Satyam Shakeout - Barron's

With all the turmoil in world markets, many investors expected a few small Asian corporations to wipe out but few were ready for a Satyam (SAY) crash. Family-run and supposedly solid, writes Barron's, Satyam has been reduced to 'India's Enron.'

Satyam once counted giants General Electric (GE) and Nestle (NSRGY.PK) among its clients, but those days are rapidly drawing to a close. After founder and chairman Ramalinga Raju tendered his resignation with the announcement that over $1B - or a whopping 94% - of its reported cash reserves were fictitious, shares plummeted. Raju said he and his brothers had been cooking the books for years. Some analysts had been suspicious about Satyam's figures, but ignored their doubts during the heady bull years of 2004-2007.

Any investigation will focus on Satyam's independent directors, its banking partners and its chief auditor, PricewaterhouseCoopers. Undoubtedly, India's regulators, including the Securities and Exchange Board of India, will be drawn into the mess as well.

Big Indian IT firms and foreign outsourcing majors like Accenture (ACN) and Cognizant (CTSH) could gain clients fleeing Satyam, but they also have to face unnerved investors whose faith has been shaken.

Suresh Senapathy, the CFO at Satyam rival Wipro (WIT), expressed his shock that auditors hadn't uncovered a fraud of this proportion and tried to stress that Satyam is an 'isolated case.' Investors are less sure, however, and are bracing for more bad news. "This was a systemic fundamental failure," said Ram Kolluri, chief investment officer at ICICI Group's private wealth-management division. "In my nightmare moment, I would start to worry how many Satyams there are around in the market."

Comments

[andyn:]

No doubt the company founders and maybe a few insiders are responsible.
But blame also lies squarely on the auditor PriceWaterhouse.
How can they miss a $1B cash hole? That too, for several years?

As an investor, you trust that the books are properly audited and that the numbers are right. Even analysts - who are supposed to be the experts in sniffing out issues with balance sheets - missed this huge issue.
If that's the case, maybe the entire accounting system needs to be thought about.

Jan 11 09:54 AM

[Georgie:]

I can't agree more with Andyn. What was PriceWaterhouse doing ?
Was PriceWaterhouse in on the corruption or just plain incompetent ? Who are the other clients of PWC ?

Corruption is pretty rampant in India and I think this may be just the begining.

Jan 11 10:59 AM

[Dr Pandey, S.N:]

While a setback in the field, the damage control initiative of the Governement of India is going to have positive impacts, and in no time, the comparison of Satyam with Enron will lose comparison. What is importantan that the newly constituted Board does its job and the 53000 employees contribute their mite.The episode hould be taken as a lesson and the regulatory authorities should rise above.
Dr S.N Pandey
[e-mail]

Jan 11 11:00 AM

[CTYankeeFan:]

Do you think it will help Cognizant and Accenture have an advantage over the purely Indian firms in getting business from Satyam since they are subject to SEC and other US laws? (although the Madoff scandle doesnt say much about the US ability to spot fraud either)

Jan 11 12:47 PM

[Drew Horn:]

Auditors cant be trusted, they say that they only regurgitate info they are told, they don't actually count the inventory. Ratings companies don't actually audit, they report what they are told. Governments don't actually regulate, they rely on info they are given.

It seems that there is a business opportunity for a service that does the work we assume they did!

Jan 11 01:55 PM

[carey_jim:]

This scandal points to one of the reasons that the dollar is rising in spite of dismal American financial news.

Capitalism rests on a long social/psychological/r... development in Europe, and especially England, which produced the atmosphere conducive to relatively honest, free-trade.

America was lucky enough to begin a new society in 1776, the very year that Adam Smith published his Wealth of Nations, a very radical book for that time.

We shouldn't forget that the Catholic Church prohibited the taking of interest on deposited money, barely a hundred years before the American Revolution, just as Islam does today and that it was the Protestant revolution that paved the way for this and other capitalist inventions.

America was founded in an atmosphere not conducive to free enterprise but to monopolies which were sanctioned by the monarchs of Europe and the Churches that stood behind their edicts (totalitarianism.)

See R.H. Tawney's Religion and the rise of Capitalism: www.amazon.com/s/ref=n...

and Max Weber's The Protestand Ethic and the Spirit of Capitalism: www.amazon.com/s/ref=n...

India threw off the yoke of British imperialism but also profited from the the British by acquiring a unifying language, English, and British parliamentary traditions.

However, Indian feudalism is still in place and manifests itself in the caste system and a dominant religion, Hinduism, which believes in reincarnation and karma. These traditions may not be conducive to a spirit of freedom and honesty, and a willingness to embrace new traditions (free speech, freedom of religion, freedom of choice, etc.) and inventions which seem necessary for a free market to thrive.

I don't think it is wise to be overly pessimistic about India's free market future but this highly unusual example of corporate fraud should give us pause.

In passing, we should have realized that Russia's unbroken history of hundreds of years of totalitarian government would make a transition to free market capitalism very difficult and we shouldn't be surprised at what is happening there now.

China too, is similar to India in that it comes into the modern world with thousands of years of relatively stable traditions which are quite different from those of Europe and the United States and which could easily give rise to economic institutions that are very different from our own, with different vices and virtues.

Mao Zedong can be seen as one more of a very, very long line of emperors who ruled China with an iron fist, where 'communism' was just window dressing in an effort to modernize China[.

It remains to be seen just how long China will remain a 'free-enterprise capitalist society' and we shouldn't be surprised if China reverts back to its long tradition of totalitarianism in difficult economic times.

Another reason for the rise of the dollar.

Jan 11 04:33 PM