This will put some extra risk premium in equity markets worldwide. Have to wonder how many more of these cases of fraudulent accounting will turn up now that the tide is out? I suspect that we have only seen the tip of the iceberg. Notice that competitor INFY is having a pretty good day after an early morning sell-off.
Satyam Scandal Could Trigger Accounting Reform [WSJ]
By JACKIE RANGE
NEW DELHI -- The emergence of a huge accounting scandal at Satyam Computer Services Ltd., one of India's biggest information-technology firms, may be a catalyst for an overhaul of corporate-governance standards in the country and force changes in how many Indian companies do business, experts said.
Although some leading Indian companies have become international powerhouses in recent years, the general standard of corporate ethics and accounting have traditionally been poor in India.
Many Indian companies developed during the nation's so-called "License Raj," a period of heavy government intervention in the economy prior to market reforms that began in 1991, said Premchand Palety, director of Delhi-based market research and consulting firm C-Fore. Businessmen "had to work with politicians, pay bribes, so the culture of ethics is very new to our country," he said.
Today small, unlisted companies often run separate accounts to evade taxation, and during the 1980s and 1990s even large companies would run one set of books for income tax, another for sales tax and yet another for investors, Mr. Palety said.
Revelations Wednesday from Satyam Chairman B. Ramalinga Raju that he doctored the company's books over a period of years to burnish its reported performance are likely to focus much more attention on transparency and corporate accountability, requiring "a radical change in the way corporates are conducting their affairs," said Jigar Shah, head of research for Mumbai-based securities firm Kim Eng Securities India Ltd.
Although Indian law requires that half of a public company's directors be independent, the people attracted to the roles are often not of high quality, Mr. Shah said. Often the compensation offered and the role itself aren't meaningful. "It should be in spirit also that they are independent directors," he said.
Other observers say Indian companies need a whistleblower-protection policy to encourage employees to speak up, said Deven Choksey, chief executive of K.R. Choksey Shares and Securities, a Mumbai-based securities firm.
Satyam's problems also are likely to put the role of Indian auditors under scrutiny. Mr. Raju's apparent sham seems to have been basic: The fictitious creation of cash balances in excess of $1 billion, for instance. Yet there is no indication it was detected by the company's auditors, PricewaterhouseCoopers, over several years. The accounting firm said Wednesday it is examining Mr. Raju's statement and declined further comment, citing client confidentiality.
There will also likely be demands for quarterly reporting of companies' balance sheets and cash flows, Mr. Shah said. The current practice is to report just profit and loss on a quarterly basis.
Some suggest that if India uses the scandal to improve its corporate standards, the nation may benefit ultimately. "Further tightening of regulations and [the] oversight mechanism for auditors emanating out of this incident should be a long-term positive for India," said Sukumar Rajah, chief investment officer for equities at Franklin Templeton Investments in India. Franklin Templeton is a Satyam shareholder.
But for now, the revelations are a huge blow to the image of corporate India at a time when the nation's economy is still seen as one of the world's bright spots. "This is a very bad thing for the country. It's shown the color of our entrepreneurs," Mr. Palety said.
Ironically, Satyam had been commended by the World Council for Corporate Governance, which gave the Indian company a Golden Peacock Award. "The company had highly qualified independent directors, and they had been maintaining great momentum," said Manoj Raut, a Delhi-based spokesman for the Golden Peacock Awards and a director of the Indian Institute of Directors. After an emergency meeting Wednesday, the award was withdrawn, he said. "They hoodwinked us in the process of obtaining this award."
The London-based group doesn't carry a lot of credibility in the governance arena, however.
There is a "puzzling lack of transparency about them, their purposes and their funds,'' said Anne Simpson, executive director of the International Corporate Governance Network, a rival organization with more than 500 members in 40 nations. Most members are institutional investors.
On one occasion, the World Council offered to bestow the Golden Peacock award on a major U.S. drug maker in exchange for a $20,000 payment, according to someone familiar with the situation. The U.S. company refused.
World Council officials didn't return calls for comment Wednesday. |
