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TMFBomb (94.45)

Satyam Means "Enron" in Hindi

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January 07, 2009 – Comments (10) | RELATED TICKERS: SAYCY.DL

Wow, talk about a bombshell this morning.  Satyam's Chairman B. Ramalinga Raju admitted to making up earnings and cash, dropping an already battered share price by over 90%.  You can read all about it in Rick Munarriz's piece: Satyam: Slumdog Millionaire

My first thought was how risky investing abroad can be.  My second thought brought me down off my high horse. 

What must foreign investors think of the U.S. (the supposed bastion of financial integrity) when they hear about the Madoff scandal, whose $50 billion in alleged fraud dwarfs Satyam's $3 billion market cap (yesterday's market cap, not today's miniscule market cap).

Or the housing and derivatives mess that has necessitated trillions in bailouts and the nationalization of businesses.

Or Ye Olde Enron and Worldcom scandals.

And that's before we get to the "little" stuff like crazy CEO payouts, Detroit paying people not to work, and bribery for Senate seats.

I'd like to say that it's easier to spot scandal in the U.S., but investing is risky business everywhere.

-A 

 

10 Comments – Post Your Own

#1) On January 07, 2009 at 3:41 PM, carcassgrinder (45.56) wrote:

The US was a bastion of integrity only to completely naive idiots.....the same type who gobble up propaganda and unconditional patriotism.

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#2) On January 07, 2009 at 4:02 PM, JakilaTheHun (99.93) wrote:

I think comparing this to American accounting scandals is missing the real dig here --- Satyam apparently wasn't running some complex, indecipherable scheme.  They actually had a very huge chunk of ficticious cash on their balance sheet!  And somehow --- this flew right by a public auditors from a Big 4 accounting firm!

Hopefully, we'll learn more over the next few weeks, but as it is being reported right now, I would say this might be the type of event that deters American investors from investing in emerging markets for awhile.  At least with Enron, you can see how they might have fooled people; same with Madoff (who, btw, did not have an auditor to my knowledge).  This scandal doesn't simply expose a few accounting rules or regulatory shortcomings --- it calls into question the entire Indian regulatory system and the practices of auditors over there. 

I'd actually be more relieved if it's revealed that there were others acting in collusion because if two people pulled off this entire thing, that is very frightening. 

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#3) On January 07, 2009 at 4:26 PM, starbucks4ever (99.56) wrote:

Satyam lessons: don't think of runing a Ponzi scheme uless you're the government. Without a printing press, you'll be at a competitive disagvantage. 

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#4) On January 07, 2009 at 4:35 PM, TMFBomb (94.45) wrote:

Great points, Huney...faking cash is a lot more scary than off balance sheet accounting.  Cash is the most basic item for an auditor to check. 

A couple additional points:

1)  The importance of getting out at the first sign of impropriety (e.g. trying to buy a family company for much more than market rates).

2) The importance of diversification...highlights the difficulty of detecting fraud (foreign or domestic) as an individual investor.

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#5) On January 07, 2009 at 4:41 PM, JakilaTheHun (99.93) wrote:

Also another thought here:

This isn't quite like Madoff and it isn't quite like Enron.  In a way, it's like both. 

Madoff ran a private hedge fund.  People investing with him were relying upon their trust of him.  As it turns out, that was a mistake. 

Enron was a publicly-traded company.  People investing in them were relying upon the company and public auditors hired by the shareholders who theoretically make sure the company is accurately reporting its financials.

When I say this is sorta like both scandals, I'm suggesting it's more similiar in nature to what Madoff did to my understanding, but they theortetically should've been subjected to more scrutiny as a public company.  I don't know that this would happen in America to be honest --- I'm very critical of our regulatory and economic policies, but --- someone correct me if I'm wrong --- I'm not sure that there has been a recent accounting scandal here that is quite as dumbfounding as this Satyam scandal. 

This is cash we're talking about here --- not some complex asset that auditors might not totally understand in some hard-to-reach location.  How can you create that much ficitious cash and not have public auditors detect it without some collusion going on?

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#6) On January 07, 2009 at 4:47 PM, JakilaTheHun (99.93) wrote:

I posted that before I saw TMFBomb's reply, btw, in case anyone is wondering why I just basically said the exact same thing :)

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#7) On January 07, 2009 at 4:55 PM, JakilaTheHun (99.93) wrote:

I realize I'm speculating away here, but it's mostly because there are a lot of facts missing and we simply don't know them yet.  But here's another thing about this:

Theoretically, if the auditors were complying with American General Accepted Accounting Principles (GAAP) and Sarbanes-Oxley, there should be some standards they have to adhere to and they should have detected this.  But Satyam is in India, which I imagine has its own accounting rules (I'm not sure if they use IFRS or not) and most accountants there learn those.  How do they get training in US GAAP?  

From an individual investor's perspective, you have no idea if accountants in a foreign nation educated under another system have any real understanding of American accounting standards.  Hence, just because they are trading on an American exchange --- does that mean they are really abiding by American standards? 

Perhaps you're really no safer than buying a foreign company over-the-counter and hoping you understand the differences in accounting rules in [country X] and the United States.

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#8) On January 07, 2009 at 5:05 PM, anchak (99.83) wrote:

Weren't they audited by PWC ( Price Waterhouse Coopers)?

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#9) On January 07, 2009 at 5:28 PM, JakilaTheHun (99.93) wrote:

Anchak,

According to their 20-F filing, Price Waterhouse in Hyderabad, India (which is part of the PricewaterhouseCoopers parent firm).  I honestly have no clue if they bring over American accountants or not --- nor do I know if any American accountants they would bring over would necessarily be as familiar with Indian regulatory structures and business practices.  

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#10) On January 09, 2009 at 2:23 PM, Sridhartoronto (21.37) wrote:

Faking the cash might have been the easiest thing to do for the person who was considered the "Hero of Hyderabad". Ramalinga Raju was literally worshipped in this city. Any government investigation into his affairs would have provoked a huge outcry from the chamber of commerce.

 Any bank would bend over backwards to get Satyam and it's 20,000 well paid employees as it's clients. Even if that meant making a billion dollars appear magically in the company's account. After all how difficult would that be given that the company had 2 billion dollars in annual revenue? 

 

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