H.J. Huneycutt

There Are Many More Satyams Out There

I think people that fool themselves into believing it's just as safe to invest in India or Russia simply because of Enron, WorldCom, and Madoff are doing themselves a disservice and ignoring the details behind these various scandals. The US has some regulatory oversight issues, no doubt. Those issues look fairly tame compared to the issues in some of the emerging markets.

When you compare the nature of the scandals: Satyam versus Enron, Satyam versus Madoff, etc. --- I find myself much more frightened by Satyam. We're talking about a $1.3 ficticious cash balance that was built up over the course of several years time and never seemed to attract the attention of auditors (either that, or the auditors were in collusion with Satyam). When you get down to it, most of the US accounting scandals have to do with very complex schemes dealing with difficult-to-understan... or difficult-to-price assets and companies finding very clever ways to fool auditors based on complexities. I'm not seeing evidence that this happened with Satyam. To be short that much cash is almost dumbfounding!

Madoff, indeed, was even worse than Satyam, but you also have to put it in context. Madoff ran a private investment firm. American regulation of the hedge fund industry is/was particularly weak, which was one of the reasons he was able to skirt the law for so long. Also, another important point here is that Madoff was not a publicly-traded company! Publicly traded companies in the US are subject to much more stringent regulatory and financial reporting standards. Madoff could've never gotten away with what he did if he had been audited by a Big 4 firm. Instead, being a private investment firm, he decided to be audited by a 3-person accounting firm that wasn't even registered to do audits. if he had to file a 10-K with the SEC, that would've sent off a red flag immediately to anyone reading the report.

So sure, on the face of it, one thinks, "hey there are scandals in America, too, and this is no different!" But it does look a bit different from my perspective. It leads one to belief that it might be possible to run a ponzi scheme like Madoff all the while being a publicly-traded company theoretically subjected to tougher auditing and accounting standards that are applicable to publicly traded companies in the United States.

There Are Many More Satyams Out There

I am in agreement with the author, but if the author is around, I was wondering if he could provide some insight as to why this is so much more of a concern in emerging markets than somewhere like the US or the UK (for instance)? Is there some reason that auditors do not pick up this type of thing over there? Is collusion more likely? Are auditors in emerging markets simply more likely to give the benefit of the doubt to the company?

I agree, I'd definitely keep away from India right now, and I'd be very skeptical of other emerging markets (particularly Russia), but I wish I had more info as to why seems so much easier to do in emerging markets.