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The culpability of Satyam’s auditors

January 9, 2009

If Satyam Computer Services Ltd could show non-existent cash reserves of Rs 5,040 crore on its balance sheets and had been fudging its books for several years, it seems obvious that just one man, Raju alongwith his relatives, could not have done this by himself. There must be others in top management who were in cahoots with him because how could they not have asked questions about the  fact that reserves and surplus of Rs 2,517 crore (March 2004) had almost tripled (Rs7221 crore) in just four years? Surely they must have asked how?

The company’s balance sheet has to be signed not just by the chairman and managing director but also by the company’s chief financial officer, and the  independent directors are also supposed to ask questions. Okay, so  the independent directors are often simply stooges, but what about the auditors who are the final stamp of authority?

Promoters and company owners can be greedy and dishonest, but that is exactly why there are auditors aren’t there, to protect the shareholders’ interests.

What were the auditors doing?
It is difficult to believe that proper accounting and auditing procedures were followed by Pricewaterhouse, the Indian arm of the global accounting firm PwC. Did the audit firm get a bank certificate confirming the actual cash balance? Clearly they didn’t get any such certificate directly from the bank. Instead, they could have relied on the company to provide it and if so, the certificate must have been forged. The ICAI (The Institute of Chartered Accountants of India) has made it mandatory that the audit firm should get verification of such a certificate by the bank, but this couldn’t have happened. The worst thing for Pricewaterhouse is if they did not get any bank certificate at all.

And then when it comes to tallying assets, or checking operating margins, these also need to be checked by looking at the paperwork from the company (often this is done on a sample basis) but Pricewaterhouse couldn’t have done this either.

But why was Pricewaterhouse negligent? Were they really negligent? After all, the discrepancy in the balance sheet is not small. In any case the job of an auditor’s firm is to be alert to fraud at all times and have plenty of what they call “professional skepticism.” Taking this into account, here are two scenarios:

  1. The auditors (or some employees of the audit firm) could have been taken into confidence by the management of the company and the books fudged with their full knowledge
  2. The auditing firm was inefficient and lazy

Exploring scenario 2 a little further, and assuming that a leading “professional” audit firm has been incompetent, we can think of some reasons for their incompetence:

  • The audit firm was naive and stupid and trusted the management of Satyam completely and so neglected to do their job
  • They were terrified of questioning the management for fear losing their business. They could also have been in complete awe of Satyam’s brand name and the promoters and dared not question anyone. Considering that ass licking is not something unknown, this could be so as well.

Although one cannot rule out scenario 2 (stupidity and asslicking), it seems more likely to me that scenario 1 (auditors knew what was going on) took place although the firm will try very hard to say they were incompetent.

Interestingly, the World Bank had pulled up Satyam as far back as 2006. It had informed the US Justice Department that it suspected Satyam of bribery and in 2007, the bank found some irregularities in the functioning of Satyam, but there is no reason to believe that the auditors were not made aware and asked to “help” with the problem, because as per World Bank rules, Satyam had the “chance to argue why it shouldn’t be banned” (from doing business with the WB.) And this happened as far back as 2007! And then in February 2008, the World Bank temporarily suspended Satyam from bidding on new contracts (with the WB), and then in September 2008 formally made the firm ineligible to bid on future contracts!! However none of this information was made public. Apparently, the World Bank debarment was for for ‘improper benefit to bank staff’ and ‘lack of documentation on invoices’. And this information was made public only on December 23rd when it was announced that Satyam was banned from doing any business with it for 8 years.

Problems in other parts of the world as well
That big reputed auditing firms get embroiled in accounting scandals is well known and this wiki list of accounting scandals illustrates this. Whether its Deloitte & Touche, Ernst & Young, KPMG or PricewaterhouseCoopers (the American mother of Pricewaterhouse in India), they have all been in deep waters. In fact PricerwaterhouseCoopers worldwide has been involved in scandals relating to Bristol Myers, HPL, JP Morgan Chase, Kmart, Lucent, MicroStrategy, Network Associates, NKFS and Tyco.

And our very own Indian Pricewaterhouse has been been in trouble earlier as well. Its auditing of the now defunct Global Trust Bank fell under suspicion. In that case, Pricewaterhouse was “unable” to detect huge levels of NPAs (Non-Performing Assets). And another entity of PricewaterhouseCoopers, Lovelock & Lewes, was found “guilty of manipulating share prices and falsification of accounts” of DSQ Software in India.

It’s surprising that despite its slip-up with Global Trust Bank, Pricewaterhouse did not lose its impressive roster of clients in India. Apeejay Tea, Bayer, Blue Dart, Bosch, Colgate Palmolive, Cummins India, Glaxosmith Pharma, Goodyear India, HCL Infosystems, HCL Technologies, Ingersoll-Rand, Marico, Maruti Suzuki, NDTV, Mastek and UTV Software are just some of them. Perhaps accounting scandals of the kind that happened with Global Trust and Pricewaterhouse are not a big deal in the accounting world?

In India it is thought that the controls on audit firms should be tighter. Rotation of auditors is a solution that has been bandied about for some years now. Finally this was okayed earlier this year (to come into effect by April 2009) by the ICAI. However, this requires the auditors to change only after seven consecutive years and that too this rule applies only to listed companies. One wonders whether the ICAI will now reduce this time period.

But even if the rotation idea is implemented, one has to be sure that loopholes are not taken advantage of. For example, audit firms could well be the sister firms of each other, and this defeats the very purpose of the rotation. Also, a minimum period before the same auditors re-join needs to be strictly implemented as otherwise this too will be defeating the very purpose of the regulation.

Perhaps India should should implement a “dual auditing pattern,” what they call a second audit, much like a second opinion. For example, in France and Denmark, there is the system of a joint audit, particularly for listed companies.

Other solutions that have been proposed are that audit firms should not be allowed to get more than half their fees from just one client, because this will tempt them to collude with the client.

