As per a news report, PwC, the auditors of Satyam, could use a 1986 Bombay High Court ruling which absolved the auditor of wrongdoing if they were provided with fake information. PwC could claim that, as per the standard contract between auditors and clients, it was the latter that was required to give the former accurate information. What the auditor can do is to make random checks to verify the authenticity of that information; it cannot do a 100% check. For more thorough checks, the company would need to hire a detective a-la Pink Panther, and not an auditor! This argument is amazing! One wonders what it is the auditor is getting paid to do. If information is accurate, it is merely double checking but if it is wrong, does the auditors' stamp of approval not mean a thing? It seems that everybody is first in line to collect fees but last in line to accept responsibility.
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ICAI, the regulatory body for chartered accountants, now reveals that the two signatories to the Satyam accounts were partners of Lovelock and Lewis, which is a member firm of PwC, and not of PwC itself, as required. Was ICAI, then, also asleep at the wheel?
Were the random checks PwC says is what it is required to do, in fact carried out? Would even a random check of bank balances not have, by simply calling up a few banks ostensibly holding the deposits, have revealed they were not? Were the auditors not asleep at the wheel?
The fraud perpetrated by Ramalinga Raju throws forth a new revelation every now and then. It seems that 13,000 of the assumed 53,000 employees were ghost employees! The amounts paid to them, over 5 years, some Rs 240 crores, can be assumed to have been siphoned off! Senior people in Personnel must obviously have been aware; such large numbers of fake employees on the roster couldn't have escaped notice. More serious, though, is the laxity of the bank in which the accounts of such fake employees must have been opened. They have obviously been rather lax in their KYC. Were both the HR department at Satyam and the bank at which fictitious accounts were opened as a group, asleep at the wheel?
Regulators, too, are asleep at the wheel. Only now have they realised that it is vital to be informed about any pledge of shares by promoters. Raju and family have apparently pledged the thin shareholding they had and so have very little to lose. SEBI has only now made it mandatory for such pledges by promoters to be immediately disclosed to the company which, in turn, must disclose it to the stock exchanges.
It would also be a good idea for banking regulator to insist that any bank, when asked for a duplicate deposit receipt, must automatically and immediately, make the fact of it aware directly to statutory auditors.
The new board of directors nominated by Government is hoping that some $ 350 m. of receivables would help it tide over the immediate cash crunch as, without proper audited accounts, no bank would be willing to lend it money. It seems that these may also have been pledged!
The Satyam episode will have far too many, negative, ramifications and the guilty must be severely dealt with. It is curious why the Andhra Government has not yet allowed access to SEBI to commence interrogation; it would, after all, be the most suited to investigate a white collar crime. Amazingly, a city court also rejected SEBI's plea to allow custody of Raju, his brother and the CFO, for investigation! Hey! SEBI is on the same team!! One hopes that the invisible hand does not scuttle the investigation; were this to happen one can kiss the India story goodbye for a long time. One could also kiss the reelection chances of any Government that allows perpetrators of such massive fraud to walk away, goodbye.
Investors have now began doubting every audited balance sheet, have started wondering about the genuininity of every bank balance and are sceptical of the seriousness to investigate by a polity that is tainted itself. This augurs ill for the market.
Results for the third quarter ended Dec make for sombre reading. India's largest private sector company, Reliance, showed a Q3 dip of 9.8 per cent in net profits, to Rs 3501 crores, primarily due to lower refining margins. Bharti Airtel's profits after tax grew at an encouraging 25% clip, to Rs 2159 crores. Despite inflation now under 6%, there is a slowdown in demand, hence Q4 results can be expected to be worse. Combine that with the loss of confidence by investors, aided by the fraud in Satyam and the insipid progress in bringing all involved to book, and one cannot be too sanguine about 2009.
Little wonder that the market slid last week, with the BSE-Sensex falling 649 points, to 8674. Major contributors to the fall were ICICI Bank (92 of the 649 points), RIL (71) and HDFC (59); in aggregate accounting for over a third. The NSE-Nifty falling 155 points to 2678.
Last week saw the change of guards at the White House, after the handing over of the presidency to Barrack Obama. Markets, though, did not cheer. He has challenges to face on several fronts, each requiring more attention than one person could possibly give. Globally, financial institutions are in a mess; witness a second bail out package by the UK for banks. The UK Government stake in RBS will go up to 70% after this package, more than our Government's stake in all PSU banks! This is how badly financial institutions have been tainted in the developed world, building up a portfolio of assets, now toxic, using the easy liquidity created by the central banks. Obama would be compelled to pump in more money, if only to save his people from unemployment and starvation, although it was excess liquidity that caused the problem. The global problems are going to worsen before they start getting better.
Funnily enough, the advise for investors would be to become, and stay, liquid. Investor faith in the fairness of the system has been shattered and the Government/regulators/judiciary are doing nothing to bring it back. Fie on them!