Wednesday, January 7, 2009

Satyam's Great Fall

Satyam CEO's revelations on inflated cash have rocked the bottom of the already deflated stock indices in India. Some say that India's outsourcing industry itself will now be viewed with suspicion. While I do not think it will happen (what with the American financial institutions in trouble due to reckless lending and the double whammy from Mr. Madoff's Ponzi scheme still smarting, I do not thinkg the offshore outsourcing industry will be singled out as a miscreant), I do think that such events are serious blows to our credibility as a world-beating player in IT services. They come at a diificult time and any merger or acquisition that will see Satyam become part of another company will undermine the true value that Satyam has commendably built into itself- in terms of its delivery processes and strength in Enterprise Application Services.

On online forums, Indians are reacting with customary hyperbole, "Raju is worse than Kasab (the captured Pakistani terrorist from the Mumbai siege):, says one. Another asks, "Who is the idiot who is running their Finance department?"

Raju released a letter to the board of Satym and the SEBI chairman yesterday. A paragraph in the letter caught my attention:

The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew significantly (annualized revenue run rate of Rs 11,276 crore in the September quarter, 2008 and official reserves of Rs 8.392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations – thereby significantly increasing the costs.

While ethical standards in companies like Wipro and Infosys are considered to be high by the general public (and their managements have been conservative and transparent to strengthen this impression), this is a scenario that could unfold in any organization. If there is a small differential in the cash flow as reflected by the books and appears in reality, will a CEO contradict his published, audited books and go public with this discrepancy? Will that not affect the impression of the company in the minds of its investors, customers, employees and other stakeholders. In Raju's case he just postponed the problem until it grew bigger and dominated the company itself. If he had gone public when this problem first started, will it have taken a beating? It may well have, and that is what a CEO needs to commit in his/her mind. Wipro's ethical guidelines state that "anything grey is black", meaning that whatever the price, the company will stay on the right side of the law and ethics. Will this be put to practice in a situation like Satyam's?

I'm firm in my view that the laws of the land must take their course in prosecuting Mr. Raju and any others involved. But the fact is, as Solzhenitsyn said, "the line between good and evil runs through the heart of every man."

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