The Satyam Saga and lessons learnt

There was a scam waiting to happen in the Indian market......and Satyam obliged. The enormous growth in IT and related services industry was the trigger. A lot can be argued about quality of management / intent of management etc, but I suppose it begins with keeping the investor expectations in mind. However, whilst there was an incentive to cheat was high, Satyam paid a relatively low price for the same. To swindle approx Rs 7,000 crores, all it needed was to increase yearly auditor fees three fold to a paltry Rs 3.5 crores and upping their out of pocket expenses from Rs one lakh to Rs five lakh and fill the independent board members with eminent personalities and pay them handsomely.

External auditors directly remunerated by client creates this conflict of interest - they are caught with two conflicting choices - whether to keep their clients happy or work as watchdogs for the investor community for whom they are appointed. Invariably the client wins - he is at hand and is in control of the purse strings........both of which have an impact on "auditor independence". The audit committee / independent directors sitting in an ivory tower have to depend solely on the auditors observations or lack of it. What then is the role of internal auditors? - quite high but invariably they need to report to the same management that perpetuate the fraud. So in many instances the internal auditors report / observations come to a nought.

What needs to be done
The first thing is to delineate management with ownership. Professional managers with only the prerequisite allowable stakeholding as per Company Law should be allowed to manage the affairs of the company. They should be responsible to the Board and a Committee of Stakeholders which should have representation from minority shareholders. The Committee of Stakeholders has a wider connontation than Committee of Shareholders - they would have representation from all major stakeholders of the company ie, clients, employees, community etc along with shareholder. The Committee of Stakeholders need to appoint the Internal and External Auditor. These should be two separate Firms rotated every two years with a Peer Review done. Remuneration to auditors would be paid through the Committee of Stakeholders who would use the Company's resources to pay the auditor.
This route may not be applicable to owner managers having substantial control of the Company.
This appears a more foolproof route to ensure "auditor independence". The business decision making should be done by the Board in conjunction with the Management Team. However, the Committee of Stakeholders could be appropriately advised on the management's decisions once in the public domain.

Making the cost of fraud prohibitive is another deterrent - auditor licenses could be revoked if wrongdoing is so attributed and criminal cases could be slapped on Board or Management who perpetuate such fraud.

However, scams will surely still happen..........if the intent is to fraud then it maybe difficult to stop the same.