As this blog celebrates its first birthday, there are two related reasons why I am unconcerned about the supply of new material for its second year.
To start, the crystal ball seems fully functional – based on my calls of December 16 promptly coming good – here – “two predictions as the Bernard Madoff story brings a sorry year to its welcome close:”
“The first is the safe but unfortunate bet …that at least one remorse-driven suicide will further color an already tawdry tale.
“The second is that before the books are closed on the reporting of dismal corporate results for 2009, an entirely new multi-billion dollar operational and accounting scandal will erupt somewhere in the world – outside the investment scams and the already battered financial services sector.”
The first was sadly realized within the week – here – with the self-inflicted death in New York of French fund manager Rene-Thierry Magon de la Villehuchet.
As for the second, yesterday's resignation of Satyam Computer Service’s Ramalinga Raju, in a letter to his board confessing cash manipulation and a balance sheet inflated on the order of $ 1 billion, introduces large-scale public company scandal in a new region of the world, with consequences that will reverberate all around.
In addition, my belief in web-based communications and the developing capacity to inform and shape serious discussion of complex issues is reinforced by the emergence of new and innovative means – in particular, the launch by Bruce Carton, at his enormously informative Securities Docket, of the Securities Litigation and Enforcement Channel, with Tuesday’s webcast, “The 2008 Year in Review” – linked at his site and well worth a listen.
Bruce’s contributors were four experienced and insightful bloggers -- Kevin LaCroix (D&O Diary), Tom Gorman (SEC Actions), Francine McKenna (Re: The Auditors) and Walter Olson (Point of Law) -- all on my list of valued resources and worthy of attention.
As noted, the two events are related, in this way: During the webcast, the unsurprising outcome of a listeners’ poll on compelling issues for 2009 was that the risk of “Big Four auditors at the brink” was only a distant trailer.
But that indifference is incorrect, as is about to be shown by the world of hurt quickly to fall on Satyam’s auditors, PricewaterhouseCoopers.
Comparisons with Enron and Arthur Andersen are being drawn, but are mis-placed unless PwC in India somehow manages a similarly self-inflicted indictment. For the post-scandal environment, the better comparison is with Parmalat, the family-controlled Italian dairy conglomerate whose € 20 billion “black hole” in 2003 has since swallowed up careers and treasure at both its audit firms.
The reason is that India, like Italy, is an immature venue for the handling of large-scale financial scandal – which makes the possible reactions of its regulators and politicians both unpredictable and extremely dangerous.
In Parmalat, Italian bankruptcy legislation was re-written after the fact, to enable a newly-empowered special administrator to pursue civil claims both at home and abroad – which he has done with enthusiasm to the tune of nine-figure settlements from Deloittes and proceedings still on-going against Grants.
Meanwhile that country’s antiquated and ponderous criminal justice system is unlikely to complete its prosecutions within the lifetimes of any of its targets – thus displaying an inability with credibility to render either punishment or deterrence.
Because even the scandal-scarred American experience has included the pell-mell excesses of the Sarbanes/Oxley law of 2002 and the Public Companies Accounting Oversight Board, can better be expected from public servants in India, never before exposed to corporate mischief on this scale?
In Satyam, the Ministry of Corporate Affairs, the Securities and Exchange Board and the accounting regulator, the ICAI, have all rushed to announce investigations – processes that, in a country lacking a base of experience with the scrutiny and exposure of serious financial manipulation, will make the posturings of America’s comical Henry Waxman look positively statesmanlike, and will more closely resemble a concoction of Gilbert & Sullivan.
While PwC’s practice in India will be put at risk for its personnel, its permission to practice and its very survival – along with whatever litigation risk may lurk in that country’s untested civil system -- there is the double-whammy of globalized shareholder litigation exposure for multi-national enterprise. Because Satyam’s securities included ADR’s traded on the New York Stock Exchange, the first of an anticipated parade of class actions was already filed on the very day of the company’s downfall.
Mumbai is so far from the American media centers, whose attention to financial scandal is short-lived and US-centric in any event, that Satyam will be a one-week story in the mainstream spotlight.
So although the company’s name may indeed be “truth” in Sanskrit, the amount extracted from the story will depend on those staying with it. Here, it’s the bet that the consequences of Satyam for PwC will be protracted, disruptive and expensive – with onward effects for the entire large-company assurance franchise.
And for those tempted to disagree – I have been two times right in the last month alone.
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