"The truth comes out when growth stops"

It was quite remarkable (yet sad) that just at the start of the fourth class of our course on Corporate Governance -where we were to discuss the article "Directors' new clothes"- the story 'Raju admits fraud' broke. Even before the course started, we were assured by the professor that the Maytas-Satyam fiasco would be a case study in action. Little did we imagine that bigger waves were travelling in our direction. As our professor tagged it, this is nothing short of a "Corporate Tsunami".

Read Raju's 'confession' here

While a rather sad one given the magnitude of the situation- impacting about 50000 employees and hundreds of thousands of retail shareholders, reputation of the offshoring industry at large etc- this is as real time as a case study discussion can get. While learning the processes of the board of directors, it is difficult to believe Raju's claim that no one in the board had a hold on the financial statements. What was the audit committee doing?

The revelations include an overstatement of cash on balance sheets of more than a billion and a half dollars. It should to be noted is that it was cash that was overstated. It is befuddling that they could manage to do that for several years.

Quoting our professor- 'Truth has to come out when growth stops' one must recognise the weight of this statement. Driven by short term growth targets, there is a small (or large?) component of 'catching up with your claims'. In the sense that you provide guidance based on projected growth. You show accrued income based on trust that remittances will follow. But at some points if your financials had reached a level of fiction that is unrecoverable, you have to start losing the chasing game and, then, when the flow of cash depletes as would happen in a slowdown, the litmus changes colors.

While facts ought to follow soon, there is very little left to imagine whether the company could have done this without the support of the auditors.Two-thirds of the assets (cash) never existed? How can you drag that on for years? What were the auditors (a big one too) thinking while passing the quarterly reports? What about bankers who would no doubt be carrying Satyam's annual reports under their pillows?

The showdown has just begun when it comes to India Inc taking a beating on credibility and corporate reputation. While it is true that this could have happened to any company in India, it has happened to one in the IT industry. Barring few notable exceptions in conglomerates in traditional business, largely IT companies were supposed to be largely clean and transparent. This perception comes from the fact that IT companies dealing with US companies or listed in the US need to adhere to SEC requirements and regulatory standards. Additionally, the company had won Golden Peacock in the recent past. Obviously, this again proves that awards do not build public trust and corporate reputation but a past track record of responsible action does.

Is there a systemic issue in how audits are conducted? As SG, one of our classmates, asked of the professor- Given US has failed to put an airtight seal on financial failures, does India have the wherewithal to implement checks and balances in place to avoid such incidents in the future?

What about the risk to Indian outsourcing industry? Given that this question is raised, what will the Government of India do, as in really do about the irregularities in the system?

PS: This is also a test for the logic of 'Wisdom of the crowds'. Some companies (including midcap) whose numbers growth, in the past, have run into public suspicion radar are already being dumped by investors. In the last few hours, each of these companies' stocks have lost about 25%. So, is the market always right? Are there more skeletons in the cupboard waiting to roll out?