Crisis of faith

Last week was like the pope being told that Jesus never existed or a scientist being told that the big bang never happened and it was all a fake or a biologist being told that Darwin’s theory is irrelevant.

Over the years we have learnt to be sceptical about unaudited quarterly numbers. We take management guidance with a pinch of salt. We are even used to mergers, de-mergers, spin offs etc which are unfriendly to minority shareholders. We even go through the notes to accounts with a fine tooth comb to check the accounting policies and other games that are played upon us. Look at the FCCB and foreign exchange related accounting of large Indian companies (RCOM) for example.

However as Investors, the Annual Report published by companies and the financial statements signed by (supposedly good quality) auditors are sacrosanct. They are almost like the bible to a pope. We never stopped to wonder if the cash and bank balances stated in the audit report or the borrowing amounts could be incorrect. There could be some inflating of sales and debtor numbers in one year which would affect the subsequent year. However a fraud of this magnitude over a period of many years is unimaginable.

The Satyam episode struck at the very root of our faith. If such a large company with one of the big four as auditors, with a NYSE listing and being subject to Sarbanes Oxley regulations can have such a big hole in its financials, what hope does one have in analysing financials of other companies.

The only path forward for investors is to be ruthless in demanding standards of integrity from the management and promoters of the companies they invest in. There have always been question marks on the promoters of Satyam and the way they ran the company. Look at this link for a past controversy on their acquisition way back in 1998 ‘Consistent growth’ and ‘attractive valuations’ always lured investors like the sirens lured the sailors passing by and got them to ignore red flags raised in the past.

To give due ‘credit’ to the Satyam promoters, they also seemingly cleaned up their act and got marquee independent directors, contributed to philanthropy and had one of the big four as auditors. The Maytas episode showed that old habits die hard.

After the failed attempt at taking over Maytas, it was all the more tempting. There was a real prospect of Rajus being thrown out and a L&T or HP or Tech Mahindra or some other company taking over /merging with Satyam. Further there was a huge amount of cash on the books. How could one go wrong buying Satyam at say Rs. 180? The price paid was only a little more than the cash per share. There was a good business that they were running after all. I was also tempted to ‘Ride the tiger’ (after all margin of safety seemed to be there), thankfully I resisted the temptation. The following from Buffett weighed in the decision.

  • There never is just one cockroach in a kitchen cabinet. If one has appeared, there will be many more inside. (Maytas / Upaid etc.)
  • The way a person will treat shareholders can be predicted from how they treat clients, employees, the government and society at large. An entity which uses bribes to get business (eg. World Bank) will not hesitate to fudge number in shareholder reports.
  • Rule number one ‘Don’t lose money’ Rule number two ‘Don’t forget Rule one’. The Upaid case was simply too scary.

I have mixed feelings about fate (you could call me agnostic about fate). However after the news of the fraud came out, I thanked my lucky stars that I resisted the temptation. Amen.


  1. Good article Rajeev, especially quote from Buffet(There never is just one cockroach ….) was very apt. I am a regular reader of your articles, keep posting your thoughts.


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