Wednesday, January 7, 2009

Raju nahi raha gentleman

We couldn’t have asked for a more shocking start to the New Year… just when the economies, battered and bruised from the onslaught of sub-prime crisis, recession, bankruptcies, were limping back to normalcy, came another nail in the coffin – corporate fraud…whether this is the final nail or more such skeletons will come stumbling out of the cupboard, only time will tell…

It all starts with a small lie, minute misreporting - under or over statement, to cover the losses and present a better picture… & very soon, it balloons into a huge crisis. The incident once again proves that people just refuse to learn from history… what led to Nick Leeson & Baring Bank’s downfall, now has contributed in making Satyam a junk stock with the now ex-Chairman's damaging disclosures… Problem however is that while the ECB stepped in to safeguard the beleaguered depositors of Barings Bank, the stake holders of Satyam have just about no where to go…

Satyam thus because of its misdeeds, has catapulted into the Enron league with PwC looking to go the Arthur Andersen way… looks like the ban on PwC from auditing NBFCs and banks post Global Trust Bank fiasco, lifted in Mar-08, is now back for good...The audit club just keeps on shrinking…will it be Big 3 now?

This unfortunate incident raises a lot of uncomfortable questions which we otherwise took for granted… Who has the final say on what numbers will be put for reporting, how did the entire company including the top management remain so clueless on the actual numbers, how did the auditors allow such a gaffe, how come the umpteen analysts tracking the scrip and FIIs, MFs invested in the scrip did not smell anything cooking, how come the banks took the reported numbers as final for deciding how much to lend…the list goes on…

While one can question the growth in the numbers achieved & stated in the balance sheet, how does one question the numbers itself? Entities like banks, audit firms etc. have all been set up for different purposes with each entity having separate responsibilities and system overall having supposedly stringent checks and balances. This basic premise has now been questioned as a result of this crisis (as has been the case in all crises)…What we see here is a mass hoodwinking scheme where everyone was taken for one jolly good ride (the sadist in me gloated over the fact that my bank is not one of the 6 banks to Satyam). Ironical…given that the company stood 2nd in the Asia, Pacific and Africa Region for its Corporate Governance practice in 2008…!!

The banks which had anyways become cautious on whom to lend, now will be forced to take a hard relook at all the companies balance sheets and numbers… another round of scenario analysis (the audit oversight sensitivity or fudging sensitivity now), MIS and downgrading follows…more bad news for India and the Indian growth story…

The sad truth is however that checks & balances have failed to avoid any failure in past and there is so reason to believe that future will be any different. While one can do endless analysis on a company, there really is no replacement to gut feeling when it comes to deciding where to invest or whom to lend. Seasoned bankers and investors swear by it and there definitely seems to be a lot of merit in going by one’s own judgement instead of believing some excel workings…As my friend recently commented, this is one hell of a time to be working in financial sector… people like me & my friend above, who started working 1.5 year back, couldn’t have asked for a better exposure (pun intended)…

P.S. Apologies for the extremely corny heading…suggestions for changes will be welcome…

7 comments:

Nehal said...

i think if u like it then use the title as -- making ordinary people do extraordinary things -- which is the tagline of satyam.. It reflects the pun in a subtle way..

Very good attempt on both articles to cite yr view in a timely manner on a current news making theme..

u'll never fail to amaze me, will u? :-)

Only one critique - try writing on a softer topic(s).. U've chosen two really hard hitting serious page 1 issues which doesn't go with the theme of - random thoughts..

shilpi said...

Nehal: thanks for the encouraging words & for the title as well...good suggestion there...

but extraordinary is a positive word & i am sure u will agree what happened is far from positive :)

i am 'incident' blogger as of now... will slowly graduate to other topics & hopefully u will read 'random' things as well...

Unknown said...

I am reading your blog for the first time and you really amaze us with your new talent (or new display of the exisitng talent).

On Satyam (or Asatyam) It will be really interesting to see how the story unfolds. Who all in the Banks or PwC fudged the statements and how come 5000 cr be fudged will be interesting news to follow in next few days.

SRK said...

"The sad truth is however that checks & balances have failed to avoid any failure in past and there is so reason to believe that future will be any different."

Well, you are the economics bond, so you should know that unless the right incentives/disincentives are in place, the expected result cannot be obtained.

"there definitely seems to be a lot of merit in going by one’s own judgement instead of believing some excel workings"

Amen to that!
read: http://www.rgemonitor.com/financemarkets-monitor/255027/the_financial_modelers_manifesto

shilpi said...

MM: Thanks a lot :-) Looks like Satyam saga will be opening a pandora's box... & hopefully public memory wont be short this time...

SRK: for all you know, checks & balances give incentives to people to find a way to break them, sometimes just for the kicks, sometimes for material benefit & the like...

eventually, it boils down to intentions... as they say 'if you have integrity, nothing else matters... if you dont have integrity, nothing else matters'...

btw, the manifesto was just amazing... modelers of the world, unite & change!

SRK said...

"eventually, it boils down to intentions... as they say 'if you have integrity, nothing else matters... if you dont have integrity, nothing else matters'"

excuse me... ambiguous moralistic statements won't stop frauds... and I wasn't arguing for more checks and balances... more effective checks yes...

irrespective of my views on how honest people are, the system should ensure that 'people with integrity' should face less hassles and more rewards than 'people without integrity'... not the other way around...

shilpi said...

SRK: each one of us make the system...why blame or expect the system to come up with a solution when you and me are part of it?

what 'should be' is becoming more of a theoretical question...as kennedy said 'ask not what your country can do for you, ask what you can do your country'...