Thu, 08 Jan 2009

Satyam: old lies and new truth or new lie?

This is my fourth post on the Satyam fraud, and what I am concerned about in this post is the willingness of people to believe a liar’s confession blindly. To my cynical mind, the fact that a person admits to have been lying for several years is reason to suspect that what is put forward as the new truth might just be a new lie.

What makes me more suspicious is that the “confession” actually paints the most benign picture possible. What the Satyam Chairman is saying that he never siphoned any money from the company. While many people suspected that Satyam profits were diverted to group companies, the former chairman is saying that the profits were never there. He is also trying to paint the Maytas deal as a last ditch attempt to save Satyam instead of the other way around.

My question is why should we believe all this. How credible is the claim that an IT business with a blue chip client list was not profitable? How credible is the attempt to exonerate everybody else? Should we consider the possibility that the problems were in other group companies of the promoters and that Satyam lost everything while trying to bail them out?

The finance profession is supposed to train one to be skeptical and cynical about everything. The lack of sufficient skepticism and cynicism is itself a cause for concern as it suggests that markets are still too trusting.

Posted at 10:34 on Thu, 08 Jan 2009     13 comments     permanent link

Comments...

madhur joshi wrote on Thu, 08 Jan 2009 10:50

Re: Satyam: old lies and new truth or new lie?

Raju has alleged that none of the board members past or present were aware of the real situation against the book of accounts. What has left me astounded is how could the elite independent directors be caught unawares of the scam being going around for the last several years ?Were they mere spectators obliging to Raju?Doesn't it seem like a white lie?

• Jim wrote on Thu, 08 Jan 2009 18:29

  Re: Re: Satyam: old lies and new truth or new lie?
  

  In my opinion 95% probability that the directors were aware and involved, 4% probability that they were aware and mere spectators and 1% probability that they were unaware.

A Student wrote on Thu, 08 Jan 2009 14:01

Re: Satyam: old lies and new truth or new lie?

A request: since you are/were on the Boards of some of India's most reputed companies, can you discuss: a. As a (prospective) board member, how did you convince yourself that the company's management and promoters displayed sufficient integrity so as to make you comfortable with sitting on the Board?

b. As an independent board member, how did/do you double-check management's statements regarding the business and financials? On the audit or other similar committees, how did you guard against the possibility of the numbers being fictional?

c. How do you manage the inherent conflict of being nominated and paid by management/majority stakeholders, but having fiduciary responsibility towards all shareholders (especially minority)? A related question of course is, how often in practice does such a conflict surface?

I would be obliged if you could discuss these in as much detail as you feel is appropriate.

Rajesh wrote on Thu, 08 Jan 2009 14:36

Re: Satyam: old lies and new truth or new lie?

The National Stock Exchange removed Satyam from its main Nifty index after the benchmark slumped 6.2 percent. Was it the right decision ?

Moose wrote on Thu, 08 Jan 2009 18:53

Re: Satyam: old lies and new truth or new lie?

Excellent post! I've had the same concerns and was surprised to see that most people are taking Raju's words at face value. It looks to me like he is taking all the blame and trying to protect someone who is either dear to him or someone who is very powerful (politically)

leonidous wrote on Thu, 08 Jan 2009 22:27

Re: Satyam: old lies and new truth or new lie?

"u r not a liar until u r caught".the Satyam fiasco is just the tip of the iceberg.I am unable 2 comprehend the way auditing was conducted by PwC, arguably the best in the business.A serious Fraud Detection Agency must be set up and all the major companies' statements should be scrutinised.we can't afford another Satyam-like episode.

Venkat wrote on Fri, 09 Jan 2009 00:30

Re: Satyam: old lies and new truth or new lie?

Sir, 1. I see the timing of this in the light of your posts on 27/10/08 - Policy choices for India - where you say "We have not yet had our Bear Stearns moment, but that moment will surely come" and on 27/11/08 - Show me the balance sheet.

If the slowdown and liquidity crunch, (Satyam could possibly not even display the need for raising money with its already cash rich balance sheet)have forced this, then this is probably not going to stop here. We might actually see another company going down. Incidentally, I wonder the exposure different instituions would have had to Satyam employees and the spillover effect it could have.

