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.

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Dave Schuler
About Dave Schuler
Over the years Dave Schuler has worked as a martial arts instructor, a handyman, a musician, a cook, and a translator. He's owned his own company for the last thirty years and has a post-graduate degree in his field. He comes from a family of politicians, teachers, and vaudeville entertainers. All-in-all a pretty good preparation for blogging. He has contributed to OTB since November 2006 but mostly writes at his own blog, The Glittering Eye, which he started in March 2004.

Comments

  1. Maggie Mama says:

    Leave it to Big Business to outsource even “corruption.” Are no American jobs sacred anymore?

  2. Dave Schuler says:

    Well, it certainly can’t be described as a job that Americans won’t do.

  3. Bithead says:

    Will this incident produce an Indian Sarbanes-Oxley, some sort of change in regulations on corporate governance?

    If it does, you can pretty much hang up on the idea that India will continue to be any kind of serious economic force going forward.

  4. Triumph says:

    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.

    Dude, have you ever been to India? The place is the biggest cluster-f**k from the standpoint of governance–public and private.

    Even simple municipal functions like infrastructure maintenance and expansion are totally botched. I’ve done consulting with some panchayats on water quality. You give the bastards a simple plan for, say, tapping a groundwater source and they either do it some backwards ass way or take so long that the technology is way out of date.

    They could never regulate accounting like is done in the US–it just can’t happen. The place is way to corrupt, anyway. I was dealing with this official in Murshidabad to get a permit for some digging. They basically “lost” our application until we ponied up a few thousand rupee. They then found it, but revoked it when they needed more cash.

    I was totally surprised that Manmohan Singh actually had heart surgery in New Delhi–it will be a miracle if he doesn’t contract hepatitis.

    Good riddance!