KEY POINTS:
Wondering where all those Arthur Andersen accountants went? It may have been India.
It's tempting to make that mental leap because of Satyam Computer Services' book-cooking scandal. Ramalinga Raju is no longer the entrepreneur who built India's fourth-biggest software maker.
He's now allegedly the nation's answer to Jeffrey Skilling, the former Enron chief executive officer serving a 24-year prison term. Satyam's crisis may be more jaw-dropping than Enron's in 2001.
It's not just the magnitude of the scam - 53,000 employees may lose jobs compared with 5000 at Enron - but the simplicity.
Enron's fraud was conducted in a labyrinth of off-balance-sheet deals and other accounting gimmicks. Accounting firm Arthur Andersen approved the company's financial creativity and collapsed in 2002. Enron didn't make it easy for the auditor.
Satyam's con was impossibly transparent: The Hyderabad-based company said it had US$1 billion in the bank that it didn't.
Raju said he inflated earnings and assets. Assuming he's telling the truth, you would think auditor PricewaterhouseCoopers or board members could have cleared up a mess, years in the making, with a phone call, a fax machine or even a postage stamp.
Management says it has a mountain of cash in the bank and you just flat-out believe it?
And why did the World Bank appear to know more about Satyam's business practices than everyone else? Last month, the Washington-based lender declared Satyam ineligible for contracts for eight years, alleging "improper benefits" were given to the bank's employees.
If Raju's version of the story is the right one, it raises a stark question: Could a moderately sized start-up
company claim to have US$1 billion or US$2 billion in cash and then go public without observers delving deeper?
Then again, Raju's claims have yet to be proven.
Investigations are afoot and no one is talking publicly - no comments all round from auditors and Raju, who was arrested with brother Rama last week.
"There can be two possibilities," says Ved Jain, president of the Institute of Chartered Accountants of India. "One, the auditor has been negligent. Second, he was aware and intentionally overlooked it."
The bigger question, of course, is what else is hiding below the surface in Asia's third-biggest economy. Is this "Enron moment" merely the tip of the iceberg?
Or will it have a chastening effect that leaves India better off five years from now? It's impossible to know.
The days of giving corporate executives the benefit of the doubt are long gone. The shenanigans at Enron, WorldCom and Parmalat have even lost their shock-value following the failure of Lehman Brothers Holdings and financier Bernard Madoff's alleged US$50 billion fraud.
Clearly, this isn't an India-specific problem. It's important to remember that India's economy and 1.2 billion people have vast potential. This is as much a setback for global corporate governance as it is for Indian officials.
Yet this is the second big blow for corporate India in recent months. It's unclear how the Mumbai terror attacks in November that left 164 people dead will affect business. The Satyam affair has only compounded concerns that foreign investors will view India less favourably.
Arun Kejriwal, founder of Kejriwal Research & Investment Services in Mumbai, spoke for many when he said: "This is a black day for India."
The reason is this scandal involves India's premier global industry. That amplifies the economic ripple effect. It's anyone's guess whether the
Government will heed calls for a public bailout.
Credit Suisse Group analysts Nilesh Jasani and Arya Sen advised investors in a report last week to own shares of Indian companies with "good corporate governance" as Satyam's troubles may prompt disclosure of more one-time losses. That's all well and good, yet that's what Satyam investors thought they had done.
The past decade has been disorientating for investors, especially the past year. First, it was regulators asleep on the job, then credit-rating companies and then accountants.
Raju, 54, was named Ernst & Young Entrepreneur of the Year in 2007. It seems he was far more entrepreneurial than regulators knew. He presumably also fooled Satyam's board of directors.
In a letter to the board last week, Raju could have been speaking for shareholders when he said that hiding the truth "was like riding a tiger, not knowing how to get off without being eaten".
Things just got harder for India at the worst time imaginable. Prime Minister Manmohan Singh expects the economy to grow about 7 per cent in the 12 months ending March 31.
Even if that rate is achieved, global trends have turned decidedly against India's prospects. Two months ago, officials in New Delhi were still saying India was less vulnerable to the global credit crisis than Asian peers.
Two stimulus packages since early December, four interest-rate cuts since October and Satyam's woes all belie that claim.
The risk is that recent events will reduce the foreign investment needed to maintain rapid growth and spread its benefits. India's 2009 just got a bit more precarious.
- BLOOMBERG