Overall, there needs to be a greater scrutiny of the accounting firms, and their being blue chip should not come in the way! If they make some “mistake” all their clients need to be informed as to what exactly happened. Needless to say severe penalties even for small errors have to be implemented. Measures such as these will restore the confidence of the world in India’s accounting practices.

As for the erring firm Pricewaterhouse, well, the ICAI has promised strict action against any person in the auditing firm if found guilty. Disciplinary proceedings have already begun against the firm.

What’s the future for Satyam and Pricewaterhouse?
One wonders what will happen to Satyam. The company has already suffered a terrible beating at the stock market and the latest news is that the liquidity position is so bad that salaries may not be paid for January. Coupled with the ongoing recession, this scandal has affected business. So will there be a take-over by another company? Or will there be a new management which will restore confidence? I think everyone is looking to fresh faces in the top management. The worst thing that can happen is that the company goes bankrupt due to loss of business and law-suits.  As for Raju and Co., they could face a jail term. As of now no one knows the full extent of his machinations. He has admitted only to cooking the books but more revelations could be in store.

Where Pricewaterhouse is concerned, it is believed that the investigations by Sebi, ICAI and the RBI (Reserve Bank of India) will take months and if the firm is found guilty, then it could even be de-barred from doing business, for good.

Like Satyam, Pricewaterhouse too could face lawsuits, particularly class-action suits. Already two such suits have been filed in the US against Satyam (Satyam is listed on the New York stock exchange.) Lawyers representing shareholders in a class action suit don’t charge their clients and get a percentage of damages awarded by the court.

(The cartoons are by Anshul of and specially made by him for this post. Thanks Anshul! Photograph of the Satyam building is copyrighted to me.)

Related Reading: Corruption in India
Do top management deserve their high salaries?
Any lessons learnt from the Uphaar tragedy?
About fake stings and fraudulent journalism

58 Comments leave one →
  1. January 9, 2009 9:42 am

    Hi Nita, as you have analysed the possibilities of the auditing firm “could have been taken into confidence by the management of the company and the books fudged with their full knowledge”, i would like to go further and suggest that it could have advised the “One who rode the tiger” these very measures. After all, professionals leave these mundane issues to the experts to handle.

    Again there is possibility that the letter itself could be a jhootam!

    Thanks Gopinath. And well, that is not something that I thought of, about the auditors themselves advising their clients! 🙂 As you said, the auditors were the experts! 🙂 – Nita

  2. January 9, 2009 9:56 am

    these things sucks big time!! 😦

    and hey, great work anshul!! (as always! 🙂 )

    Anshul’s cartoons really livened up the post didn’t they! – Nita.

  3. January 9, 2009 9:56 am

    Nita, the solutions you have come up are excellent. Especially of the dual audit one. So that would mean more cooks to cook-up the financial broth. The cook used to serve hot fudge as dessert. But now Raju would have to “eat crow”! Your blog-readers would like to read more about it in my latest post.

    Thanks for your comment and wish you and your family a very happy new year too!

    Well, the solutions are what I read about. And happy new year to you too. – Nita.

  4. January 9, 2009 10:09 am

    A well knit post…

    I didn’t know about satyam being banned from not bidding….more than employees,i think it has to do something with the partners of pricewaterhouse….I don’t think the rotation policy will have that big an impact..for all you know,the company might be able to do the same thing and in fact it would become tougher to place whose mistakes it is,if they keep rotating…

    End of the day,there are those greedy people(Though Raju in his letter says he didn’t take any of it) will exist and they will have the support…And maybe this is not greed too,it is a necessary evil,maybe…
    What surprises me the most is NDTV’s audting firm being pricewaterhouse…because they were the ones who were ripping apart the firm and Raju…

    After I read your comment I thought perhaps I hadn’t been clear in my post. Satyam was banned from working with the WB. And more reading on this (I have added this link as well) showed that Satyam was accused of bribing an employee in the WB to get their business, and then later there was some falsification of documents as well. About Raju not taking any money, true he said it in the letter, but I highly doubt it. – Nita.

  5. January 9, 2009 10:50 am

    Nita, it’s all the fault of the state and their stupid regulations. Let free market work and scandals like Satyam’s won’t happen.

    You don’t need a smiliey or a “tongue” tell us what you mean! 🙂 – Nita.

  6. January 9, 2009 11:31 am

    @ nita : Very nice post. This screams Enron all over does it not? So what did we learn from Enron? Nothing. Zilch. Corporate thieves when they run around freely do not get targeted because they are creating jobs, building the economy. What about the government? Is it completely absolved of the responsibility since they are playing regulators? Do they have no corporate intelligence? Any one wants to wager that they would not have known at all?

    Someone should drag the auditors and the government to court over this as well. The only solution now I see is the nationalization of the company and its sale.

    Odzer, thanks. And Maytas (The company Satyam wanted to buy at an inflated price) has been involved with the Metro project in Hyd, enough reason I guess for the government to turn a blind eye! The AP CM Reddy had once made a statement that AP was getting the Hyd metro for free, such was the financial arrangement between him and the Satyam group! Well, nothing is free in life is it!! However I d o not think the govt. knew. That some hanky panky was going on, well, some sort of hanky panky goes on in most companies, and people must have known that. What no one must have expected is that the fraud would be of this magnitude. We have a habit in India of turning a blind eye to minor misdemeanors and this is what it leads to! About nationalisation being a good idea, I don’t know and I feel apprehensive about it. – Nita.

  7. January 9, 2009 11:55 am


    Good post.

    Friends of mine in the financial services business have been telling me the mechanics of how audit happens and since the fraud was built progressively over the years, there is another possibility (however low its probability) – that PwC was fooled by some kind of margin of error.

    While everyone will instantly think of tighter regulation, we have to ask if the current ones aren’t being enforced well, how will additional regulation help anybody? Because looking at the Madoff Scandal, there really is no regulation that can protect against one person’s/ agency’s intentional dishonesty. Satyam also has precedence in Enron and Parmalat.

