SHOCKING NEWS: The chairman of India’s Satyam Computer Services resigned on Wednesday (January 6th, 2009) after confessing to fixing the IT outsourcing company’s books for the past “several” years, the country’s first major fraud case to emerge following the global financial crisis. This case may be India’s ENRON. Remember ENRON’s management cooked the books with a collaborating auditor.
When it comes to corporate governance, transparency, disclosure and reliability of financial statements from emerging markets, underwriters and credit managers tend to often treat such documents as suspect. There are plenty of jokes about the use of multiple balance sheets. The Satyam case unfortunately shows that this syndrome is still very much a fact of life. In this regard BIIA covered a short news story from India in its September Newsletter 2008 concerning a rise in unethical and fraudulent practices of falsifying accounts (see insert). Did the author of the article know more than the regulators?
The systematic fraud over several years in a company listed on the New York and Mumbai stock exchanges raises serious questions over governance, auditing and regulatory oversight in India.
The news caused Satyam’s stock to crash by 66.5 % to Rs 58 from Wednesday’s high of Rs 188.70. The BSE Sensex crashed 470.23 points or 4.55 per cent to 9,865.70, after rising to a high of 10,469.72 earlier Wednesday. Investors aggressively cut their positions. The BSE IT Index plunged 7.70 per cent and BSE Realty tumbled 11.20 per cent. IT and other stocks in related sectors took a beating as the Satyam fraud raised questions over corporate governance of other companies, especially IT.
The financial services industry of the world has entrusted many Indian outsourcing companies to manage systems and confidential data of their clients. In view of the Satyam case why should they? Trust is the key element here and Satyam has violated that trust. However, India has decided not to trust foreign credit information companies by restricting their involvement in owning and managing consumer credit information in India. The global financial crisis has brought the virtues of transparency to the forefront of the regulatory agenda. Unfortunately both cases show that India is heading in the wrong direction as far as transparency and reliability of financial information is concerned.
BIIA Newsletter November 2008 Issue