Satyam's fraud bigger than thought, what does this mean?

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News that the accounting fraud at Satyam could be much bigger than thought could put the spotlight back on corporate governance in India.

The CBI in India is saying the fraud, originally thought to be worth $1.5bn could actually be worth £2.6bn.

I was talking to Mark Lewis, a  lawyer specialising in outsourcing at Berwin Leighton Paisner, this morning and he says if the fraud is much bigger than thought it could raise "further questions about corporate governance in India."

So is Satyam out of the woods? Is corporate India out of the woods?

Indian companies don't seem to being badly out of it.

HCL won a nice deal with Equitable Life worth £200m only this week.

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The other worrying part of this news is the scale of the fraudulent activities, not so much the amount: financials were apparently falsified on a much bigger scale and more frequently than we first thought. There now seem to be about 200 other suspects implicated, according to the CBI in India. So the worry is that this is not just about one rogue promoter, his inner circle of family and colleagues and a few enormous frauds: it clearly shows a "systemic" collapse in corporate governance affecting these transactions, the banks concerned in these transctions and the audit of Satyam and these transactions. The fear: is this a one-off in a country in which about 50% of all listed companies are owned by individual or family promoters, wielding huge power in their banking, corporate and accounting relationships, or are there other frauds out there? I hope not! Worth saying that, while other Indian IT and BPO are (deservedly) winning good deals in the developed world, many large Western corporates have put in place special due diligence, pre-qualification and governance processes to try to weed out another Satyam.

The new "revelations" about that Satyam's financial problems are, in essence, no real surprise, but are also of little real import. The previous management are going through the legal process, when some things will be clarified - and some things may never be got to the bottom of. However, the issues do not change the underlying current financial situation of Mahindra Satyam, which is essentially operating as a new company, with new management and a new book of accounts. The final findings from the legal process may show that certain Satyam assets have a lower value than the stated book price, but the liquidity and free cash situation is known by all involved and should not be impacted by the ongoing case. Indeed, as the case is against a set of individuals, it is their financial position which is most under threat, and their assets are likely to be seized and used to pay back some funds to Mahindra Satyam

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This page contains a single entry by Karl Flinders published on November 27, 2009 10:53 AM.

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