Second Shoe Drops in Indian Outsourcer Scandal
Over the last several months a scandal has been emerging in India that’s received precious little attention over here: the Indian information technology services outsourcing giant, Satyam Computer Services Ltd., has been found to have been cooking the books, overstating its financial and business strength over the period of nearly a decade. Now the next shoe has dropped in the story. Two employees of Satyam’s auditing company, Price-Waterhouse, have been arrested:
HYDERABAD, India — Police in India have arrested two employees of Price Waterhouse, the auditors of the troubled Indian outsourcing giant Satyam Computer Services Ltd.
S. Gopalakrishnan and T. Srinivas of the auditing firm are being investigated for fraud and criminal breach of trust, senior police official A. Siva Narayana said late Saturday.
Satyam’s founder and former chairman, B. Ramalinga Raju, confessed earlier this month to perpetrating a $1 billion fraud.
Price Waterhouse subsequently said its audit reports for the last eight years relied on potentially false data provided by Satyam and should be disregarded.
The unfolding scandal has been described as the “Indian Enron”. It certainly appears as though the Indian scandal has at least one thing in common with the American one: complicity of its auditors in the fraud.
Satyam was troubled before this latest set of revelations emerged: it had already been banned from doing business with the World Bank for bribing World Bank employees. The new fraud scandal has already cost Satyam several blue chip American clients, notably Bank of America and State Farm.
The Indian authorities are to be commended on the alacrity they’ve shown in dealing with this situation. We could use a bit more of that on the part of our own law enforcement. However, I do think this scandal raises serious issues about the reliability of offshore outsourcing. Everything I’ve read about this particular scandal suggests that Raju, Satyam’s founder, was treating the publicly-held company as a personal fiefdom and piggy bank. Note that one of the revelations has been that Satyam claimed to have 53,000 employees while actually having only about 40,000. Millions of dollars have been drawn from Satyam’s accounts to pay the salaries of these fictitious employees and nobody seems to know where the money went. There are some reports that the company is having difficulty securing financing to pay its employees, unsurprising given the current credit environment.
Will this incident produce an Indian Sarbanes-Oxley, some sort of change in regulations on corporate governance? My guess is that more scandals will need to come to light before that happens.
Pictured above are the two Price-Waterhouse employees who’ve been arrested, Chief Relationship Partner S. Gopalakrishnan and Engagement Leader Srinivas Talluri. Photo courtesy of AP.