players — the Government, the corporate and the financial sector who will need to work together and come out on top. Let us all learn our lessons well and make sure that post-2009, such corporate debacles merely remain part of history.
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