Summary
The Satyam fracas is one more fraud in the long history of misappropriation of resources given in trust to individuals and institutions. This particular episode is drawing heated debates in India - especially on television and print news. What this entire episode however brings to me is the following - (a) any control system is only as good as the people administering it. (b) audits are not a replacement for responsible management (c) Laws and regulations cannot deter persons who wish to defeat them - atleast temporarily. What is required is that companies are administered ethically and in accordance with rules of conscience. In this analysis I look at the entire episode from the viewpoint of audit quality and administration of accounting standards.
Analysis
1. Auditors, accountants and the role they have played in the collapse of Satyam and the loss of $1 bn of resources are in the spotlight.
2. The Parmalat case was a case of inflating the cash balances held by the company. Satyam apparently is another case of the same genre.
3. The inflated cash balances could probably have been easily detected by following GAAS - whether Indian or US. The accounts of Satyam are audited both under Indian and US laws as the company has issued securities in both these jurisdictions and is based in India.
4. The Satyam case points to a case of miapplication or non-application of auditing standards as well as pure common sense. Most audits are based on pure common sense and auditors are expected to look at basic audit evidence in the course of drawing up their opinion and report on the financial statements.
5. The money trail in the Satyam case will probably end up in lost traces somewhere to a great extent - as most such cases normally do.
6. What the Satyam case brings to my mind is that:
- management should be proactive
- investors and analysts should be probing in their questions
- loose threads in financial statements - which have been several for the last few years - especially in the "Notes to Accounts" should definitely be properly probed.
- The reputation of auditors and management is no replacement for proper analysis of financial statements and other factors effecting corporate performance.
