For the last 48 hours, everything about an inappropriately named company called Satyam involves incredulity, indignation and schadenfreude. Incredulity by all: How could the promoter B. Ramalinga Raju cook the books by a staggering Rs.7,000 without the management and the statutory auditors being in the know? Indignation by corporate India and the press: the former for Satyam having tarnished its name, and the latter against those who were sleeping on the bridge. And schadenfreude (malicious enjoyment of another’s misfortune) is from the press: glee at a fat cat drowning, a big-four accounting firm running for cover, and exalted independent directors caught in flagrante.

I empathise with all three emotions, though the schadenfreude is a bit over the top. Satyam’s fudging of accounts is not something to be gleeful about. It has tarnished the image of corporate India at an especially difficult time. Also, none can claim, “I told you so”. Until Satyam’s tried to purchase Maytas, nobody criticised the performance and corporate governance of the company. Raju was a voice of the new India. Let’s humbly admit that we were all duped by the man — hugely and comprehensively so.

The size of Raju’s scam is humongous. Focusing on the major swindle is enough to understand what he was trying to do. That has to do with Satyam’s cash and bank balance which was inflated by Rs.5,040 crore as on 30 September 2008.

In Satyam’s 30 September balance sheet, the cash and bank balance was Rs.5,361 crore. Subtract the Rs.5,040 crore fudge, and you get just Rs.321 crore. Recall that Satyam had proposed to buy Maytas for $1.6 billion (or Rs.7,700 crore), financed out of its cash. But it didn’t have the money. So, what was the play? Get the Maytas assets into Satyam, delay paying cash to Maytas and, in the meanwhile, shore up Satyam’s balance sheet with valuable infrastructure assets. In Raju’s pathetic confession, “The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones” [emphasis mine].

The game was up once the institutional investors thumbed down the acquisition. Raju desperately needed suitors to purchase Satyam to fill the gap between real and fictitious money which had “attained unmanageable proportions”. It appointed DSP Merrill Lynch to do match-making. And Merrill’s team found these discrepancies, forcing Raju to confess.

Raju couldn’t have rigged the books on his own. You can’t overstate cash and bank balance by Rs.5,040 crore, or quarterly revenues by Rs.588 crore without participation of the CFO and, at the very least, negligence of the CEO. If you were the CEO of a company whose revenues shot up by an unanticipated Rs.588 crore, wouldn’t you ask, “Where did that come from?” And if you didn’t, what should I infer?

The most amazing aspect of the case is PwC, the dog that didn’t bark. Like Andersen in Enron, PwC failed as a statutory auditor whose task is to certify that the accounts are ‘true and fair’. The cash and bank balance scam is damning. From the article-ship days, auditors swear by the need to verify a company’s cash and bank balance. How could this be inflated by Rs.5,040 crore leaving PwC clueless? When DSP Merrill Lynch figured it out in a trice? Clearly, either the CFO fabricated documents on banks’ letterheads, or rigged the company’s enterprise reporting software, or PwC didn’t dig deep enough. PwC’s apparent errors in omission are too glaring to be countenanced.

Here’s my initial take on the post-debacle scenario. First, Satyam as we know it is history. It will be well nigh impossible for Ram Mynampati, who has taken over, to steer the company to a safe harbour. And it will be a while before anyone shows an active interest in buying a company riddled with falsified accounts. That’s a shame for which Raju is entirely to blame. His hubris made him the terrible destroyer of all that he created and grew. To think of the fate of 53,000 lost souls who struggled day and night for a company whose promoter cheated them so outrageously brings rage and tears in equal measure.

Second, PwC’s goose is cooked. US shareholders will slam class action suits, and the Securities and Exchange Commission will pitch in. If it is very lucky, PwC will be severely fined, lose many clients, have its Satyam audit partners punished, and become a shadow of its former self. Otherwise, it may fold like Andersen. Not by actions in India, but in the US.

Third, I fear that like the post-Enron era, this can prompt a rash of new directives and rules from the SEBI and the Ministry of Company Affairs (MCA). I hope not. India’s problem is not of inadequate laws; it is of grossly inadequate enforcement. Let’s not have more over-regulation and under-enforcement.

Fourth, I pray that SEBI and the MCA will collaborate to take swift action and confer exemplary and punitive punishment on the guilty. India needs to see show the world that it can punish the high and mighty, and do so quickly.

Finally, while I recognise that independent external directors can’t do much if the internal or statutory auditors don’t blow the whistle, the Satyam episode is a wake up call to all of us who serve on boards. Independent directors must focus more on their companies — be more diligent, deeply question proposals, speak their mind and take outside counsel. Understand the management’s perspective, by all means. But never forget that you are a fiduciary of the shareholders.

Published: Times of India, January 2009