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• The Satyam fiasco: Complete coverage

This happens principally because of the wrong notion held by most people that finance management happens in the finance department. The fact is that financial management is the responsibility of every individual in the organisation. A decision taken by the sales-person on the field as to the price at which the product is to be sold or the period of credit to be offered to the customer is a financial decision.

The level of inventory to be maintained (a decision taken by the materials manager) is a financial decision. Decisions taken by the human resources (as to the number of people and level at which personnel are to be hired, their compensation package, the size of the bench to be maintained) or the production manager (regarding the installed capacity of the plant or as to production scheduling) are all financial decisions. And these are precisely the kind of people who call themselves 'Non-finance Managers'. It is ignorance at this level that causes financial mismanagement and consequent business failures. 

How aware are the company's top management about financial management?
I think top managements are becoming increasingly aware of the need, but you will be amazed at the level of ignorance there is about what constitutes good financial management at that level.  Finance is one of the most misunderstood subjects and there is tremendous amount of insecurity when it comes to appreciating and interpreting numbers.

Is the top management to be blamed for the financial mess companies get into?

Even though blame should be shared by everybody who is guilty of mismanagement, to a large extent the blame does lie with the top management. It is their responsibility first to understand the importance of 'Good Finance Management' and then ensure that requisite training is provided to their executives and employees to empower them to take financially sensible decisions.

Do CFOs just sign on the dotted line (as the Satyam CFO admitted) because they leave the nitty-gritty to the juniors and have faith in them?

To say so would be generalizing it too much. I think there are large number of responsible and capable CFOs who would not do so and who do appreciate how fraught with risk it could be. In most cases, there would be checks and balances to verify what the juniors have done before they would sign. But then there are also CFOs like Srinivas Vadlamani (of Satyam) who has (allegedly) confessed to blindly signing the balance sheets.

People have lost faith and have started questioning the veracity of company's reports in the wake of the Satyam fraud. This is affecting the stock markets too as people have begun to doubt quarterly corporate results. How can this situation be changed?

Yes, I agree that the Satyam episode has shaken investors' confidence in audited financial statements. Reviving this confidence is going to be a slow process. It will now depend on how quickly and effectively the government takes steps to get to the truth, the circumstances due to which PwC failed in their duties, perhaps changes in the regulatory mechanism to ensure such frauds are not repeated and demonstrable and transparent good corporate governance practices amongst corporations. 

Can a fraud like the Satyam scam be done without the complicity or negligence of the auditors? If found guilty, what will happen to the PwC and the auditors?

It is very difficult if not impossible for a fraud of this magnitude to occur without either the complicity or gross negligence of the auditors.

If found guilty, PwC can face action from Securities and Exchange Board of India (SEBI), from Institute of Chartered Accountants of India (ICAI), financial penalties and blacklisting, at least from India.

How can a fraud of this nature go unnoticed for so many years? What are the loopholes in the system?

It seems quite inconceivable that the fraud has gone unnoticed for so many years. But then we are basing everything on  Raju's confession alone. What if the confession itself is untrue and/or misleading?

Is there a need to separate the promoters from the management, as is the case largely in US firms, to bring in more transparency?

While there definitely is merit in delinking promoters from management, there are also examples of promoter-led corporations which are doing very well.

Satyam has inflated figures in its balance sheet while Maytas has underestimated its figures? What is the purpose behind this?

I'm not too familiar with what Maytas has done and why. But Satyam  has inflated its profit which could be for various reasons - to impress investors, to attract more funds, to indulge in insider trading, to get bank facilities, for Mr Raju to personally raise funds against inflated value of his share-holding etc

How do you compare the Enron fraud and the Satyam scam?

They are similar in that both are very large corporate frauds, committed through falsification of accounts, leading to many individuals getting immensely rich at the cost of shareholders' money, insider trading taking place, the auditors not performing their duty with honesty. 

 In Enron we had Kenneth Lay, here we have Ramalinga Raju. There we had Jeffrey Skilling, here we have B Rama Raju. Andrew Fastow was the CFO who was one of the key perpetrators and in the case of Satyam we have Vadlamani Srinivas. Andersen were the auditors, who had to close down in the aftermath, bringing the 'big five' of the auditing world to 'big four'. Here we have PwC, and the fraud has the potential to reduce the 'big four' to big 'three'. 

What all does an auditor check in the company's account books?

The auditor has an elaborate procedure to follow strictly. The auditor must check everything necessary so as to reach a conclusion that the financial statements represent a true and fair view of the financial affairs the company.

Do accounting practices in the world, and especially in India, need overhauling? What one or two important changes would you like?

While accounting and reporting practices must be constantly reviewed and improved upon,  I think the greater need is for auditors and regulators to exercise more diligence in the execution of their duties. I'm not sure that India needs a Sarbane Oxley like Act.

Will the new accounting standard introduced in the US, and to be followed elsewhere too will stop such scams?

Scams can never be fully stopped. There will always be brilliant fraudsters who will find newer ways. The need is for utmost vigilance, diligence and honesty on the part of those who are entrusted with the job of regulation and auditing.

What would be your advice to companies and auditors?

My advice to companies - In the long run, honesty is the best policy.

To auditors - not doing your duty conscientiously is a crime against your profession, against the shareholders who have entrusted you to protect their interests, and against the investor community in general. One act of dishonesty serves to discredit the entire profession and shatters the confidence of people in all financial statements. You owe it to your profession and your clients to honestly perform your duties.

Do you think India Inc's image is badly hit by this? How can we restore confidence among people?

India Inc's image has definitely been hit. But we need to remind the world that the Satyam is an aberration and that just as Enron does not represent corporate America, Satyam does not represent corporate India.