    I think the interesting question here is of the class action lawsuit. If the firm wasn’t trading in the US, the question would not even arise. PwC can expect some interesting days ahead! There is also the possibility of suing board directors for negligence.

    And the mention of directors reminds me: One of them was the Dean of Indian Business School. Ooh, you don’t say! 😉


    Really? Nationalisation and sale? And pray, who will buy a company whose assets, revenues etc all are under a pall of suspicion? 🙂


    Somehow I thought you would say that but the real audience for your t-i-c comment is not here 😉 Yet.

    Shefaly, thanks. Yes ofcourse, if current regulations are not being enforced how is more regulation going to work. As I mentioned in my reply to Odzer’s comment, one needs to come hard on every little transgression and only that will bring the fear of god into these companies. – Nita.

  8. January 9, 2009 12:08 pm

    I think this should also come as a wake up call to the Indians who have a ‘lets privatize everything in sight, then it will be less corrupt’ mentality.

    Well, I do see this as a wake-up call, but more for our law enforcement agencies. – Nita.

  9. January 9, 2009 12:27 pm

    @ Shefaly : The government can run the company for a while if it must then till things are clearer. Otherwise it is curtains as far as I can see.

  10. January 9, 2009 12:39 pm


    I think things will be ‘clear’ pretty soon because at least some major clients will abandon ship, good employees will too. Shame it is a downturn else I would bet on the entire good staff being poached overnight.

    The government should run the business of governing. Even in a change to public ownership (note: change to), governments rarely interfere with management issues; they may ask for change of board members or force a new CEO’s appointment.

    The company may disintegrate but its valuable component parts – employees, client relationships etc – will go elsewhere and create value there. This is one time when people with fancy titles are probably glad that they are after all cogs in the machinery, nothing more significant or culpable 🙂

  11. January 9, 2009 4:05 pm

    @ Shefaly : Ordinarily I would agree with you but the circumstances are such that the government should move rather quickly and take over the management. Perhaps you are right that a new board ought to be constituted. In any case it also has to do something with the confidence in this industry itself, if the company flounders. Its not only about value, its also about accountability. The government definitely is accountable in this case and so it must take some responsibility. In any case corporates have caused enough damage this past year and we have seen the result of “we will regulate ourselves, thank you very much. trust us.” mentality. The time has come when publicly traded companies become accountable to the public. People who invest in such companies must be able to at least trust a balance sheet. As for the auditors I hope they get sued for every cent they own.

  12. January 9, 2009 4:09 pm


    We just have to disagree on this one. 🙂

    Knee-jerk reactions are never a clever idea. As for investor interests, well, do you really believe investing happens on fundamentals? Neither professionals nor day traders do that. Most do not have the skills and where they do, the real valuation is tempered by things like the CEO’s propensity (or in many cases, not) to wine and dine the analysts. This is not about one worm, it is about a can of worms. Regulating one worm won’t do much for controlling others 🙂

  13. January 9, 2009 6:06 pm

    ..most of the companies lie so that the quarterly/ annual report looks good and so that the graph will rise higher.

    People who do audit are also the makers of law that make them. They will appear to change as a snails pace. And as for satyam as shefaly says ” who will buy them?” Like it happened to Lehman, if satyam breaks – they will be sold in pieces. Auditing is a whiz’s game – you can be technically correct, still keeping with the laws, until some insider leaks information and shows evidence black and white. High profile politics and business are intertwined. They mutually benefit and mutually take a hit. ..

    the harshad mehta scandal ( not same) was a green light to many businesses ” keep calm and carry on” till you get caught.

    business thieves or should i say economic bandits or company terrorism – what sounds better ?

    the pity is – the capitalists are making capitalism look bad.

    Thanks anrosh. There is always one buyer for Satyam, the government! 🙂 They have been looking with envy at these profit making IT companies for a long time and now they have their opportunity! – Nita.

  14. January 9, 2009 6:44 pm

    For starting any business, they should think about the demand in market. I know that IT is not having great demand in Indian market. But I didn’t imagine that IT can cause loss @ 8,000 crores or 10,000 crores by a single company. All of the Andhrites know that Chandra Babu Naidu concentrated much on IT sector and neglected all other sectors. Even YSR tried to follow the foot steps of Chandra Babu Naidu. If every capitalist does IT business, then who will invest in cement, fertilisers and other industries? Market can expand if capital is invested in different businesses but so much extent of the capital has been wasted for investing in IT services. Even now, government can think about alternatives modes of capital investment. But the government didn’t learn lesson.

    I guess it is true that people have been fascinated with the glamour and riches that the IT companies have brought. But in any kind of business, funny things can go on. – Nita.

  15. January 9, 2009 7:42 pm

    Its a shame to the image of India and its IT sector in global market. Its sad to know that even the IT sector has its share of corrupt men who embezzle money from company. Its sadder to know the innocent common people will lose jobs now.

    Somehow I feel that our IT sector is still one of the best as compared to our other sectors, but ofcourse there will be bad eggs here too. – Nita.

  16. Rashid Faridi permalink
    January 9, 2009 8:46 pm

    Good Analysis

    Thanks. 🙂 – Nita

  17. Sudhir Jatar permalink
    January 9, 2009 9:02 pm

    Why blame the ‘independent directors’? Nita says,”.. the independent directors are also supposed to ask questions. Okay, so the independent directors are often simply stooges, but what about the auditors who are the final stamp of authority?” The auditors are the real culprits because they are supposed to check the documentary evidence such as bank statements, etc. Independent directors are not supposed to check the documentary evidence substantiating the audits. Else, they become auditors themselves.
    As for “independent directors are often simply stooges”, perceptions differ. It is correct that no private company wants nosy independent directors or directors who ask too many questions. But it is rather a generalised statements that, “independent directors are often simply stooges”.

