Some quick thoughts and updates from my side, based on published data.
Later, I propose to list a few of the legal provisions that would need to be examined. The idea is to see what the present law provides for dealing with the allegations in the alleged “Satyam Fraud”.
1. The Justice Kania Committee chaired by ex-Chief Justice of India, Mr. Justice M. H. Kania, opined as early as 2005 that, under the SEBI Act, “there is no provision for monetary penalty for giving false information.”. Recommending amendment to the law, it stated “The Group recommends that SEBI Act, may be amended so as to empower SEBI to initiate adjudication proceedings for furnishing false information knowingly.”. This gap is of course in a narrow compass but it may come to haunt lawmakers and SEBI in taking action since even today, this recommendation made in 2005 has not been acted upon.
2. PwC, auditors of Satyam, in their report of 31st March 2008, have given an “unqualified report” – to simplify, they reported as required under law that the accounts show a true and fair view and this view was without any reservations.
a. Interestingly, also note the specific statement made in the Annexure to their Report:-
“During the course of our examination of the books and records of the company, carried out in accordance with the generally accepted auditing practices in India, and according to the information and explanations given to us, we have neither come across any instance of fraud on or by the company, noticed or reported during the year, nor have we been informed of such case by the management.”(emphasis supplied).
3. Clause 49 requires that the CEO and CFO should certify, inter alia, that:-
a. “They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief: (i) these statements do not contain any materially untrue statement..”.
b. “There are, to the best of their knowledge and belief, no transactions entered into by the company during the year which are fraudulent, illegal or violative of the company’s code of conduct”.
c. “They have indicated to the auditors and Audit Committee…instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the company’s internal control system over financial reporting”.
d. This “certificate” is to be given to the Board. Since the auditors (see below) have certified that the requirements of corporate governance have been complied with, such certificate would have been given placed before the Board.
e. Quick points:-
i. The CFO also has to sign this certificate, apart from the CEO.
ii. This report is to be given to the Board. However, it will be interesting to examine what role this certificate will play in holding some guilty and relieving some others.
iii. In particular, see the statement they make to the auditors and the Audit Committee about the “significant frauds” if any of which they are aware.
iv. Note that even the cash flow statement has to be certified as to be free from materially untrue statements.
4. Satyam had adopted a “whistle blower” policy which incidentally is an optional corporate governance requirement under Clause 49. The Company says that “no personnel have been denied access to the audit committee”. Incidentally, clause 49 describes the whistle blower policy as “…a mechanism for employees to report to the management concerns about…actual or suspected fraud…”.
5. The auditors, PwC, have also certified, without any qualification/reservation, that conditions of corporate governance specified in clause 49 have been complied with.
– Jayant Thakur