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Have we learnt anything from the Satyam scandal?
March, 23rd 2009

The Satyam scam topped headlines and news coverage in the entire world after it became public but have we learnt anything from it? Are our corporate governance laws stringent enough to prevent such scams or do they still offer grey areas?.

THERE IS a very well known saying: There is no short cut to success. Most of us believe in it too, but its never understood by the people who are successful due to their hard-work and perseverance but later forget this saying when they reach the top. To maintain their position they try to take the shorter path. Enron, DSO Software, Satyam etc. were big names but what happened to them. They all tried to take the shorter path, which in the beginning was lucrative but what happened at the end is known to everybody.

The main objective behind every fraud is to make money out of it. Enrons fraud involved Mark to Market scheme which attracted the investors to invest but it failed. Same happened with Satyam which fudged its balance sheets. But the result was the same as with Enron. After Enron case it was said that no person heading any organisation would have unlimited power. To have the checks, SOX was enacted in the US and any company which is registered in NYSE had to comply with SOX.

In India seeing the effects of SOX, Sebi also enacted some laws. But are these laws complete and competent enough to maintain the interest of the shareholders and employees of the company. We dont think so. Various instances in clause 49 are left to the interpretation of the individual firms as they have not been clearly elaborated by the committee which brought about the legislation.

The major loophole of the clause is related to the formation of the audit committee which just refers to its formation, but does not mention whether the committee formed is to be an internal, external or a third party guided one. Even if a firm takes a decision of an audit committee for its financial transactions then it would be bound to have an independent director as the head of the committee. This takes away the autonomy and unbiased stand from the committee, as such committees are known to buckle under managements pressure. The best examples of it are Enron, Satyam, World-Com etc.

Independent directors is a term on which special emphasis is laid in the clause drafted for Indian corporate governance but these directors are not really independent as they cant have their own say and arbitrate when they have been appointed by the promoter of the company rather than a regulator.

The sub clause (iv) contradicts sub clause (iii) part (a) which states that the person does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director. What we suggest is that this must be more elaborative in nature indicating what all relationships it covers and what not, a nominee from an institution having customer-client relationship is principally supposed to have a transactional relationship and should not be qualified for being an independent director but the reverse stands true here. The best solution to this problem would be that SEBI itself must appoint the nominees who are eligible for being independent directors rather than the company choosing them on their own; such a step can only guarantee their independence and give them the strength to work for their investors and public as a whole.

The SEBI under its aegis must establish a body similar to the PCAOB in US in order to keep a check on various auditor firms and organisations and must have a specific code of conduct and procedures laid down and rigorously implemented and followed so that erring associates are not given any lose rope to hold on. It has been found out that the ICAI has not been able to punish erring auditors and their firms due to their lackadaisical approach. This is very important keeping in view the present scenario of Satyam where it has been found that PWC was their auditor and this very firm is under investigation for its role in the Global Trust Bank by the ICAI.

The question one has in mind after this are:

a) Why the ICAI did not ban or refrain PWC from conducting audits when it is still under investigations for certain malpractices.

b) Why has the ICAI opposed the appointment of KPMG and Deloitte citing the reason that they are foreign firms when it itself had not objected to the operations of PWC when it was auditing Satyam and was also found to be involved in malpractices under the Global Trust Bank audits?

ICAI president Ved Jain says that the Satyam case is an aberration and not a case of system failure. How can a system not be termed as failure and ineffective when it says that it does not give permission to foreign firms to audit in India and the top five audit firms auditing in India are foreign firms who audit here through partnerships. According to its own guidelines, ICAI is in no position to take action against PWC as it can only investigate the partners who signed the Satyam audits and the maximum it can do is to withdraw their license.

Even after a month of the fraud becoming public the case still proceeds in an unambiguous manner and SEBI with great difficulty has been able to interrogate the Raju brothers to find out how the fraud was planned and executed; and how such mendacity escaped the eyes of the regulators.

The various agencies involved in getting their hands on this probe are the SFIO, SEBI, RBI, Ministry of Corporate Affairs and the Ministry of Finance. All this is taking place due to the absence of a single agency defined by the legislation to solve the case due to which it seems to be lying in doldrums.

The immediate resolution of all these problems found in the legislation of corporate governance can be eliminated by careful reconsideration of the following points:

1) Clearly defining accepted conditions of the relationships the independent directors can have with the promoters of the company.

2) The process of appointing the independent directors through SEBI and not through the company internally.

3) Specifying whether the audit committee formed is to be an internal one or a third party one or one assigned to companies by the SEBI on a rotational basis.

4) Formation of a strict regulatory body for the auditors with stringent provisions for malpractices and having a check on various auditors operating.

5) Formation of a single nodal agency to deal with such financial frauds so that one single agency steers the whole fraud to its logical end.

6) Better vigilance of the compliance of the companies to these rules by the SEBI with double checks at various levels.

7) Making the whistleblower policy a mandatory requirement and reporting must be done to the regulatory authority itself.

8) Defining and adoption of specific frameworks along with the procedures of implementing the clause.

9) Introducing a check on internal controls being followed in an organisation for further increasing transparency.

The last thing that needs to be mentioned here is that corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. It succeeds not only by complying with it on paper as an extra overhead but needs to be practiced in the right spirit and perspective to yield out the true benefits of it.

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