Sh. Joginder Singh ji
(Former Director – C.B.I.)
Jan. 27 : In the Rs 7,000-crore Satyam scam the company’s chairman B. Ramalinga Raju has admitted to a financial fraud that went on for several years. He has also disclosed that the company’s balance-sheet is a fabrication. Mr Raju, his brother, as well as Satyam’s chief financial officers, are now under arrest.
There has been a lot of glib talk about effective and transparent corporate governance and a system of institutionalised checks and balances. The role of checks and balances is best illustrated in the thriller Silver Blaze where Sherlock Holmes probes the theft of an expensive racehorse on the eve of an important race. Asked whether there is any point on which Holmes wants to draw the Scotland Yard detective’s attention, Holmes points to “the curious incident of the dog in the night-time”. The detective says the dog did nothing in the night, to which Holmes replies, “The dog made no noise because he knew the thieves well”. Perhaps, this explains why Satyam’s internal and external auditors didn’t squeak.
The truth is that even government companies and organisations do not function as models of probity and efficiency because of continuous interferences, not only in taking decisions but also in awarding contracts and misuse of funds by those who remote-control them from their seats of power.
When the infamous Harshad Mehta scam took place, Prime Minister Manmohan Singh, who was the finance minister at that time, described it as a failure of the system and had declared that steps would be taken to rectify the situation and plug loopholes. Then came the Ketan Parekh scam and now the Satyam scam. Each new scam seems to be overtaking the previous one and yet there is no single agency to deal with frauds in the corporate sector.
One problem is that enforcement is split — there’s the serious fraud investigation office, department of company affairs, Sebi and the police. The police comes in only in the final scene and can take action only for the offences of cheating and fraud. A police case means a long-drawn affair which may take up to 10 years for the case to be tried, heard and the judgment passed.
There is hardly any worthwhile punishment for scamsters, their collaborators and the internal policeman — the auditor. The Companies Act lays down the auditor’s duties and powers, but the penalty for non-performance is puny. If an auditor fails in his duties, the maximum penalty is a fine of Rs 10,000.
Incidentally, PricewaterhouseCoopers, the firm which audited Satyam’s books, received a consolidated audit fee of Rs 4.3 crores for the financial year 2007-08 — almost twice of what Satyam’s peers like TCS, Infosys and Wipro pay to their auditors. Satyam’s promoters and others who have benefited could not have done so if there was fear of being found out by the auditors. According to one report, about Rs 800 crores was made by insider-trading and sale of shares.
Many Ketan Parekhs, Harshad Mehtas and Satyam scams which will surface if company auditors are willing to put their neck on the line and risk losing business. But it is doubtful if anybody in his business would commit harakiri.
According to the company law, there is a maximum fine of Rs 5,000 and imprisonment of upto two years for fudging accounts. The Companies Act provides for a special audit, investigation, reconstitution of the board of directors and even a “dawn raid”. But the penalties for non-compliance are as good as non-existent. Besides, there is no mechanism even for checking corporate balance-sheets and account statements.
Those who do not learn from history are condemned to repeat it. The investigation into the Enron fraud had also shown its auditor, Arthur Andersen, of being as guilty as the Enron CEO.
The corporate scene is not as rosy as it is made out to be. No doubt there are a very good companies with impeccable record, but the same cannot be said for a majority of companies. Failures are bound to happen in any business, but any malfunctioning and crash based on a false rosy picture in which the shareholders are cheated is totally unacceptable.
While it is correct that the government has no business to interfere in how a private businessman conducts his business, the fact is that no business can become really big without the participation and investment of the public, government-supported financial schemes, institutions and banks.
Therefore, a mass of people, however gullible they may be, cannot be allowed to be taken for a ride by a few devious and unprincipled individuals. Too much government interference can kill the goose that lays golden eggs, but we must remember that conmen have existed from times immemorial and would continue to exist.
The loser in any scam is the common man and it is for the government to ensure that it is easier for the corporate sector to do what’s right and difficult to do what’s wrong. What is the point of having so many watchdogs and talk about good corporate governance when the country’s fourth-largest IT company can easily defraud and take millions of people for a ride?
The government must decide what it needs do to end such occurrences in the future, and do it. It’s as simple as that. The government should remember what Indira Gandhi once said: “My grandfather once told me that there are two kinds of people: those who work and those who take the credit. He told me to try to be in the first group; there was less competition there”.