The Hindu Business Line : Rating agencies favour greater due diligence

Kolkata, Jan. 13 Rating agencies plan to step up their due diligence process and strengthen their rating methodology after the recent Satyam incident, according to senior officials at rating agencies.

Rating agencies base their analysis on the audited balance sheet of a company, which forms the primary source of information.

“Rating agencies do not look at a company’s primary accounts.

“The recent incident has thrown open some challenges for us as it is practically impossible to conduct a re-audit of accounts,” said Mr D.R. Dogra, Executive Director, CARE Ratings.

While the Rs 7,100-crore financial fraud at Satyam is only an isolated incident and should not raise suspicion over the entire auditing fraternity as a whole, the rating agencies should, however, take additional measures in order to ensure there is no discrepancy in ratings, said senior officials.

“This (Satyam fraud) is only a one-off case but it has certainly made us more cautious now, we will try and take a closer look at the balance sheet. Though the rating methodology need not be changed we will certainly be more cautious,” Mr Dogra said.

Beyond pure numbers

According to Mr Raman Uberoi, Senior Director, Crisil, though rating agencies clearly rely on audited accounts the analysis goes beyond pure numbers.

“We conduct a comparative study of the performance of the company with regard to its peers in the industry. We will continue to do it and try to strengthen it further,” Mr Uberoi said.

Though the fundamental information for any rating agency is the figures provided in the audited balance sheet, the analysis, however, is based on various other parameters, according to Mr P.K. Choudhury, Vice-Chairman and Group Chief Executive Officer, ICRA Ltd.

The analysis of rating agencies, Mr Choudhury pointed out, goes beyond the balance sheet and is based on interaction with internal and external auditors.

“We also look out for a host of other issues such as the sector in which the company operates, the company’s assets such as plant, machinery and market share,” Mr Choudhury said.