    Sudhir, perhaps “stooges” is a harsh word, but the fact is that in Satyam’s circumstances at least I feel it is apt. – Nita

  18. Dev permalink
    January 9, 2009 9:03 pm

    Nice post Nita! I wonder what’s going on right now in the minds of thousands of talented & hard working Satyam employees, who are going to be really affected by this scam. Good luck to them!

    I don’t even feel like thinking about the employees, I just feel terrible thinking of it! – Nita.

  19. vasudev permalink
    January 9, 2009 9:42 pm

    Hey Nita! You have too much brains! I will keep away from commenting on the topic

    Vasudev, thanks, but your viewpoints are always useful! – Nita.

  20. January 9, 2009 9:48 pm

    Shefaly, once in a blue moon, I mess around with my comments. 😉
    I thought of putting a “toungue-in-cheek” or an emoticon, but decided not to. 🙂

  21. January 9, 2009 9:49 pm

    Ahem.. “tongue”

  22. vasudev permalink
    January 9, 2009 10:15 pm

    Nita…FOR A SEPARATE TOPIC IF POSSIBLE… do you think the oil co. strike and its quelling were justified?

    Vasudev, I think the oil strike itself was unjustifed as no one has a right to cripple the economy of the country, and certainly not a handful of priviliged people! As to a post, well, I need to see if I can add anything that news articles haven’t done already. If I can’t, then usually I don’t post on a topic. – Nita.

  23. January 9, 2009 10:24 pm


    It is not a shame for India alone. This is the undesirable fruit of a hyper-connected global economy. Lets stop beating ourselves up and look up Enron, Parmalat, Robert Maxwell and so on. My Satyam post on the work blog was not huge but the comments are very instructive if you are interested.


    I ‘know’ you long (and dare I say, well) enough to not need symbols any more 🙂

    Sudhir Jatar:

    Their directors were all experienced businesspeople and academics. I daresay that their somnambulance has definitely made a contribution to this situation. There is no way a $1Bn hole can be created without _someone_ being either complicit or asleep at the wheel. In reality, probably both.

  24. January 10, 2009 1:17 am

    Nice post Nita. I am sure there are many more cases like Satyam yet to be exposed. As far as the letter is concerned I am sure Raju is trying to divert the attention of the shareholders and there is a bigger scam waiting to be unearthed.
    As you said, rotation of auditors is a good idea and is being considered by ICAI for the last few years but there is very little chance of it being implemented because the main beneficiaries of the present system are the members of the board and they won’t like to hurt their own interests.
    Shefaly, I don’t think there is a possibility of PWC being fooled. Even if PWC was not actively involved in this scam, they surely closed their eyes. I was talking to a few auditor friends of mine and all of them were of the view that any sensible auditor would be able to detect a fraud of this magnitude.
    Odzer, I agree with Shefaly, nationalisation is not a good idea. Government should only be governing. In any case nationalisation would mean that government officers would be provided one more avenue of making money and getting free air tickets and free holidays at the expense of Satyam share holders.

    Absolutely Prerna! There is a huge scam waiting to be unearthed! I am quite sure he has diverted money but the truth will eventually come out. About the rotation, yes, that’s true what you said, but a second audit on a sample basis? Well, I am saying that because it came in the papers today, the govt. is thinking of picking out some company or other and rechecking its audits…but I am sure this too will get mired in corruption eventually! – Nita.

  25. Naveen permalink
    January 10, 2009 1:35 am


    Your comment reminds me of an old roomate, who used to tell us every day, a tale of a cheating housewife and give us yet another reason, why not to marry. I believe that fraud has something to do with human nature and it is immature to put the blame on privatization.

    BTW, my roomate is happily married now.

  26. January 10, 2009 1:36 am

    @ Prerna/Shefaly/Nita : The latest I hear is the government has moved and fired the board. As I had anticipated this board could possibly not run this company anymore. The government has stated that they will appoint 10 new board members. Any company that goes down in such a way has basically only limited options in my view. Either it can be taken over by the sovereign or it can go down the drain. I think getting taken over and salvaging something out of it is not a bad idea. Also prerna I disagree the Government of India runs several profit making enterprises. There is no reason to doubt their capability of running a small IT firm :p

    Isn’t the government a big business organisation anyway? Some investor confidence should now hopefully return in the industry.

  27. January 10, 2009 1:40 am

    @ Shefaly : I agree we should disagree. I do not view as “resources”. The value they have is of secondary importance to me than their well being in this case. I think one of the functions of governance is also well being of the subjects or citizens they govern. The government has every right to interfere in business when there is such blatant economic terrorism at work which affects so many people. I am surprised it took them the whole day!

  28. January 10, 2009 1:42 am

    @ Shefaly : Ugh my 1:41 am English is showing up. The second line should read, “I do not view people as resources.”

  29. January 10, 2009 5:59 am

    Sadly, people are either ignoring, breaking or seeking loopholes in the law. It’s Enron, WorldCom and Arthur Andersen all over again. Govt can keep making law, but whether corporates abide to it, is a whole other discussion. I agree with Prerna’s views, especially with regards to the auditors. But what really happened, is yet to be known, or not. I don’t see any improvements to corporate governance ever since the Sarbanes-Oxley Act was enacted.

    Rules are meant to be broken aren’t they! But I think this will teach the regulators a lesson and they will try and improve. – Nita.

  30. January 10, 2009 10:02 am

    I don’t think that IT can serve much of the population of India. 3 years ago, computers with i386 (32 bit) processors costed around Rs 15 thousand. Now, even those computers that are configured with AMD 64 bit processors are available @ Rs 15 thousand. Even today, many people in small towns and villages don’t use computers. Majority of the people of India are still agrarians. Rather than concentrating much on IT, Indian capitalists should think seriously about alternative modes of capital investment, accumulation and development.

