The shocking admissions of B.Ramalinga Raju, CMD and the promoter that the financial statements of Satyam Computer Services Ltd, a global Indian company in business and information technology, have been fudged for years showing inflated margins, cash and bank balances and under-reporting of liabilities have sent shock waves. In fact, financial statements which are audited to confirm their fairness and correctness are long perceived to be among the cleanest documentations in the public domain.
While we have not yet seen the final outcome of the scandal with several regulatory agencies trying to get hold of CMD and other key officers of the company and grill them to find out how they did it and what course of action can be taken against them, the sordid incidence prima facie raises effectiveness of auditors, board of directors and the regulators.
Auditors are appointed by shareholders with the understanding that they will act as watchdogs. But auditors quite often owe their employment in the company to management and moreover they are in several cases ensured handsome incomes for rendering other consultancy services. So, short of collusiveness, temptations to be pliable are very strong and luckily escape routes from responsibility are quite open: they can always say that they have followed required audit procedures that include entitlement to rely on management control over financial reporting and the information and explanations provided by the management.
So, both fairness and correctness of the records are governed by these norms which do not seem to require auditors to be little more inquisitive wherever they see abnormality with respect to successive periods and/or peer group performance. In Satyam's case the question is: can Price Waterhouse, the auditors, blatantly say that their audit reports of several years are unreliable and incorrect because the CMD now says that financial statement of the company have been fabricated for several successive years?
In the board of directors, promoter group is strongly placed to play around and other directors have to see that promoters do not treat corporate resources as their own and work prima facie in the interests of the company. Here, non-promoter directors should ensure sound corporate governance from the point of view of particularly the minority interest groups. Independent directors appointed sometime to add prestige hardly display their professional and academic skills and they are more of ornamental value. Some have suggested that there should be proportionate representations of large investor groups (other than promoters), but the question is, what is preventing this in equity based voting in shareholders meeting?
Regulators wake up too late and only for cure and not prevention. Research, which should be strongly founded in such bodes is terribly lacking and is limited to collecting the data but hardly making any use thereof.
Unfortunately, corporate scandals which to some extent are fallout of downturns cause lot of damage to investors' confidence, which is already ebbing. Thus, the government and regulatory authorities need to take corrective actions promptly and also come out with transparent preventive machinery. The episode as well calls for upgrading financial literacy in tandem with massive resource flows.
Source : www.projectsmonitor.com
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