The Hindu Business Line : Corporate scandals: Ensuring fast and deterrent action

The Government, the RBI and SEBI must simplify and streamline their procedures to be able come down heavily, and quickly, on the firms indulging in fraud.

The SEBI Chairman, Mr C. B. Bhave…Swift action must be taken against the culprits before they fade from public memory.

B. S. Raghavan

The great betrayal at Satyam Computer Services, the fourth largest firm in the informational technology (IT) sector with business in 66 countries and figuring prominently on the New York Stock Exchange, boggles the mind. But was it not all according to the script, looking at what was going on around the world, beginning with the fall of Enron and Arthur Andersen?

It is not that warnings were wanting. This paper has been in the forefront delivering them many times in the past. For example, in an article on ‘Capitalism’s foul odour’ (Business Line, February 15, 2002), I had written: “Enron is not the end. We are watching a mega-serial in which corporates and auditing firms will find the temptation to play Ponzi too hard to resist, kicking up dust in the process by generating more, and juicier, scandals.

Hidden horors

“If the scale and magnitude of India’s stock market scams and financial frauds do not bear comparison with the muck thrown up elsewhere, it cannot be surely because rectitude and business ethics in India are of a higher level. For one thing, the “hidden horrors” (as The Financial Times calls them) of bogus balance-sheets and market machinations fly above the heads of the ordinary investor, leave alone the lay public.

“For another, many otherwise shocking cases may not come to light because of the lack of sustained control and vigilance exercised by India’s watchdog bodies, such as the Security and Exchange Board of India and the Institutes of Chartered and Cost Accountants, their lax enforcement of standards of disclosure, and conflicts of interest and transparency.”

On August 5, 2002, I had this to say through these columns: “Even the top corporate executives and enlightened persons in public life here still continue to go gaga at all the foreign names, and swallow the prescriptions peddled by the accounting and rating firms as if they are gospel.

“The irony of ironies was that PricewaterhouseCoopers opened in Delhi a pretentious outfit to teach us ethics a day after it paid a hefty fine of hundreds of millions of dollars for malfeasance in the US.

Fudging and fiddling

“The Government and the Institute of Chartered Accountants of India should jointly mount a drive to guard against the Big Four (auditing firms from the US) subverting our own relatively higher standards of accountancy and auditing norms, and against our corporates falling a prey to their wiles and guiles.”

And again, on July 12, 2004: “… the free market should not be allowed to degenerate into a free-for-all market. It is in this context that the role of the Government as a moderator, umpire and regulator becomes important. That is why constant vigilance against human greed getting the better of public weal is necessary. India cannot simply afford a scandal of the nature of an Enron, Tyco or Worldcom exploding in its face in the future.”

Well, Satyam has exploded in our face. In a tantalising departure from the customary denials of any wrongdoing, the Chairman-cum-Founder, Mr Ramalinga Raju, has set a new trend (which, one hopes, will catch on) of making a clean breast of all the fraudulent transactions extending back to several years. The Ministry of Corporate Affairs has promised investigation by the Serious Frauds Investigation Office and stern action under the law against the guilty “after verifying the facts”.

It is unclear what more facts have got to be verified when Mr Raju has laid bare the entire range of fudging and fiddling in all its grimness. As regards the auditors of Satyam, Price Waterhouse, the President, Mr Ved Jain, of the Institute of Chartered Accountants of India (ICAI), has made a thundering declaration that “to any person who has not worked according to our standards and our expectations, severe punishment will be given”.

He has also qualified it in the same breath by stating that before the body takes any action against the members involved in the “fraud”, the ICAI needs to collect all facts and information. “So we are looking into that and we will start our proceedings”.

Such hedgings do not inspire public confidence. Actually, going by past experience, there is every reason to fear that it will be some years before these inquiries result in any tangible outcome. Meanwhile, the episodes, deserving of the severest condemnation and punishment, will fade away from public memory as has happened in the case of the securities scam of mid-1990s and the misdemeanours at the Global Trust Bank (GTB) brought to light in 2003. In fact, they provide good case studies in themselves of the dilatory nature of the working of the Government, and regulatory authorities such as the Reserve Bank of India (RBI), the Securities and Exchange Commission of India (SEBI) and the ICAI.

Dubious record

Not many will remember that Price Waterhouse were also the auditors of the Global Trust Bank when the scandal broke, and in July 2004, the RBI had written to heads of banks and non-banking finance companies asking them to stop engaging Price Waterhouse and Lovelock & Lewes (the previous auditors of GTB, and again, part of the Price Waterhouse family), while directing the ICAI to investigate the failure of the two firms to “detect a hole in GTB’s balance sheet”.

The matter has just not seen the light of day since. There is also no way of knowing why an audit firm with such a dubious record, instead of being ostracised, has continued to be in the good books of the corporate world. Unless the retribution to culprits caught red-handed in the corporate sector and the audit fraternity is swift and condign, one can bet on such scandals assuming more alarming proportions and occurring with menacing frequency.

The Government, the RBI and the SEBI must simplify and streamline their procedures as to be able come down heavily on the firms indulging in fraud and other types of malfeasance within four-six months of their coming to notice.

As regards the ICAI, the Naresh Chandra Committee on corporate audit and governance, appointed by the Government, has made the salutary recommendation that an independent prosecution directorate, with all the powers of a civil court under the Code of Civil Procedure, be created within the ICAI to exclusively deal with all disciplinary cases and expedite the process of inquiry and decision-making by fully devoting its time and energy towards processing these cases. It is essential to amend the Chartered Accounts Act as soon as possible to give effect to this recommendation.

As of now, the disciplinary powers of the ICAI under the Act are limited to censure or removal from practice, permanently or for a particular period, of only the partners/accountants signing the audit reports for professional misconduct; this is not deterrent enough.

It should also be vested with the power to ban/blacklist the firm as a whole for whatever period considered necessary. Likewise, the ICAI should be vested with the power to levy monetary penalty of whatever amount adjudged to be effective in keeping the firm away from mischief in the future.

( blfeedback@thehindu.co.in)

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