  31. Nimmy permalink
    January 10, 2009 3:51 pm

    Nita,I honestly do not know why are we crying out loud on ths 7,000 crore rupees..Newspaper report it as if this was the most worst thing that could have happened to India..Agreed that this had a bad timing of happening during recession..But hypocritical indian cry babies are mouring as if arrest of Raju will make india shoot up its glory..uh..

    What is the loss for economy just by the strike in oil sector,a strike by those people who draw salary in 5-6 digits,for a hike..Any idea of how is harmed India,in this time of recession..7,000 is only a small amount as compared to the money going into the tummies of our politicians.Afterall,Mr Raju built it on his own and provided job to 50k + ..Everbody,inculding the employees and investors had made the most out of it during boom period..So,they needn’t mourn much..If one is so bothered about money wasted or vanished,go pick at those politicians and beurocrats who eat mine and yours tax without even doing work worth 5 rupees..

    Agreed that punishing him will set an example of law and order..But people are going to do it anyway if they want it..

    p.s:Nita,i don’t intend to hurt your feelings personally,but i am sick of reading patriotic comments regarding this in blogs and newspapers..I vent out my frustration here bcoz i think i have the freedom to take/spam some space of yours ..Please forgive me if i was rude,but i am just feeling bad about hypocritical nature of people…

    Nimmy, I do not see this as a personal comment at all so don’t worry! 🙂 And you are not alone in your views about Raju, there are others. Ofcourse I understand what you are saying, but my take on this is slightly different. I think a crime is a crime. For example some people say why make a fuss about molestation when there are so many rapes going round. Well, I think one needs to punish Raju, not just to set an example, but because he broke the law of the land. And as far as I hear even those who have struck work in the oil strike are being punished, but ofcourse they could eventually make a deal. But while I think their behavior is irresponsible and reprehensible, I think Raju has committed a bigger crime. Today there are reports that another client of Satyam’s, a London client by the name of Unpaid, is saying that Satyam did some irregular things. And I am also reading about some very sad stories about people who are now without jobs in Satyam. Lets hope they all hold together.
    And Nimmy it is not necessary for us to agree! You are welcome to express your feelings. – Nita.

  32. G.S. Chandy permalink
    January 10, 2009 7:40 pm

    India’s worst enemies (in order of ‘merit’):

    1. Crooked and incompetent politicians;
    2. Crooked and incompetent bureaucrats;
    3. Crooked businesspeople (who are obviously very ‘competent’ at their crookedness; not so competent at growing their businesses);
    4. ‘We-the-people’ – who do not take the minimum trouble we should to ensure that honest, effective politicians and bureaucrats are properly rewarded and crooked/ incompetent politicians and bureaucrats are properly punished and prevented from practicing their crookeries on us.
    5. Pakistan, the terrorists it sends out, China, the USA, …….

    — GSC

    That’s a nice list! – Nita.

  33. January 10, 2009 8:35 pm

    Hi Nita,

    Satyam has been a big jolt to all of us.

    When you look at Satyam afresh
    – We cannot trust the list of clients and contracts
    – The billing is fake – so sales and debtors go for a toss
    – Money recd. is shown as fictitious bank deposit
    – Or still better shown as fictious expenses
    – You cannot vouch that they do have 53,000 employees. This is another way you can siphon cash out…
    – Genuine expenses may be inflated to siphon of cash….

    It seems that Satyam had a whole dirty tricks dept which forged every conceivable document in a way that apart from Raju and his brother and the CFO nobody else was aware of the true state of affairs.

    This is not just an accounting or embezzlement case. This is a case of political nexus and crony capitalism at its worst.

    Large contracts get awarded and cash changes hands and nobody is bothered about the irrigation and port projects.

    Let me say a thing or two about Independent Directors. They can never be independent if appointed by the management. They get big amounts as fees and the odds are one in a million that something like this happen.

    But to e fair to Independent Directors, it is virtually impossible for them to smell something like this as all papers they get are very well scrutinised and the audit report is a big source of comfort. This could have continued for a few years more and everybody would have chugged along merrily, had it not been for Raju and his merger plan.

    Govt. nominated board is all fine but someone should know how to run this business…..The senior employees will have to be involved, however guilty we presume they are.

    Mavin, as usual you have given a lot of information in your comment. Thanks! – Nita.

  34. January 11, 2009 12:19 am

    Very nice post.Really Satyam scandal has come as a shocker.
    Do go through my perspective of satyam fiasco at my blog

    Your comments will be appreciated


  35. Vinod permalink
    January 11, 2009 3:41 am

    In UK law, auditors will not be held responsible all that easily in negligence to the shareholders, although the connection seems commonsensical. You may find it interesting to google for something like – “Law of Tort – auditors liability”. Auditors do not, in general, owe a “Duty of Care” to shareholders. I wonder how Indian law views the relationship between auditors and shareholders. I’m sure that the fact that the law puts the Directors (“Director’s liabilities”) acountable to shareholders through Company Law Acts and the fact that there is a contractual relationship between the auditing firm and the company, the law would shy away from burdening auditors further by making them liable in negligence to shareholders. Perhaps, auditing firms can be taken to task through some specific legislations related to auditing firms. Is there anything like that?

    Vinod, I need to check on this but I think if there is one person who might know this is Mavin, because he works in a finance company. – Nita

  36. January 11, 2009 10:20 am

    @ Naveen, since you addressed me. My comment is not against privatization but more against the expectation that privatization will end corruption.

  37. January 11, 2009 1:51 pm

    Ah Nita! I had just started making sense of all this for a post and you already have a thesis on it 🙂
    Great post. Naturally, I will refer to this when I write.
    To add to this exhaustive post:
    1) Here’s a Wall Street Journal opinion piece that suggests that one of the reasons that a whole lot of the management ignored the cooked-up books is most of them were either family or buddies of the Raju’s. How else can you explain this?
    You are right. There must be much more dirt that will be unearthed. No doubt there are several conflicts of interest that we don’t know about.

    b) About World Bank: Well, they probably wanted to keep it quiet because bribery was only a part of the problem. There was a huge security breach at the bank, and Satyam was found to be responsible for it!
    The news appeared in Oct. in the U.S.
    Read this piece (I missed it then) and check out the two people involved. Satyam and PwC (who were given the charge of investigating the breach)!

