What are the ramifications of the Satyam fiasco? There could be several but the greatest of them all will be the body-blow it has probably dealt to that fickle thing called confidence.

As someone remarked in an anguished conversation soon after the outrageous confession, Mr Raju has probably achieved what the Lashkar-e-Taiba terrorists set out to do but failed: damage the confidence of international investors in India.

One does not want to appear alarmist but the first question that every company hoping to do business or raise funds abroad is likely to face from now on is: how trustworthy are your credentials?

Just look at Satyam’s credentials. It is amongst the top four IT exporters from India, it is a $2-billion blue-chip company listed on the New York Stock Exchange, it operates in 66 countries worldwide and counts 185 of the Fortune 500 companies among its clients, it employs 53,000 people, it is audited by a Big Four audit firm, PricewaterhouseCoopers; it was awarded the Golden Peacock Award for Excellence in Corporate Governance in 2008 by the World Council for Corporate Governance and, finally, Mr Raju himself was chosen the Ernst & Young Entrepreneur of the Year 2007 by a jury headed by no less than Mr K.V. Kamath, Managing Director, ICICI.

Can it get better than this? If the promoter of a company with such credentials can indulge in a scam of the highest order, whom do you trust?

Satyam Computer’s peers in the top bracket, some of them with impeccable credentials (at least till now), are bound to feel the pressure as they face their clients and investors. Of course, corporate scandals are not uncommon and American clients of India’s outsourcing companies may be only too familiar with them.

Yet, the troubling fact is that the Satyam scandal has come at a most inopportune moment for the outsourcing industry which is grappling with a slowdown in its major markets, billing pressures and, importantly, apprehension over a possible protectionist turn in American policy under the incoming Obama administration.

Foreign investors are unlikely to take kindly to the Satyam fraud; the Sensex skid by 7.25 per cent on Wednesday and we are likely to face extreme turbulence, as more foreign investors get jittery and unload their holdings across Indian companies.

The corporate sector has seen many corrupt incidents in the past but rarely has the promoter of a high-profile listed company been caught with his hands in the till.

Investors have already lost massively, with the market capitalisation of Satyam crashing from Rs 15,100 crore when the Maytas saga started to Rs 2,680 crore now, with Rs 9,300 crore wiped out on just one day — January 7. Lenders, especially overseas, could henceforth increase the risk premium they charge Indian companies.

After all, if a balance-sheet signed by a Big Four audit firm shows up a billion-dollar hole, what do you base your lending on? While the smaller borrowers could find money hard to come by, the larger ones may be forced to shell out more, at least till confidence is restored.

Pitiable is the plight of the 53,000 employees of Satyam, who face a turbulent period ahead. Given its inherent competencies in outsourcing and servicing high-profile clients, it is unlikely that Satyam will be wound down. It is more likely that Satyam will be acquired and subsumed into another company but the employees are bound to pay a part of the price.

This could be in the form of attrition, lower compensation or relocation. There is a long uncertain phase ahead of Satyamites; they are likely to lack direction from the top, with the Damocles’ Sword hanging over their jobs. Worse, the option of switching to other companies is also next to zero, except for those working in very niche segments.

There are some tough questions a lot of people need to answer, not the least the auditors and credit rating agencies. It is inconceivable how the auditors could have overlooked such obvious acts as overstating earnings, inflating cash and bank balances, understating liabilities and overstating receivables.

One of the basic audit practices is to call for letters of confirmation for bank balances from the concerned banks and debtors, even when starting the audit of a company. It is obvious that this was not done.

Auditors generally take shield under the verbosity of their reports, with phrases such as “in our opinion and to the best of our information and according to the explanations given to us…” which is the format set out under the Companies Act. Auditors also only certify the balance-sheet as “true and fair” and not as “correct”.

It would be sad indeed if PricewaterhouseCoopers resorts to this shield. The lapses are on basic checks.

By Mr Raju’s own admission, the practice of inflating profits had been happening for “several years” and it is strange how the auditors failed to notice it. PricewaterhouseCoopers has a lot to answer for.

The Institute of Chartered Accountants of India (ICAI) should take charge of the situation and suo motu investigate how the lapse occurred. If the auditors are found guilty of negligence, they should be disqualified from membership and the audit firm should be blacklisted.

There have been instances in the past, especially in the Harshad Mehta securities scam of the 1990s, where the negligent auditors either escaped scot-free or with a mild reprimand.

The ICAI would do well to not repeat those mistakes, for what is on the line is the reputation of an entire profession. How the ICAI acts in the next few days could well make or mar the profession of auditors.

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