Here’s our current understanding of the mechanics of the Satyam fraud:
- Chairman Ramalingu Raju pledged his personal stock in the company in exchange for about $1 billion–which he then stuffed in Satyam’s accounts to cover the difference between stated profits and actual profits
- Raju then concocted revenues and expenses to produce the desired fake results.
- The accounts of the subsidiaries were accurate–it was just the consolidated accounts that Raju faked.
- Raju and his “Managing Director” pulled off the whole thing. (Think Madoff and his dot-matrix printers on the 17th Floor).
One difference between Satyam and Madoff, however, is that Satyam wasn’t audited by a lapsed CPA with a tiny office in a strip mall. It was audited by PriceWaterhouseCoopers, one of the “big four” international accounting firms.
Another difference between Satyam and, say, Enron, is that faking several years of revenue and expenses is (or should be) a hell of a lot harder to pull off than claiming that an investor that owns 3% of some off-balance sheet special-purpose entity is actually independent (key to the Enron fraud). Faking revenue and expenses should require faking billions of dollars worth of purchase orders, invoices, etc., for years on end–and then making sure the company’s global financial systems reflected that.
So we ask again:
PWC, how are you going to explain this Satyam thing? How is it possible for two people to produce enough documentation to hide personal transfers of $1 billion of cash into company accounts, along with massive faked revenues and expenses? Wasn’t there some attempt to reconcile subsidiary accounts with consolidated accounts? Why shouldn’t investors conclude that this was YET ANOTHER case of an “auditing” firm taking a single person’s word for something without doing ANY due diligence?
While you’re at it, please tell us why we should even BOTHER TO HAVE AUDITING FIRMS? If the only thing that auditors do is confirm that a company’s accounting arithmetic is accurate, why don’t we just save ourselves millions in fees and misplaced confidence and just admit that audits don’t mean a damn thing?