india's stinking auditors - satyam scandal - part two

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  • 8/14/2019 India's Stinking Auditors - Satyam Scandal - Part Two

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    Cheaper money worldwide for over 10 years has forced Investors scurrying for yields. It createdenormous demand for equities and high yield bonds. Almost everyone wanted to become instantreach in the instant age of Instant coffee (Nescafe), Instant Mail (eMail), Instant money (ATMCard), Instant Credit (Credit cards), Instant car or scooter (Car loans), Instant girl or boy friend(Internet Chat), Instant Baby (Instant pregnancy via artificial insemination), Instant Marriage(before Registrar), Instant food, Instant death (in bomb blast) etc. We are now living in an instantage.

    God and nature has taken a back seat. The demand for instant return created another breed ofcrooks and scoundrels, Con Men, who labeled themselves as self styled Professionals.

    When I was a stock broker, however good I was, I detested my clients calling me a professional. Iused to tell them you made money in your life, so you are the realprofessionalnot me. If we hadmoney as much as you had, we would not need any client. We brokers always look for OPM,

    pronounced as Opium, a drug, a narcotic that is equally addictive. It reminded me Danny DeVitoswitty movie OPM = Other Peoples Money. He tells everyone about money Easy come, Easy go.Our forefathers used to advise us Hard earned money never disappears, Easy one does. Theinstant coffee does not taste or smell better than slowly brewed percolated coffee. Hard earnedmoney follows same pattern.

    The crooks that have surfaced now are seen in every country. You found Rama lingam Raju ofSatyam in India. He was still better than other two crooks that have just surfaced in USA. Madoffwho stole $ 50 billions from investors and Alan Stanford $ 8 billions by selling bogus CD orCertificate of Deposit promising 14% return in US dollars.

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    Indias Stinking Auditors Anil Selarka (Kalidas) 2009 Page 2 of 7

    This reminds me again, the case of CRB Capital from India that went bankrupt a few years ago.Many investors in Hong Kong were lured to invest into this company promoted by a CharteredAccountant Mr. C R Bhansali. He had approached me to find clients assuring 30% return in US$ forinvesting into India when the market was teetering around 2800 level. My best client asked for myopinion and referred him to me for follow up. I asked him the following questions for which he didnot have any reply.

    Q: To make 30% post tax return, you must make 35% gross. In that case, you should make atleast 50% to make 15% return for yourself for handling the investment. If you can make such aneasy return in highly depressed market, why do you need clients from Hong Kong? You can investyour own money and take all gains. Why settle for 15%?

    Within months the company folded up. Hong Kong investors lost over US$ 10 millions!

    Satyams Raju was better than Madoff andStanford in USA. A British soldier investorkilled himself for losing his life savings withMadoff. Hey, why did you kill yourself, soldier!You could have gone to USA and shot thatbastard instead of killing yourself.

    A royal familys member in France, a billionaire,also killed himself for investing his clientsmoney into Madoff. He must be a decent guy.The name of the criminal Madoff was notinspiring either. What did the US governmentdo? Nothing. How could he have lost $ 50billions? It is not small money. It should beeasily traceable. But nay, the agencies like FBI isuseless. It would not take more than 10 days tofind out where the money had gone.

    Robert Allen Stanford, the banker, was not even arrested nor criminalcharges filed against. He was under house arrest, not even formally charged.That scorpion was smiling with big eyes, baggy s suits, and monkey teeth.Look at the US government. They could throw into Guantanamo Bay jail somebearded British Islamic guy for suspected role in terrorism, hold him withouttrial for 7 years, and torture him to the extreme third degree, whereas fullydocumented and complained about fraudster of $8 billions, Allen Stanford,

    goes unnoticed. Such hypocrisy in the name of democracy, human rights andjustice? A person like Stanford should have been stripped and flaggedpublicly in a baseball stadium.

    Watch here Businessweek's Video report on Stanford Scandal

    What is the common factor in above frauds? The Auditors or so called Chartered Accountants inIndia or Certified Public Accountants in USA. The Institute of Chartered Accountants of India takespride in strict graduation result of 2% to show the world that they are breeding the best personsas Chartered Accountants. Is this the quality they are churning out? The institute itself must becondemned for not enforcing strict accounting standard on its members.

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    As rule, I never invest into companies headed by Chartered Accountants as CEO or Chairman orExecutive Director. They know very well where they can follow the practice of green accountingcalled creative accounting. In laymans language it is called Fraudulent Accounting. Almost allmega frauds are clearly abetted by the members of this noble profession - that is what they call.Even prostitutes call their profession as noble profession.

    LTCM (Long Term Capital Management , tagged $ 1 trillion) Enron (tagged billions of dollars), WorldCom (also tagged for billions of dollars) Satyam Computers Services Ltd. Madoff Stanford International Bank Ltd. and Stanford Trust Company Ltd. in US /Antigua /

    Barbuda)were all audited by the CPA of large and reputed companies. The CFO of these companies was allCPA. The investors should trust the accounts of companies headed by these CharteredAccountants or CPA with extreme caution. I do not even touch them or even look at them.

    Let us now look at the role played by the statutoryauditors of Satyam Computers.

    This dollar tree was extracted from SatyamComputers Annual Report for 2007. It shows thatthe money grows on trees. In reality, these cashwere found only on paper.

    The annual report of Satyam also make interesting reading. Their accounts were audited by PriceWaterhouse in India which is a branch or audit arm of reputed International accounting firm PriceWaterhouse Coopers. Look at the following figures extracted from the Audited Annual Report for2007 of Satyam Computer Services Limited.

