Republic of scams

Benjamin Franklin once said, “There are three things that men are most likely to be cheated in: A horse, a wig, and a wife.” One can easily substitute the word horse for wealth, as the former was considered a measure of a man’s wealth at the time. The desire to become rich has been at the root of all scams recorded in history.

India is not new to scams — they have plagued us right from the time of independence. But the regularity with which they are taking place is truly shocking. Also, given that most of the scams involve the same old tricks of cheating such as underwriting or fudging company books, one will not be wrong in saying that history is repeating itself. The only thing that distinguishes one scam from another is that the companies and the principle actors are different. But the motive remains the same in each case.

The Rs 7,000-crore scam that chairman of Satyam Computers Services Ramalinga Raju has admitted to has taken the wind out of corporate India. He has disclosed that the company’s balance sheets were dressed-up over several years. It is a crime for which he and his brother as well as the chief financial officers of the company have been arrested.

There can be no doubt about the fact that this was a case of corporate fraud of epic proportions, which like other similar white-collar crimes will take centrestage in public memory for some time to come. In the aftermath of the fraud there has been a lot of 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, wherein Sherlock Holmes deals with the theft of an expensive racehorse on the eve of an important race. Asked whether there is any point to 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 replies, very aptly, that the dog did nothing, to which Holmes responds that the dog made no noise because it knew the thieves well. Perhaps, this is what happened to the internal and external auditors in Satyam’s case. As it is, the laws in our country are so lax that a thief who has stolen a bottle of liquor gets almost the same quantum of punishment as that of a prince embezzler.

Much has been made of the role of independent directors in the Satyam saga. I asked an officer, who had retired from a top audit and accounts service, as to what he was doing these days. He said that he was an independent director in a large number of companies. Then I asked him as to how seriously he took his job, to which he replied that he was only interested in the sitting fees and perks, and that if he raised too many queries he would be eased out of the board.

The truth is that even Government companies and organisations do not function as models of probity and efficiency because of the continuous interference, not only in taking decisions but also in awarding contracts. Large amounts of funds are misused by those who exercise control over these companies from their seat of power.

When the infamous Harshad Mehta scam took place, Mr Manmohan Singh, who at the time was the Finance Minister, described the scam as a system failure and had subsequently declared that steps would be taken to rectify the situation. But promptly after that surfaced the Ketan Parekh scam.

Each scam that comes to light seems to be bigger than the previous one. And each of them is due to greed and the lack of any deterrence. The best of laws with the worst of men can be misused and the worst of laws with good men will never deter these corrupt practices. There is no coherent, integrated machinery in our country to deal with such fraud in the private corporate sector.

The responsibility of enforcing the law in the corporate sector is split between the Serious Fraud Investigation Office, Department of Company Affairs, SEBI, Banking Department and the State police. The police comes in the final picture and can take action only for offences of cheating, fraud and defalcation. A police case can mean a long-drawn affair, which may take even 10 years to be finalised.

Truly speaking, there is hardly any worthwhile punishment for the collaborators and the auditors in such cases of fraud. The Companies Act undoubtedly lays down the duties and powers of the auditor. But the penalty for non-performance is pathetic and puny. If an auditor fails in carrying out his duties properly, the maximum penalty is a fine of Rs 10,000.

Incidentally, PricewaterhouseCooper, the firm which audited the books of Satyam, received a consolidated audit fee of Rs 4.3 crore for the financial year 2007-08, almost twice as much as Satyam’s peers like TCS, Infosys and Wipro pay to their auditors. Satyam promoters and others who have benefitted — some by insider trading — could not have carried out their scam with the fear of being found out by the auditors. According to one report, about Rs 800 crore was made by insider trading and sale of shares in this scam.

The truth is that there can be big or small money involved in auditing, depending upon the size of the company. No auditor, unless he wants to be out of the business, would be too harsh or expose any wrongdoings. There are many Ketan Parekh, Harshad Mehta and Satyam scams waiting to emerge if company auditors are willing to put their neck on the block and lose their business. But it is doubtful, if anybody would commit harakiri.

According to company law, for fudging of accounts there is a maximum fine of Rs 5,000 and imprisonment of up to two years. No doubt the Companies Act does provide for special audit, investigation, reconstitution of the board of directors and even ‘dawn raids’. But the penalties for non-compliance are as good as non-existent. Moreover, there is no mechanism even for test-checking a few corporate balance sheets and accounting statements certified by auditors.

Those who do not learn from history are condemned to repeat it. The investigation into the Enron fraud had also shown its auditors, Arthur Anderson, as guilty as Enron’s CEO. No doubt that there are a number of very good companies with impeccable records, though the same cannot be said about every company. The Government must decide what it should do and then do it to end such occurrences. It would be prudent to remind it of what Mrs Indira Gandhi 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.”