If a finance minister cooks up budget figures, he earns a pat from the country for presenting ‘a dream budget.’ If a corporate honcho does that, he goes to jail for accountancy fraud. Yes, there is no justice in a world brimming with discrimination and inequality in law enforcement. In the first case, the entire country is cheated; in the other, its shareholders and investors are deceived. However, we certainly offer no defence for B Ramalinga Raju, the promoter of Satyam Computer Services Ltd., for fudging books in order to hoodwink the markets and manipulate the share price of the company. Last week, Raju and his brother, B. Rama Raju, managing director of the company, and a few associates were sentenced to a seven-year prison term for cheating and criminal conspiracy. In order to compete with the more successful IT companies and to keep the share price of Satyam high, Raju had inflated the revenue and profit figures and, in some years, even paid taxes on the inflated profits. Other years when he failed to pay taxes on the inflated figures, he was hauled up by the income tax authorities. When, eventually, he failed to produce the non-existent revenues listed falsely in the account books, he himself made a clean breast of the scam. He could no longer sustain the falsehood. Immediately, the Satyam shares crashed. The iconic company was rescued by the government, which set up a panel to devise its takeover by another professionally managed group. Now merged with Tech Mahindra, Satyam is only a bad memory in India’s IT story. Yet, the conviction of Raju and his associates ought to serve as a lesson to every businessman who seeks to take investors for granted. Admittedly, the regulatory process has acquired further teeth since the Satyam scam first hit the headlines six years ago, but a lot remains to be done. In this context, a report before the Serious Fraud Office of the Corporate Affairs Ministry indicates that cooking of corporate books is quite common. Of the top 500 companies, at least a hundred relatively bigger ones presented what is euphemistically termed `managed’ accounts. If finance ministers could dress up figures to present `good budgets’ by shifting expenditures to next year’s or by inflating receipts and deflating expenditure, promoters of companies could justifiably claim that by presenting a rosy picture, they tried to keep the shareholder morale high. That in both cases it is a fraud is not acknowledged by the political class, though after the conviction of Satyam’s Raju, controllers of companies ought to be on notice. The Satyam convictions might suggest that the accountancy frauds are rare since it is the first case of its kind, but the fact is that the practice is prevalent throughout the corporate world. Indeed, a major reason for the ever rising non-performing assets of banks is loans to the corporate world on inflated figures of future earnings and profits and against collaterals, whose value is deliberately exaggerated. When banks seek to recover their dues they discover that the collaterals will not cover even a tiny portion of the principal amount. Crackdown on fraudulent accounting practices also becomes necessary in order to instill confidence in foreign and domestic investors.
It is significant that the Satyam scam could go undetected for several financial years despite the presence of respected names on its board as independent directors. Quite clearly, as is their wont industry-wide, independent directors did precious little to ensure good corporate governance, taking the directorship merely as a means of additional income and perks. In the Satyam case, even the widely respected audit firm was found wanting when it endorsed the cooked books without detecting the fraud. The point is that myth-making to fool the people comes naturally to the denizens of our corporate world. Despite recent moves to empower SEBI, the Serious Fraud Office etc, corporate governance remains lax and hostage to the ethical standards of individual company promoters and directors. Some corporate houses cannot help cheating despite having become very big, others try and adhere to the straight and narrow. Eventually, it is a reflection of the society at large, which has not gotten around to respect the law unless faced with the threat of detection and punishment. For evidence, go no further than the next traffic light in your neighbourhood. See how poor and rich, educated and illiterate vie with one another to break the law.
