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Leaps of faith

india Updated: Jan 10, 2009 23:07 IST

Does one bite the hand that feeds it? It’s a time tested phrase that lies at the very heart of the Satyam scam and the systemic flaws that allow such frauds to be carried out, undetected.

Independent Directors: Each independent director of Satyam drew a compensation of Rs 12 lakh last year for attending six board meetings or six days of work. This was positioned as ‘commission’, as the law caps monthly remuneration to independent directors at Rs 20,000. Krishna Palepu, who resigned from the board recently, drew over Rs 90 lakh. Apparently, he ‘coached’ the Satyam top management. Many top Indian companies pay similar hefty compensation to their independent board members. Not to mention the corporate status that comes with being on the board of a reputed company. There's money, recognition and respectability in it for someone approaching the sunset of his career.

Now, would anyone in these comfortable shoes want to rock the boat by questioning what an executive management is doing? Unless there is something utterly visibly fraudulent? Nope. This is the unfortunate truth: most independent directors merely make up the numbers in a board, rarely do any homework or ask questions and merrily go along with the management/promoters while benefiting materially from the company they are supposed to be keeping an eye on.

Auditors: Pricewaterhouse received nearly Rs 4 crore from Satyam for auditing (sic) its books. Audit firms compete fiercely to bag big corporate accounts. In such a situation where, say, a Pricewaterhouse is competing to retain the Satyam audit account, they would want to be in favour with the management, right? Is it so hard to imagine that they would be willing to make certain concessions. Do remember, each partner in an audit firm would have a revenue target. So, am I saying that all audit firms sign on anything that a management dishes out? Not at all. I am only saying that if that were to happen, the reasons are not hard to find.

Rating agencies: They are compensated by the companies they rate i.e. they earn their livelihood from the very companies they are supposed to be cautioning lenders/investors about. Does it surprise you then that the mighty S&Ps and Moodys had lofty, top notch ratings for the financial powerhouses that succumbed to the credit crisis? Ironically, the poor rating agencies would rather suffer the ‘incompetent’ tag in this than face the allegation that they just couldn’t bring themselves to downgrade their paymasters.

Would you trust SEBI as a regulator if the chairman drew his salary from India’s top five companies? Would you trust me to be an objective media commentator on Infosys if I drew my salary at the end of the month from that company? No, right?

All independent directors or auditors are not unscrupulous. But there is an obvious conflict. Perhaps these things aren’t spoken about as it is a system that works mostly, with the odd scam here and there. But for my money, a new system needs to be thought about. Else, you’ll simply be hoping that those you trust are not crooked. And that isn’t good enough. These bodies must get their bread buttered by the people they are trying to protect against fraud. Investors, not company managements or promoters. Is it so difficult to devise a system where auditors and rating agencies are paid by the ‘users’ of the information they dish out? I doubt it.

Udayan Mukherjee is Managing Editor, CNBC TV18