If the first instalment served to reiterate the gloomy truth that independent directors by and large are after all not truly independent and often are smug, indifferent and blasé about the goings on in the companies, the second instalment serves to reiterate and reinforce the gloomier truth that audit is not an insurance against financial shenanigans — inflation of cash and bank balance by a massive Rs 5,040 crore when the actual cash and bank balances were only Rs 321 crore with the corresponding credit entry being, hold your breath, sales. Some Rs 490 crore of sales too was fictitious with the corresponding debit being parked in debtors. The icing on the cake was fictitious accrued interest of Rs 376 crore.

The exaggerated valuations of Maytas — the twin subsidiaries of Satyam — were blessed by no less than Ernst & Young the formidable house of accountants revered the world over and hence presumably accepted as sacrosanct by the independent directors.

And it was based on such mind-boggling valuations that a staggering Rs 7,200 crore was proposed to be paid for their acquisition by Satyam Computers out of its staggering reserves which in retrospect was also hugely exaggerated.

In a shocking disclosure, Raju the protagonist of the sordid drama says unabashedly that the attempt was to get some prime assets for the sinking Satyam — so as to maintain the aura of sturdiness and robustness in the face of slowing down of the information technology business that has all along been its mainstay — that in the ultimate analysis would not be paid for given the fact that the sellers are after all the handmaidens of Satyam. A Ponzi scheme of sorts.

If valuations of the subsidiaries were outlandish, the accounts of the company were punctuated with gaps not arising out of non-compliance with GAAP but due to sheer brazenness to which the auditors were obviously privy.

Parallels are bound to be drawn between L’affaire Enron and L’ affaire Satyam. But they are not on all fours. Enron was less brazen in the sense that future sales were shown as current and represented by debtors. In Satyam, on the other hand, fictitious sales were shown as real cash sales. What a gall!

Didn’t the auditor check the cash and bank balances physically? Apparently, he didn’t — an unpardonable sin. Kenneth Lay, the Chairman of Enron had the mortification of being called upon to disgorge a staggering $250 million or thereabouts he reportedly made on the sly through his accounting shenanigans to which Arthur Andersen, another firm of accountants, was privy.

Raju, on the other hand, swears that neither he nor anyone close to him even made a rupee. Kenneth Lay soon died of heart attack apparently triggered by depression born of guilty-conscience, in gaol. Raju too would presumably cool his heels behind the bars for a long time and one wishes he lives long enough not only to complete his sentence but to perform penitence for his ignominious acts.

Lay was egged on by greed. But if Raju were to be believed, he was egged on apparently by his concern for his company’s image in the bourses. That of course is no extenuating factor. Nor is the fact that he has kindly agreed to lay himself off from the company.

When he is incarcerated he would leave behind a massive debt of Rs 1,230 crore which he claims he borrowed for Satyam but which he did not book in the company’s accounts for the fear of affecting its strength and vitality. Touché!

Raju has requested his fellow directors to scout around for a company that would take over Satyam. One doesn’t know whether anyone would touch the company even with a barge pole. It is a fit case for compulsory winding up. But whatever happens, the so-called loan for the company should not be accommodated on the balance sheet of Satyam unless simultaneously Raju surrenders the corresponding assets also to the company.

If the first set of revelations brought out the futility of reposing too much faith in the independent directors who are not truly independent, the latest one has brought out the futility of reposing too much faith in the audited accounts.

Either the auditors were too lackadaisical or were hand-in-glove with the management of the company but the bottom-line is erosion of faith in the institution of audit. There is now need more than ever before to emulate the public sector companies and institute a system of rotational auditors who would not too readily cosy up to the promoters of the company.

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