Improving Corporate Governance: A blueprint for preventing future scams like Satyam Computers

By Atim Kabra , Singapore, Hardnews special

Why are we so surprised at Satyam Computer blowing up?

Probably not because there were accounting shenanigans, not because Raju placed himself before shareholders, not the fact that auditors were probably hand in gloves with the management and conveniently turning a blind eye to the fraud being perpetrated at the company, certainly not the fact that the so called independents were dwarfed by Raju, his charm, his wealth, his connections or were just plain incompetent and beholden to Raju for inducting them as independent directors in the first place. We are surprised by the sheer scale of the fraudulent activities which went on unchecked by reputed auditors and the numerous corporate governance awards which multiple organizations vied to bestow on Satyam. Well, it speaks volumes for these organizations but that is a matter for another debate. I wonder whether we are more shocked at the events that unfolded at Satyam or shocked by the fact that Raju had to own up to the going ons at Satyam. That such a well connected man with assets of gigantic size had to own up to mischiefs and scams, gives rise to innumerable conspiracy theories ranging from blackmail to jail in India being preferred over jails in the USA by Raju.

I have had the opportunity to discuss this issue in details with many fund managers based in India as well as overseas and I am attempting to detail a few steps which might help in preventing such scams in the future. I acknowledge that greed and hubris is an integral part of human nature. History of mankind and the scams perpetrated by humans on unsuspecting fellow humans make for an interesting reading. I believe that no amount of regulation can eliminate completely the possibility of recurrence of such scams. However, we certainly can make efforts towards minimizing the probability of scams and their size, by utilizing the twin tools of enhanced scrutiny and deterrent punishment.  It is critical to work towards increasing the probability of discovering nascent scams early enough if we were to minimize damage to trust and transparency which combined together form the underpinnings of any financial system.  The interesting part if that most of these suggestions are already being applied in parts in India with quite positive results. So we are not reinventing the wheel but just suggesting extending the existing format for wider coverage. While I do believe in self regulation, I also believe in strong industry regulators who can ‘police the police'. Without further ado, here is a prescription sheet which if implemented can probably control the spread of the disease.

Make the watchdogs accountable for the theft: punishment should be substantial

We hope that the truth about the role played by Satyam's auditors will come out after an extensive investigation. When questioned about the investment decision, the common refrain is that the investors relied on certifications by Price Waterhouse, the reputed auditors of Satyam. If these so called savvy and professional watchdogs could not detect the fraud at Satyam, then how can we expect the due diligence done by investors to throw up the mischief?  I am not in a position to conclude conclusively whether the auditors were misled and were negligent in the conduct of their duties or they willfully colluded with the management at Satyam in perpetrating the fraudulent events. In any event, the impact of their role cannot be underestimated.

In both the scenarios, they failed their duties miserably. I would not be alone in calling for an exemplary punishment to be meted out to these auditors, a punishment which would raise the stake for others who may have been knowingly or unknowingly aiding or turning a blind eye to similar events at other firms.