The roots of the Satyam accounting fraud lie in the way Indian IT companies report their earnings and ready acceptance by investors and analysts alike, according to a study by global risk consultancy firm Kroll.
"At the turn of the millennium, one of India's leading software export and outsourcing companies began the trend of self-reporting a range of non-standard data to investors. Since then it has become common for IT companies to present, in addition to the usual income statements and balance sheets, a set of operational metrics which they themselves create and their own assessment of performance achieved against them," the study said.
The metrics – including employees billing rates per hour, percentage of revenue earned from top clients and geographic mix of client base and profit guidance among others – are helpful in tracking performance of a complex and innovative business like IT.
Analysts and investors have been interested in guidance on likely profits for the next accounting period. This is because IT firms have recorded consistent increase in revenues and profits – as high as 30 per cent per annum.
However, these are arbitrary and self-reported measures, entirely assessed by the company and add an "opaque layer to disclosures through which investors and analysts cannot objectively probe", it said.
An objective investor scrutiny of the reported performance in these self-developed measures has been missing. It has been difficult, sometimes impossible, to verify claims like employee utilisation or client mix. Company executives also rarely reveal anything more than that which has already been announced. Moreover, accounting statements are never been compared against the reported performance metrics.
Stock market regulators monitor only reported earnings and data on stock trading by insiders, and disclosures related to these. They do not typically follow investor conference calls, corporate media announcements and metrics like profit guidance among others.
Stock analysts, when faced with unsatisfactory responses simply lower stock price estimates by a certain percentage and move on.
The Satyam scandal also suggests that corporate governance concerns do not always rank as high as they should in the selection criteria for these directors. Satyam's independent directors have already made an early exit and washed their hands of the problem, leaving the regulatory authorities to deal with other directors.