2. I believe there were certainly internal and external people who had knowledge of what was going on (When a promoter having a single digit stake pledges his shares, a few eyebrows must have gone up and asked a few questions). Going by the former Chairman's letter where he takes pains to absolve a lot of people, I even think that either there could have been a remote control which operated him, or he wants to be a remote control.

3. It appears that there is lot of interest on 'how it happened?' and 'how much?' than on 'why?'. The motive for this does not appear to be what Raju has claimed to be.

Shankar Venkataraman wrote on Fri, 09 Jan 2009 10:38

Re: Satyam: old lies and new truth or new lie?

Prof. Varma:

Valid points, but I am wondering - who are these influential people who are ready to believe anything (let alone everythng) that Raju has to say in his letter?

The president of the ICAI has made it clear that he is not ready to take the letter at face value http://www.business-standard.com/india/news/icai-president-doubts-veracityrajus-letter/19/36/52478/on

KPMG has expressed their doubts about the claims in the letter http://economictimes.indiatimes.com/articleshow/3955127.cms

And a routine report from the TOI http://timesofindia.indiatimes.com/Business/India_Business/Rajus_letter_on_shareholding_misleading/articleshow/3949237.cms expresses doubts about the claims made in the letter.

I think there are enough people who doubt the contents of the letter.

Satheesh Kumar T.N. wrote on Fri, 09 Jan 2009 15:40

Re: Satyam: old lies and new truth or new lie?

Some of these questions have been passing through my mind too. How could Satyam alone fail to make money in an industry where margins and profitability are high? That is the impression created by Mr.Raju when he said that merging Satyam with the Maytas companies was the last straw to save Satyam. Or is it that all the IT companies(Infosys, TCS, Wipro and the likes included) face the same problem and overstate their profits? Mr.Raju might have disclosed very little and whatever he disclosed might not be true at all. How could Mr.Raju expect the deal of acquiring Maytas companies would solve the problem because if the company had kept the money in bank(keeping Rs.5161Crors in hard cash which might have enabled the deal to go unnoticed and the auditors failed to verify the balance cash is beyond anybody’s imagination) and in which case cheque had to be issued to the promoters of Maytas which would have been verified and certified by the auditors?Also, the cheque would have bounced as there is no cash in the bank according to Mr.Raju and hence would again have come to the notice of auditors.And why did the board including the independent directors not raise a question reg the idle cash and bank balances of such huge amount? Were there any imminent plans for investments?Were all the cash in the form of hard cash or bank balances or were they also in the form of near-cash equivalents like money market instruments? I sincerely feel that Mr.Raju is hiding more information than he chose to disclose.We are still not able to even partly unveil the story and say what went wrong. There might be more issues than apparently meets the eye. The regulator SEBI also gets annual reports from companies as filing the reports is mandatory. Why don’t they do some random checks so that the erring companies can be pulled up then and there rather than making an enquiry and punishing the guilty after all the damage has been done?Mr.T.T.Ram Mohan of IIMB in his article in ET,8th Jan suggested that a Board for Audit and Surveillance(BAS) be created to carry out surprise audits of any listed company above a size, on the lines of CAG which does additional audit of the public sector companies, which is laudable. I feel that the body can be attached to SEBI as SEBI does the surveillance for corporate governance in the country. Rather than worrying about the various provisions under law to punish the guilty, we have to move to a structure and framework to prevent such frauds from happening inflicting miseries to large numbers of employees, investors and other stakeholders.

Kash wrote on Sat, 10 Jan 2009 02:31

Re: Satyam: old lies and new truth or new lie?

Sir we heard that you'll be part of the new board committee of satayam is it true? if yes then what will your intimidate steps

Gaurav wrote on Sat, 10 Jan 2009 00:53

Re: Satyam: old lies and new truth or new lie?

is PWC too big to be punished?? wat shld be there quantam of punishment

• Thommy wrote on Thu, 15 Jan 2009 17:24

  Re: Re: Satyam: old lies and new truth or new lie?
  

  PwC should go the AA way

Thommy wrote on Thu, 15 Jan 2009 17:23

Re: Satyam: old lies and new truth or new lie?

Satyam lies could be many... fictitious billing and receivables (to boost sales), fictitious payroll (to boost head count and siphon out salary to benami accounts), fictitious sundry creditors (to siphon out cash) unfair valuation of receivables (again to boost sales). The challenges are too many, how to know who are the 53000 employees (how to line them up and do a head count and identity check)???