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    The subject matter of the fraud is that the company never had Bank deposit of Rs 3308 crores(=US$ 750 millions at then prevailing rate of exchange) reported in its balance sheet for severalyears. Such huge balances are never held in cash they are always in bank accounts. How couldthey have misses such major item from their audit trail?

    If the $ 3308 crores of bank deposits were not verified, how about rest of Rs 683 crores in cash?How could a company keep cash balance of Rs 683 crores in 2007 and Rs 1,194 crores in 2006? Itwould require 7 room of the size 10 x 10 x 10 to keep such huge cash in popular denomination ofRs 100. It will require 119.4 million pieces of Rs 100 currency note or 1.194 millions of Rs 100

    bundle (100 pieces per bundle). It will require storage space of 7,773 cubic feet or 6 x20 shipping

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    containers.

    Unlike US con men Madoff and Stanford, Mr. BRamalinga Raju was an honest thief. The thieves alsohave unwritten code of conduct, and perhaps Mr. Rajuwas following that conduct.

    Until today, no one knows whether he really siphonedoff the cash or just inflated the balance sheets to boosthis status in the info market and boost share prices.

    He was also trying to glorify the image of Satyam in themarket place. He valued his own company in glorifyingway. Read the following extracted from the sameannual report (for YE 31Mar2007)

    According to self evaluation conducted by our great BRamalinga Raju who is smiling at us alongside, theSatyams enterprise value was US$ 18 billions (usingexchange rate prevailing then).

    There were about 42,000 employees working forSatyam who were valued collectively Rs 65,668 crores.If you divide this sum by 43,000 employees, eachemployee of Satyam was valued at Rs 1.53 crores or Rs15.30 million rupees or US$ 332,600 approximately.

    Who says India is poor? We have 42000 Slumdog Millionaires in Satyam alone.

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    Now. Look at the Human Resources valuation by Satyam as follows. This is part of their AuditedAnnual Report for YE 31-March-2007. It is self congratulatory and self glorifying. However, it doesgo to show thatMr. Raju was mentally sickand was trying to project image larger than life

    Conducting Audit An Art, Science or Commerce?Accounting is a commercial subject. However, accounting presentation is an Art and also a science.This is a new branch of commercialism. Hybrid commerce we should say.

    How to conduct the Audit some basic rulesThese are my rules from experience. I was an investigator and vigilance officer in a nationalizedbank in Mumbai India. The very first rule is that ignore the obvious. Try to audit that area whichdoes not attract much attention.

    Most of the time, the fraudster is suggestive. He will take the Auditor for a lunch or drink and showhim the importantbooks the Auditors should see. The Auditor should do only the opposite.Everyday, before the Auditor goes for inspection, he should think what the other guy did not wanthim to see or verify. He should mentally make a list and check those items especially when thatguy is not around.

    My Experiment with Lies in Mumbai, India

    I detected one major fraud in terms of number of entries, not by amount and also worked withCBI. The amount involved was only Rs 250,000 at that time (1980) but the number of fraudulententries were over 2000 most of the rolled over from one account to another to cover up theoriginal fraud. Same thing is happening in Citigroup now in my opinion.

    The fraud was at one of the five star hotels financed by the bank. The bank also had small branchcalled extension counters. Being a hotel, bank used to get lot of foreigners for encashment oftravelers cheques or checks (Credit card was not popular in 1980). The branch manager will askthe visitor to open the account before he could encash the TC giving banks policy as reason. Sincethe tourist will remain there only for a day or two, the manager will start using their accounts asdummy account for his various needs.

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    I also used to check even ladies toilet asking woman helper to check the inside of the FemaleRestroom. The reason is that most of the time, the Auditors or Inspectors are male and would notdare to go that place for fear being labeled sex maniac. Read the following actual example insame bank in Hong Kong.

    Hong Kong

    I was transferred to Hong Kong in 1984 and used to head Legal and Internal Inspectiondepartment. Our Deputy General Manager was in habit of entertaining the government officialsespecially from finance ministry, because the bank was owned by the Government of India. He wasseeking quick promotion through such measly favors.

    One fine morning, we got a message that our banks senior General Manager was visiting HongKong from Singapore. He was very strict administrator, and never liked our DGM (HK). Our DGMwas terrified. The reason was he had used banks advertisement budget to buy over 200 briefcase and suit cases of Samsonite and other local brands to give them away to visiting officials fromthe Ministries. One room was full of such suitcases. He discussed with his deputy on same floor(we were located in lower floor) who showed him the great idea. He was pleased.

    In the evening, we found suitcases coming down to our floor one by one, and going into LadiesRestroom. All suitcases were transferred there on previous evening. I asked my senior Managerwhat was going on. He replied that our visiting GM had habit of inspecting every inch of ourpremises. But he would not dare to go to Ladies restroom. So the bags and suitcases were beingtransferred there.

    I realized at that time that I was right in inspecting Ladies Restroom in Mumbai which was beinglaughed at. I was 4 years ahead of other Auditors or Inspectors.

    Anil Selarka (Kalidas), Hong kongMarch 7, 2009 Article Ref: 0903-026Blog: http://anilselarka.com

    Document Details (Without this box or table)Main Statistics Pages 7,Words 2,093,Characters (no spaces) 9,996,Characters (with spaces) 12,095

    Paragraphs 49, Lines 195

    Document Ref Number 0903-026A Date 2009.03.07 Author Anil Selarka Screen Name Kalidas

    Official Title Indias Stinking Auditors Copyrights 2009 Anil Selarka (Kalidas)

    Key Words Accounting fraud, Antigua, Barbuda, BSE, Con Men, Fraud, Government of India, Green accounting,India, Madoff, NSE, Price Waterhouse Coopers, Price Waterhouse, Ramalinga Raju, Satyam, Scandal,SEBI, Stanford,

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