The Satyam Lesson: Many More Satyams Out There
No doubt, authorities in
Satyam’s auditors, Pricewaterhouse Coopers, are maintaining a stoic silence in the face of widespread public demands for an explanation of how Satyam was allowed to create $1.30 billion in “fictitious” cash on its balance sheet. But, in these recessionary conditions, it is not difficult to figure out how and why financial statements can be manipulated. “Raju was trying to catch the tiger with bare hands,” a
For those unfamiliar with the intricacies of accounting, this is how the fictitious-cash exercise works: keep asset valuations at inflated levels, be creative in cash-flow (and earnings) recognition methodologies, diminish the true extent of doubtful loans and receivables, and stretch payables out as far as possible. Reads like an extract from an internal memo issued by one of Wall Street’s bailout candidates?
In the wake of the Satyam story, a Franklin Templeton Investments spokesman said that “Satyam is only a short-term negative which, with more regulatory oversight, could turn out into a long-term positive.” The head of Indian equities at Hong Kong-based Mirae Asset Global Investment, Rahul Chadha, reiterated that
Furthermore, Mr. Raju’s deliberate balance-sheet structuring is not fancy-footwork restricted to
So there is no need to be shocked by Satyam. Because as long as auditors fail to conduct extensive and precise reconciliations between cash-flow items within financial statements on one hand and contractual obligations which generate those items on the other, innovative managements will always find ways to create an aura of viability. While this is not the appropriate forum to detail other emerging market corporations whose balance sheets are highly suspect, Satyam serves only to reiterate this writer’s short call on emerging markets through exchange-traded funds (ADRE, BKF, EEM, EWX, FRN, PXR), despite the massive 2008 declines.
During an interview with Bloomberg on Thursday, Marshall Mays, director of Emerging Alpha Asset Management, bluntly declared that “all companies lie on earnings.” That is probably the truth, a business reality. The question is, “By how much?”
Well, the more depressing the underlying economic environment, the more is the incentive to lie, fudge, exaggerate and mislead; particularly when, like the rating agencies, even giant auditing firms are unable to perform the most basic of time-honoured due diligence tests. Despite what Indian cabinet ministers are saying, the Satyam problem is not one of lack of regulation. And, before advocating more regulation, lawmakers everywhere (including Washington) are well-advised to put in place credible mechanisms to ensure that auditors and lawyers in the money centres of the world don’t simply sign off on corporate documents, collect hefty fees and then leave investors to find their own way through the maze of dubious financial data.
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