    Can this get any better?

    Snigdha, thanks a lot for these links. I was shocked to read about what happened at WB! Looking forward to reading your post. Also please check the link to your blog, it is not working. – Nita.

  38. January 11, 2009 6:10 pm

    I think this should also come as a wake up call to the Indians who have a ‘lets privatize everything in sight, then it will be less corrupt’ mentality.

    Free market capitalism never talks of utopia of honesty. What it claims is proper Market punishment for the corrupt, culprit.

    In the telecom scam of Sukharam in 1992-93, whole lot of money was of Indian Tax payers, we were the shareholders of the money embezzled. Same was the case in each of the scam/corruption of welfare state of India.
    Did we ever get any penny back? Was there any economic justice for the theft?

    But in the case of market justice, the stolen capital will be payed back to the investors from whom it has been stolen via bankruptcy of the embezzler.
    Also, as embezzler has lost all his market worth, he will never be able to do any scam or cheating again. he is at his end.

    If you compare it with Indian welfare state system, after Boforce scam, Rajeev gandhi’s family is still at the gear controller of Indian politics, no punishment no justice, even the case has been closed now. Narsimha Rao was discharged of any corruption, Natwar lal is still a defending politician, L.K Advani faced and denied all hawala charges, 95% of Indian MP’s are corrupt and criminals no less than Raju.

    There is no comparison of failure of welfare state and some freakish misadventure of a capitalist system. Why?

    because Welfare state itself is corruption.

    Gargi, welcome to my blog, and I agree that a welfare state tends to be corrupt. However making a true free market system work seems difficult. America has tried, but failed. They bailed out Lehmann bros and worse, their top honchos as well! – Nita.

  39. January 11, 2009 6:54 pm

    >>>but more against the expectation that privatization will end corruption.>>>
    Privatisation increases corruption and never reduces it. Practically, I am also a capitalist who owns private business. But I observed that many business people won’t follow ethics in business.

  40. Muhamad Rizal Avif Khan permalink
    January 11, 2009 7:26 pm

    India is nice country
    i have seen some wonderful india movie…
    they are so wonderfull…

    this is so so so so so great blog which has over 1 million hits. i’m sure it’s authors are smart which have wide analyzing skill…


  41. January 11, 2009 9:34 pm

    @Nita – Vinod

    The auditors in India are appointed by the shareholders at the annual general body meeting and they are therefore answerable to the shareholders.

    In the event of a corporate fraud like Satyam, where the auditors have certified the statement of accounts to be true and fair things should become simple.

    However, auditors will take the plea that they were given all documents and statements and the accounts did indeed tally with the documents / statements / contracts. They have already taken the plea that they went by normally accepted audit principles.

    Now the possibility exists that Satyam forged every document including bank statements and the auditor based their comments on such forged documents. This is a tough one to accept or prove otherwise.

    Then we have the Institute of Chartered Accountants who will sit in judgement whether PWC discharged their responsibilities in an honest / professional manner or there was neglect or worse still connivance. This professional body has a right to suspend PWC and debar them from further practice in India. This action will however, be subject to judicial review.

    Civil action and remedies are expensive and take a long time to conclude but a case will be made out and tried under new laws dealing with economic offences. Interestingly, the state will initiate action and not a shareholder or employee.

    I am not sure if action will be initiated suo moto or on the basis of a complaint. We have seen judicial activism lately where suo moto action has been taken but this is too big an affair for that.

    Thanks Mavin. From what you said, it does look as if it will be difficult to prove that Pricewaterhouse was involved. And therefore their execs could perhaps avoid jail. No wonder these things will never stop! – Nita.

  42. January 11, 2009 10:56 pm

    I am really sorry for the employees. They are paying for no mistake of theirs. And on top of it, Infosys chief is making some very degrading statements too.

    As you say, the majority of the employees would not have known what was going on and if they suspected they must have stayed on for their bread and butter. – Nita.

  43. January 11, 2009 11:31 pm

    “satyam “the word means truth but this company has been cheating on the shareholders for good damn years! what was SEBI doing…….sleeping as usual! biggest corporate scam which highlights the inadequacies in the regularization of corporate houses .

    Now that SEBI is waking up, more scams are going to be uncovered! I just hope SEBI makes it public! – Nita.

  44. January 12, 2009 12:07 am

    I second Vikram on the issue of privatization. India has a wonderful mixed economy, with the benefits of both. And certain industries should not be privatized – like weapons manufacturing, for example.

    //welfare state itself is corruption//

    Indeed. I may argue that private firms are also corrupt, but there is something more important:

    If the remote villages across the nation are connected via a telecommunication and rail network, it is because of state owned companies. If many villages have some sort of health facilities and schools in their vicinity, it is because of the Govt. And the rural part of India is greater than 70%!! All these institutions may be corrupt, but they offer their services (even if inefficient) at a price, that the 70% of the nation can afford. Even today all these services are utilized by a huge spectrum of the population, and we can’t be blind to this! If corruption is a hurdle, then fight only that. Replacing the Govt. with a private enterprise is no vaccine either to corruption or to greed. These things will find a different way to surge!

    Nita, there are some auditors who would even suggest how to do such things! ICAI should be more stringent with the auditors and their code of conduct. What is the punishment for an auditor who is clearly caught with a magnitude of an economic crime like this?

    DI, yeah I do think so too. Auditors would be consultants on a wide range of matters. From what I know however I think it is very difficult to prove that an auditor was in the know, and that is why in some countries they have two auditors. – Nita.

