Is corporate India now vaccinated against an outbreak of white-collar financial fraud?
The great and the good of the country’s regulators would think it – taking at face value their prideful descriptions of the investigative scrutiny of scandal-ridden Satyam Computer Services Ltd.
The former chairman of the Securities and Exchange Board of India, Meleveetil Damodaran, is quoted – here -- as calling the fraud at Satyam “unique,” and “an isolated case, not reflective of the state of affairs of India Inc.”
He would say so, of course, as a current board member of Tech Mahindra, the successful bidder now grasping the handle of the poisoned Satyam chalice. But the annoying question persists: on what basis could he possibly make such an over-reaching claim?
Not from the work of the Central Bureau of Investigation, which invokes its use of “cyberforensics” – here -- in order to “uncover how in-house computer systems (at Satyam) were exploited to generate false invoices.”
Please. Spare us another exaggerated claim on behalf of the “forensics” of post-exposure inquiry.
A sewer worker can unplug a cesspool, too, if given a shovel and told – pointing to the clogged hole – “Dig here.” Admirable are the muscles involved. But the worker is not thereby qualified to engineer the waste plant, nor to monitor the flow through its twisted pipes and drains.
The forensic program to illuminate a revenue statement inflated by bogus business would start – and typically would end – with a single sharp finger pointed to the designer of the information system:
“Will you please show me the back-door technique by which alternative invoices – authorized or not – can be entered into the system? And for good measure, would not such an entry be concealed from the mainstream reporting process?”
That’s it. Not the stuff of brilliance or epiphany.
It does remain to be revealed, probably in court, whether such simple and direct questions were ever asked in the normal course of Satyam’s risk management process – under audit or otherwise. But conceiving them after the fact is hardly the matter of revelation now being publicized by the Indian regulators.
As for the excessive enthusiasm of the good Mr. Damodaran. Nassim Nicholas Taleb’s “Black Swan” presents the two lessons essential to avoid the “induction trap” into which the SEBI veteran falls headlong:
• First, no number of observations of white swans can disprove the existence of a black one. Likewise, however superficially successful may appear the historical performance of a financial reporting and assurance structure, the past can give no comfort that a catastrophic failure will not suddenly emerge.
• Second, the single observation of a black swan not only destroys the baseless over-confidence that the species does not exist – it must also contemplate the prospect of other like specimens. More directly, Satyam as one mega-fraud not only establishes that it can happen in India, but supports the necessary expectation that others exist, only as yet undiscovered.
Or in more folksy terms – the first appearance of a cockroach, in a kitchen thought to be pest-free, both disproves any assumption of health-code compliance, and also reasonably alerts the chef – since vermin are not known to be solitary – to the unpleasant presence of more.
The Institute of Chartered Accountants in India, meanwhile, is off on a wild-goose-chase of its own – here and still here -- chasing after the details of the international affiliations among the only accounting firms globally established enough to participate in the delivery of audit services in a true cross-border involvement.
As if agreements as to name-sharing, letterheads and business cards had anything to do with the defalcation at Satyam. Or, either, with the provincial stature of India’s locally-biased profession – flailing away in back-footed defensiveness as it confronts the reality that it is at least a generation behind the modernization required to participate in a globalized economy.
Rather than take comfort that a black pot of India Inc has been bleached to lily white, in other words, prudent investors and gate-keepers alike would do well to view the pronouncements of naïve regulators as a symptom that the country’s environment for financial chicanery remains fertile and inviting.
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