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Sleeping Watchdogs - The Discovery Of Yet Another Large-scale Fraud

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http://www.guardian.co.uk/commentisfree/20.../corporatefraud

The names of Enron, WorldCom, Maxwell, Bank of Credit and Commerce International (BCCI), Versailles Group, Parmalat and Madoff must now be supplemented by Satyam. In every case, the frauds were an inside job. Satyam is India's fourth largest software company. It complied with the latest accounting standards and boasted audit committees, independent directors and a global accounting firm as its auditor.

The resignation letter of Satyam's chairman explained that he inflated cash and bank balances by about $1bn, understated liabilities by $253m and improved profits by accruing non-existent interest and overstating debtors. For the quarter to September, the company inflated its profits by 97%. It published an operating margin of 24% against an actual of 3%. Its profit should have been $12.5m instead of $136m. Such frauds can't easily be perpetrated by one person.

Satyam's accounts received a clean bill of health from the Indian arm of auditors PricewaterhouseCoopers (PwC). The firm received a fee of $1.92m from Satyam, including $325,000 for consultancy (see page 87 here).

PwC audits should be under scrutiny because auditors are paid to ask awkward questions and come to each audit with an inquiring mind. On the face of it the frauds don't look sophisticated and have been encountered in many previous headline cases. Any overstatement of debtors requires falsification of sales and that could have been done by issuing false invoices. A standard audit procedure for that is to circularise debtors, ie write directly to debtors to confirm the amounts owed. This also needs to be tracked against subsequent cash receipts and any discrepancies should put auditors upon inquiry. It is also a standard practice for auditors to check bank statements and communicate directly with banks to confirm any bank balances.

Satyam accounts seem to display some "red flags". For example, in 2008 Satyam's net income grew by 40% from $298m to $417m (see page 4 here). This was accompanied by an increase in operating cashflow of 30% (see page 47 here). For 2007, the company reported an increase in net income of 20% but this required operating cashflow increase of nearly 61%. Hopefully, Indian regulators would shed some light.

India has embraced western ideas on corporate accountability, possibly to comfort foreign investors. All the conditions associated with failed audits in the western world are present. Auditors were selected by directors and paid by Satyam. They also acted as consultants to the company. Their fee dependency on corporate clients makes them susceptible to pressures to go along with directors.

Can any of the large auditing companies be trusted?

If many companies do have bad accounts just how inflated are stock prices?

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http://www.guardian.co.uk/commentisfree/20.../corporatefraud

Can any of the large auditing companies be trusted?

If many companies do have bad accounts just how inflated are stock prices?

Difficult to say. I used to work at one of them, and never saw any where the auditor was in any way complicit. Having said that, a fraud would be very easy to hide (for a while at least) from the auditors if senior management of the business are in on it. I think this is especially true of large complicated comapnies. A material fraud would be harder to hide in a small company if the auditor is doing their job properly.

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I posted some responses to this ridiculous piece when it appeared in the Grauniad. Prem Sikka really does not know what he is talking about. And Worzel is absolutely right - if a fraud is perpetrated by someone high enough up the management tree with a decent knowledge of bookkeeping, it can be hidden for years, indeed even "traded out of" over a period if it is a teeming and lading type of fraud (although I have only seen that done successfully once).

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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