    Destination Infinity

  45. January 12, 2009 12:20 am

    Gargi, the lack of accountability of Indian politicians has more to do the failings of India’s political, judicial system and the electorate than the economic system. In fact, India’s politcians are not held accountable not only for money-type scandals but also for human lives, eg Advani, Thackeray and Modi.

    You are right, state control of economic activity does open avenues for corruption by politicians/bureaucrats but my point was that the possibility of corruption in economic activity remains even after state control is removed. This is not an argument against privatization per se but one against rapid privatization without any oversight.

  46. January 12, 2009 7:59 am

    I am also a capitalist who owns private business. But I observed that many business people won’t follow ethics in business.

    Even Rahul Bajaj and Anil Ambani etc are Not Capitalist than how can you be?

    I mean to say, how a capitalist may support communist/socialist idea like SEZ?

    Isn’t TATA exploiting India through SEZ socialist way? Or Bajaj or Ambani?

    What you are talking of is Croony capitalism but not free market.

    What you are talking of is the same illness from which America is suffering to much great extent.

    When government is licensing, subsidizing, controlling, promoting regulating each and every section of economy and business how caqn you say it is capitalism?

    owning a licensed private business which can be confiscated any time or can be promoted any time by government is not capitalism. India is not a capitalist state. Ironically even America is croony capitalist state killing capitalism on the name of keynese and Paul croogman type of crooks. When they have alreaxy aldulterated capitalism, how can you expect businessmen to act on market ethics?

    Gargi, I do agree that we have a mixed economy of sorts! But I am not sure what will happen in a true free market (as you say a system which no country follows). – Nita.

  47. Chirag permalink
    January 12, 2009 10:34 am

    Dal mein bauth jazada kala hai, Ya sari dal hi kali hai 🙂

    Areee Nita, this guy was doing what every business does, maximize profits, but iski kismet kharab thi pakda gaya.

    Well, I think he got too confident! – Nita.

  48. January 12, 2009 2:08 pm

    I claimed my self as capitalist because I own licensed private business. India is 100% capitalist state. Otherwise, how can Tatas and Ambanis earn so much of private property?

    Gargi wrote:Even Rahul Bajaj and Anil Ambani etc are Not Capitalist than how can you be?

    I mean to say, how a capitalist may support communist/socialist idea like SEZ?

    Isn’t TATA exploiting India through SEZ socialist way? Or Bajaj or Ambani?

    What you are talking of is Croony capitalism but not free market.

    You thinks that all the other self-proclaimed capitalists are socialists except free market advocates.

    I don’t like these rants like libertarians. I started private business because money is required to live in capitalist society (society with private property). I am a capitalist in practice because I am owner of a private establishment. I follow my ethics in my business. I don’t like occupying lands of farmers for SEZs as Tata did and things such as traiting share holders, forging bank documents etc as Satyam did. Satyam’s scandal costed @ eight thousand crores. If private property is abolished, at first properties of these immoral people should be confiscated and distributed to the poor.

    IT Engineer, I have a very high respect for businessmen like you. I just wish all businessmen had these ethics. – Nita.

  49. January 12, 2009 5:34 pm

    I own licensed private business.
    I don’t like these rants like libertarians.

    No matter you like rants or not, you cannot make a false to turn out to be true.

    Licensing is the socialist idea of socialist LENIN which turned USSR to Oligrachy.
    Oligarchy is NOT capitalism.
    About Libertarians, If to start a business you need to take permissions from someone/some system, how it can be said FREE? Free Market?

    How free it is if its not the consumers but the government deciding how much you produce, how you produce and what price you may take?
    Can you avoid government subsidizing the products you are creating? Can you avoid government increasing taxes on the raw materials you need for production? Nah!
    I can agree that you are a “Croony capitalist”. You certainly cannot be a laissez-faire free market capitalist. You may support the idea though and you dream and try for it. Nothing more.

    If private property is abolished, at first properties of these immoral people should be confiscated and distributed to the poor.

    Private property? Are you sure you live in India? Indian parliament removed property rights in 1962.
    Anyways, I can fathom your dissatisfaction from your own conditions. Why should money of Raju be squandered in poor people? And what will it help about?
    Will it increase the productivity of those poor? No.
    To make them rich, you don’t need to squander your money, because it wont make them rich, it may make you poor though. To make them rich you need to increase their productivity, to provide them jobs. But apart from that, why should not Raju’s property be distributed in the shareholders and all others included whose money he embezzled? Where is the economic justice in your wish of distributing Raju’s money in poor?

    Anyways, i wish you become capitalist one day.
    Good luck.

  50. January 12, 2009 5:45 pm

    Gargi, the lack of accountability of Indian politicians has more to do the failings of India’s political, judicial system and the electorate than the economic system.

    Improve economic system and all other systems will start providing efficiency by themselves. Remove government from economic sectors, Apply Property Rights to Indians. And things in politics and every other sphere will improve by themselves.
    But alas! you can even not dream about it.
    Government applied reservations at the start just for five years. Now its going to be 65 years, reservation is always increasing. No government No political party can ever think of removing reservation laws, why? if they even dream about it, they looses any hope of being in government. What they can do is divide indians further on the name of caste, creed, religion and keep announcing reservation.
    But more than what reservation do is much more drastic. it removes all incentive of a person in a reserved category to work harder and compete. it makes him impotent as he has no reason to work harder. He will get seat for higher education even for job without facing “actual competition” ever. So why should he try hard? Nah! for him, it is better if he starts demanding an increase in the salary tab applicable for reservation. So that, no matters he become an IAS officer with minimal efficiency and qualification earning enormously, his children will get reservation again. Remeber Ajit Jogi and his son?
    Education is the base of every economic sector.

