The terrorist attacks on Mumbai in November and in past years have showed up the weaknesses of India’s internal security system, but also laid bare the fact that security failures are linked inextricably to broader issues of governance and corruption (policemen who allow the smuggling of commercial contraband also allow RDX to come in). In the same way, the Satyam scandal points to the dirty underbelly of India’s corporate world, and of its regulatory and legal framework. The fact is that Satyam would not have happened without the failures of the company’s independent directors, auditors and bankers, not to mention senior executives not linked to the guilty promoters. Such broad-based failures do not come together by accident; they have to be pointers to broader, systemic failures.
In the Satyam case itself, the valuation of one of the Maytas firms for purposes of the aborted merger was done by a leading accounting firm on the promise of secrecy—an unheard of procedure that the independent directors accepted without demur. Evidence of broader systemic problems has also surfaced, with news reports pointing to the pathetic record so far of the Serious Fraud Investigation Office (virtually no convictions till date) and of the Institute of Chartered Accounts of India (which has a poor record of penalising guilty accountants, and has not yet taken action in the auditing case involving Global Trust Bank, despite the lapse of four years).
There is a spreading consciousness that we are faced with a broad-based problem. I have been getting messages on my phone from different people which, whether true or not, suggest that the senders believe there are many more scams aboard. One talks of a Rs 900 crore accounting fudge in a public sector power company, another talks of the Indian subsidiary of a global giant dealing shabbily with minority shareholders in a downstream subsidiary, and a third talks of scams involving two large Indian groups. Whether true or not, the fact that people are sending such messages points to a new level of credulity when it comes to such allegations, and this belief in a scam-tainted India Inc seems to have spread overseas. People in the financial world recount episodes where overseas companies have overnight walked out of deals because they don’t think they can trust the accounts of the companies they want to invest in. Others point out that some credit rating agencies have still to downgrade leading real estate companies which everyone accepts are financially stretched.
Then there is our columnist Sunita Narain recounting in her column yesterday how leading accounting firms have brazenly fudged the calculation of carbon credits. The media too is being asked to look inward: the editor of a financial magazine has just walked out, alleging the rigging of an award in order to please an advertiser (presumably in order to earn more ad revenue).
Everyone knows that business is not a morality play. There are always good and bad eggs. The question is, what is the mixture, and is it palatable? When the World Bank is pointing fingers at even marquee corporate names, does anyone recall that Transparency International polled international businessmen to come up with the finding that Indian businessmen are the No. 1 bribe-payers abroad?
We can respond to a scandal by brushing uncomfortable questions under the carpet, and hope that business can go on as usual. But that would be the worst possible way to deal with the problem. If we want to clean up rather than simply wait for the next scandal to erupt, we had better start looking for systemic correctives.
