Some writers have noted parallels between Satyam Computer Services Ltd and the infamous Global Trust Bank Ltd scam of 2003-04. It appears that both companies were audited by the same partner in the same big-four firm and both companies had the same Harvard don on their boards, although not at the time the scam broke out.
If it is true that not only an auditor, said to be on the central council of the Institute of Chartered Accountants of India, or Icai, but also one of the world’s leading authorities on accountancy was on the board of both firms, it must rank as one of the great ironies of governance and force a closer look at the role of various stakeholders in this saga.
What more could be done by regulators to help independent auditors and directors do their jobs and avoid a recurrence of such an incident?
After the Satyam episode, it has become fashionable to bash the independence of auditors. The question to ask is whether regulation has made it possible for auditors to be truly independent, given the multiple pressures they face.
Auditing today has been converted into a business, with revenue targets and upward growth for senior partners based on revenue they bring in. There are business pressures on a senior auditor to push the envelope of governance. Although most auditors work sincerely most times, their true test lies when an auditor is faced with an issue on which he differs with the chief executive or chief financial officer of his auditee. How many audit partners can push back chief executives of the stature of B. Ramalinga Raju, who are lionized by the media and showered with awards?
Are we being realistic to expect anonymous audit partners to stand up and distrust an assertion about bank balances given by the chairman of an Rs8,000 crore company? The answer is, maybe not. True independence can only come about when auditors are not measured by revenues but stringent reporting. Can we please see some sponsors for an award for the toughest auditor and the perfect accounting purist? Instead, we are stepping forward to see greater advancement for the networker and the champion of innovative accounting.
If Icai or markets regulator Securities and Exchange Board of India, or Sebi, finds a way to create incentives to be a tough auditor, things can change. Sebi’s proposal to have a peer review of company accounts is an excellent move and needs to be expanded to cover more companies.
A more forgiving school of thought has suggested that the auditors of Satyam may have simply succumbed to the pressures of time and, therefore, chosen to overlook the bank and cash confirmations. If this is true, it raises a different issue, namely, the fashionable but purposeless race to publish accounts as soon as possible once the quarter is over.
Sebi allows companies to publish their accounts up to 60 days after the end of the quarter and 90 days after end of the year. Yet many companies, including those in the information technology sector, announce their results within 15-20 days of the month-end, placing their auditors under intense pressure to complete their processes.
Nothing gainful is achieved by this and it is quite possible in this case that granting more time to auditors to conduct checks could have helped. Sebi should insist that companies not publish their accounts for at least 30 days after the end of the year to insulate auditors from undue pressure.
A second category of individuals who face the heat include Satyam’s independent directors, now relieved of their charge by the government.
The credibility of Satyam’s directors was damaged more by their lack of opposition to the Maytas deal than their inability to detect accounting fraud. This credibility can be rebuilt if more independent directors indulge in and provide evidence of vigorous debate and a willingness to ask awkward questions.
As I mentioned in my previous column, independence needs to be measured by actions, dissenting views expressed in the minutes and voting patterns, and not by the eminence of the person concerned. Regulators may want to consider having a committee which undertakes selective checks of board minutes to draw inferences about the relationship between the chief executive and the board and to assess whether there is healthy debate.
And finally, a note on organizational culture, a soft factor, sometimes confused with edgy dress sense, wine and cheese Fridays and campus discotheques. As is likely, organized accounting fraud on this scale would usually happen only with the connivance of several senior persons across the company. Even the maligned Enron had at least one employee (Sherron Watkins, the vice-president of accounting) who had blown the whistle. Satyam appears to have had none. If more than one person in Satyam was involved in this scam, clearly something in the prevalent senior management culture at Satyam did not encourage them to raise the alarm.
If this drama proves anything, it is that after all the disclosures, representations, certifications and audits are done, the investor is left with only one shield against fraud and that is the integrity of the chief executive. No regulation can assure that, but after the Satyam episode, investors would do well to factor that in, when they buy stocks.
Govind Sankaranarayanan is CFO, Tata Capital Ltd. He writes on issues related to governance. The views expressed in this column are personal.Write to him at firstname.lastname@example.org