  51. January 12, 2009 6:30 pm

    Licensing is not a socialist idea. Every capitalist state, including America has licensing system. India is 100% capitalist state. If there are no enough property rights, how did Tatas, Ambanis, Godrejs etc earn so much of private properties? Lenin claimed himself as socialist but he was also capitalist in practice. “New Economic Policy” implemented by Lenin was capitalist policy and not socialist policy. He permitted market oriented economy in rural areas and he nationalised industries in towns. Private property was restricted only in urban areas of Russia in Lenin’s era. Licensing is necessary of capitalist economy. Licensed business man pays taxes. Otherwise, his license will be terminated and he will be not allowed to run business. Government can get revenue to construct infrastructures like roads, bridges and dams etc only if capitalists pay taxes. Libertarians are individualists and they don’t mind about social responsibility. So, I hate them. Ramalinga Raju’s Maytas Company tried to fool Andhra Pradesh government in contracts of infrastructural projects. Maytas company was able to apply tenders for those projects because government has money collected in form of taxes. Without licensing and taxes, capitalist government can do nothing.

  52. Vinod permalink
    January 13, 2009 5:08 am

    Mavin, thanks for that info. It was educational.

  53. January 15, 2009 10:54 am

    In India, Satya can never win, and Satyam scandal can never be punished.

    In a free-market system, bad companies dies, good companies evolves, that is the justice. Corrupt should be punished.

    But in India, to save one corrupt man/corporation, every individual honest tax paying citizen will be punished.

    Now the government is planning to bail out Satyam.

    Doesn’t it shows enough that the government and the corporate in the Indian oligarchic mixed economy system are all in same colors?

    Why should we be punished?

    When Mr Raju has accepted that he was Manipulating the balance sheets, and the Inc is not in so huge profits which is being show-cased upon to bait banks for loans and investors for shares, Why will a SANE person invest in Satyam?
    But alas!, we have given our hard earned money in the hands of the LOOTER government, which will now safeguard the corrupt the scoundrel.

    Isn’t it the same which Mr Raju was wishing for? he had no cash yet on papers there was huge cash. To manipulate things, he tried to show-off buyout of Mayta’s. Now when he has accepted it, he has no worries to think about. Government will throw the tax payers money in the dark hole of Satyam, and will punish citizens for the corruption of a corporation.
    What for? For saving some jobs? Nah!
    Jobs are not in danger, government will bail out to keep some space for further scam and embezzlement of Tax payers money.

    Why should not let the Satyam Inc and other property of Mr. Raju be bankrupted and the money collected thus should be used to payback the bank loans and money of shareholders being embezzled in the process of Satyam Fraud. The new buyers of Satyam will take care of the workers of Satyam, and even if some workers loose their jobs, it would be much better than punishing whole India for the crime of one corporate by bailing it out.
    As it is highly improbable that Indian government will support free-market process and will support bailout because it provides enough space to further embezzle tax-payers money.
    Thus, again Satyam fiasco is taking the shape of crime of government interventionism, collectivism forcing the crime of some to all other individuals.

    But alas!, Indians love to be exploited as they hate freedom.

  54. January 15, 2009 11:10 am

    IT Engineer,

    I don’t know how brilliant you are in IT and computers!

    Licensing is Lenin’s idea in the modern world. Before it, licensing was used in Feudal system alone, where a dictator was used to dictate a license to an individual, in India such licenses were used to be offered by jamindar’s as “Patta” to allow poor farmers to work in their field and gain some earning. it is totally corrupt and anti-capitalism, anti-freedom Idea and it is based on socialist philosophy. I guess you know the difference between, Feudalism, Oligarchy, and capitalism.

    India is mixed economy regulated socialist system, an Oligarchy, where some corporations and a big static government controls the economic sector with a centralized bank system (RBI) controling, inflating deflatin/looting public via currency system

    Lenin started licensing idea first in modern world to discourage gun rights in USSR.

    “A system of licensing and registration is the perfect device to deny gun ownership to the bourgeoisie.” — Vladimir Ilyich Lenin “

    This Idea was supported by Stalin as he knew guns should be abolished in order to rule and exploit public.

    Licensing was also used National socialist Party of Germany under Hitler, for the same cause, to discourage common man to own guns.

    Licensing is used in India, to discourage common man to be capitalist.

    The amount of money one need to waste in bribing officials, politicians ministers just in order to get a license, wastes maximum of resources.

    Have you ever visited to a driving license office?

    You wanna license? Just bribe, no one is going to ask you if you can drive or not.

    Delhi suffers blueline accidents, what is the deal?

    Licensing. Drivers gets license from other states and cities and starts driving in delhi, irrespective of their abilities. Rouge thekedars of buses, gets license and permits to drive on roads and they threatens common man to get a permit to own a bus, government officials help them.

    Licensing always increases mafia and discourage honest citizen to get involved in innovations, job creation.
    In India, although after 1992, works is going on to ease the process of starting a business easy, but it is extremely difficult if someone want to close it out.

    About capitalism, I am an architect belonging to a construction family. My business is to construct and sell.
    I know how easily corrupt officials and politicians can propose me a one night stand for getting a map passed out and a project tender be forwarded.

    License, regulated economy, oligarchy, all is nothing but Mother of Corruption. Raju is debauched son of the Mother of Corruption.

  55. January 19, 2009 10:00 am

    and a great header again.

  56. January 20, 2009 1:31 am

    The article was very well written. I have spent 15 years in the auditing profession and its hard me to believe that the auditors will not be able to identify such a big discrepency in cash by performing a simple audit procedure, such as, requesting a cash certificate from Bank. PriceWaterhouse really didn’t do their job and must have joined hands with management. This is a shame on our profession and I am so sorry about this.

    Thanks Kamal and welcome to my blog. I too feel that the auditors were involved but proving these things is going to be difficult. – Nita.

  57. hari permalink
    January 21, 2009 3:46 pm

    hi Nita,

    good post.

    as you have analysed the possibilities of the auditing firm was excellent. i can’t beliving that the auditors will not be able to identify such a big discrepency in cash by performing a audit procedure. i think they must have joined hands with management.


  1. re: The Auditors » Blog Archive » Price Waterhouse India’s Slumdog Millionaires – Cheating Pays

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