Republic Days are not the same anymore

As a child (age 5-15) and even during the next decade, I remember the joy and enthusiasm with which my friends and I used to watch the Republic Day parade and celebrations. Somehow, the sight of those advanced weapons being displayed used to instil a sense of confidence and security, although I remember asking my father when I was 10 or 11 years old whether it was a good idea to display our military might so openly. My naive mind assumed that enemy powers waited for our Republic Day parades to figure out what defence systems we had!

Today, I am older- and wiser- and realize that the  “intelligence networks” work 24×7, 365 days a year to try and keep our country safe. And therein lies the irony. As a nation, we still display our weapons systems at Rajpath. But as a people, our sense of security is far lower now than it was 15 or 20 years ago. Terrorists are trying to outsmart security forces and the “intelligence” agencies. Even this morning, 2 suspected terrorists were killed in UP, supposedly trying to enter Delhi in time to unleash terror and mayhem tomorrow.

Although we as a nation have made creditable strides in many areas, the basic sense of unalloyed pride and joy at our progress is marred by a veil of fear.

Satyam: the best way forward

Once the new 10-member Board is in place, it will be time for debate and discussion on the future of Satyam. Does it make sense to run it as a going concern or is it likely to be better for shareholders and employees if the entire company or parts thereof are sold to various investors?

Fictitious balance sheet or not, let us not forget that till a month or so ago, when the spectacular fall from grace began with Ramalinga Raju’s Maytas merger misadventure, Satyam was seen as one of the top India-based IT services companies. Its client base included several blue chips around the world, with many of whom, Satyam has multi-year contracts. Of course, the UPAID litigation and the blacklisting by The World Bank did cause some damage to Satyam’s reputation and business prospects. But even so, it is probably attractive to someone like Anil Ambani or Sunil Bharti Mittal to consider acquiring Satyam. Doing so gives them a skilled employee base of 50,000 people, ongoing contracts, well-established processes and a global delivery footprint. All these are vital elements for any company aspiring to become a big player in the global IT services space.

Existing IT services players- especialy from India- would be happy to acquire specific business units- for instance, Tech Mahindra, which has a strong telecom practice, may benefit from taking over Satyam’s large Communications/ Media /Entertainment practice. An L&T Infotech, on the other hand, may prefer to acquire Satyam’s BFSI or Manufacturing business unit. Satyam’s strong SAP practice would be very attractive to IBM, Accenture,  or even Cognizant or Patni. And although HCL is burdened by the debt it took on to fund its recent acqusition of Axon, think of the phenomenal synergy it could derive in the ERP/SAP space by buying out that group from Satyam. Axon acts as the “front end”, while the Satyam SAP practice becomes the “back end” engine.

But I am sure this is exactly the kind of thinking that deal-makers from I-banks and advisory firms must be engaged in. To paraphrase Shakespeare’s Macbeth, “if it were done when ’tis done, then ’twere well it  were done quickly”. Speedy action alone will help alleviate at least some of the misery Satyam’s investors, employees and clients are facing.

Let me just sit back and see how this story plays out in the weeks and months ahead.

The Satyam saga

The season of bad news from 2008 seems to be continuing into the new year. Earlier in the week, Ramalinga Raju, Founder and CEO of Satyam Computer Services Limited, India’s 4th largest IT services company, declared that he had perpetrated a fraud by inflating the company’s balance sheet to the tune of over Rs7000 crores. Worse, he claimed that he had been systematically cooking the company’s books for the past several years.

There have been immediate ramifications in terms of investors and employees. Naturally, many of Satyam’s clients too are worried about the company’s ability to continue servicing them- and some may well take the decision to sever links with Satyam and partner other top tier vendors.  What is not so obvious (at least in terms of grabbing media attention) is the pain of the entire vendor ecosystem that Satyam has built- caterers, printers, car service providers, travel agents, builders, interior designers and many more. And what of the banks that may have extended them working capital loans or even long-term debt?

Several questions arise as a direct consequence of this shocking episode. Some may take weeks and months to answer; others may never be fully resolved. And there are several other angles that may be uncovered only in the fullness of time.

1. How could a fraud of this magnitude have been committed without several people in the company’s Accounts/Finance departments being involved? It is virtually impossible for the CFO (and possibly several senior Finance executives) to have been in the dark. If they were, it would raise even more fundamental questions about their professional competence, given the checks and balances that exist even in companies a tenth of Satyam’s size.
2. OK- so the entire Accounts & Finance department was somehow compromised. But what of the company’s internal auditors and statutory auditors? The science of auditing has evolved to such a degree that computer-based testing is today routine. And with ERP software being the repository of all enterprise financial data, could trained professionals have been so naive as to rely only on hard copies that, arguably, may have been forged?
3. Directors on the Board generally rely on information provided by the management (CEO/COO/CFO). Of what value is such information if there is a chance that it is falsified?
4. Investors and regulators around the world rely on audited financial statements- which often state that the auditors have relied on data provided by the management. Of what value is such data- and therefore, the audited accounts- and consequently, the valuations and other analyses performed on the basis of such data?

L’affaire Satyam will force regulators to impose tighter disclosure norms and more audits. But in a world of “Big 4″ auditors, isn’t it easy for them to get into a “you scratch my back, I’ll scratch yours” kind of arrangement? In other words, firm A okays the audit conducted by firm B, which okays work done by firm C, which in turn certifies work done by firm A. I know I am being very cynical- and perhaps unfair on the many professionals in the audit business whose competence, probity and integrity are above question. But in the light of the unraveling of Satyam (and several other previous corporate disasters like Enron, Worldcom, Global Trust Bank and so on), would you not be cynical and suspicious as well?

And who knows what long-term impact this entire episode may have on India’s IT and ITES industry in particular and on India Inc in general?

And as I sign off, think about this: what if more frauds come out as a result of the SEBI-mandated peer review audits on companies in the Sensex? What’s that I hear about the Indian stock market indices going back to 20K and higher in the next couple of years or so?