Comments on the News

The Wall Street Journal ran a story on January 14 containing more disturbing details of the truth about Satyam, the misnamed Indian company that is being brought down by its own fraudulent behavior. In an article headlined “Satyam Probe Scrutinizes CFO, Audit Committee,” the Journal reported that the company’s audit committee has not been meeting SEC standards.

As a company whose ADRs are traded on US stock exchanges, the company is required to meet both Indian and American governance standards. One of the latter, according to the Journal, is to have qualified experts on its audit committee. Satyam’s has not for some time at least.

Worse, this fact was serious enough for GovernanceMetrics International to warn its clients as far back as December 2006 -- more than two years before the scandal broke – that Satyam’s governance wasn’t up to snuff.

So, how could an accounting firm like PriceWaterhouse miss this crucial, tell-tale detail?

All those who placed their faith in the company’s claims and PriceWterhouse’s stamp of approval must now regret not having got a second opinion. But why should that be necessary? Audit committees and outside auditors should must do their jobs and do them right and be held fully accountable when they fail to do so, or the capital markets will operate under a cloud of suspicion for a long time to come.

Charles Blum

Labels: Confidence, economic reform

Few Americans had ever heard of B. Ramalinga Raju before last week, but most people think they know what to expect of PriceWaterhouse. Raju’s Indian firm, Satyam (from the ancient Sanskrit word for “truth”), built a sterling reputation in providing consulting and outsourcing services to Indians and clients around the world. Ironically, Satyam was no truth-teller. It juiced the value of its shares by inventing assets, including a billion dollars of non-existent cash, and inflating its profits by a factor of nine. As it turns out, Satyam’s fabulous rise was just one more fraud, and Raju, his brother, and the company’s CFO are now under arrest. By contrast, PriceWaterhouse, Satyam’s auditor, insists it’s done nothing wrong.

Thanks to this latest scandal, we can see more clearly than ever that:

--No country has a monopoly on financial fraud. It’s a global problem.

--Even adults need adult supervision, especially when money’s involved. Self-regulation is all too often no regulation at all. When self-regulators fail to adhere to high standards, abuses can go on long enough before being detected that the consequences are dire, widespread and difficult if not impossible to remedy.

--It takes more than one person or a small group of unscrupulous conspirators to perpetrate a fraud such as Raju’s, Madoff’s or the others that keep coming to light. It requires gullible investors in search of the highest possible return, otherwise savvy institutional investors who willingly suspend their disbelief in financial results that sound too good to be true, auditors who don’t audit, and regulators who don’t regulate. These frauds are little more than genteel gangsterism or refined racketeering, not the work of mavericks on the make.
PriceWaterhouse in particular should be ashamed. If it failed to apply the most rigorous accounting standards to Satyam, the culprits within the accounting firm should be prosecuted with the full force of the law. If, as it claims, PriceWaterhouse did it by the book, then the book needs to rewritten – fast.

--In the US and around the world, more than a mere recovery is needed. Our aim must not be to reinflate the bubbles that have been bursting and reward the reckless and irresponsible with an intravenous drip of new capital . Rather, we need simultaneously to restart economic growth, restructure our economies to eliminate the sources of imbalance and excess, and rebuild confidence in our institutions. These goals are interactive and mutually supportive. The bottom line is that a sustainable recovery is probably unattainable unless we get on urgently with the work of restoring confidence in our banks, stock markets, auditors, and governments.

Satyam shows that the truth can hurt. But confronting the truth can set you free, opening up new possibilities for progress and growth with the highest standards of integrity.

Charles Blum

Labels: economic reform, Fraud, Recovery

The next American president faces a fuller and probably more daunting than usual agenda. Constitutionally, he is commander-in-chief, and national security must of course come first. There’s another White House role, long neglected in this country, that closely rivals the first in importance and in fact impacts our national security directly. America needs someone to lead the process of forging and implementing a comprehensive national trade strategy. We need a “competitor-in-chief.”

We need to commit ourselves as a society to reduce our foreign debt, restore the value of the dollar, and expand investment and production in this country. Without protectionism or isolationism, America could then once again be financially strong and enjoy the strategic benefits that flow from being a creditor nation. Those changes would enhance our leadership in the world while restoring faith in the American Dream.

Recently, I’ve sat through dozens of discussions about the need for such a strategy to meld all the factors – traditional trade policy as well as tax, energy, environment, health care, infrastructure, education, and other policies – into a coherent, comprehensive program that would unleash the competitive brilliance of American workers and entrepreneurs. The overall concept seems to be gaining in acceptance. There is no lack of interesting ideas about the various components of an effective national strategy. We have numerous studies and ample data in hand.

Intellectually, molding these inputs into a strategy is challenging work, but it’s not impossible. Virtually every other economy of any size has a clear idea of what it is tying to accomplish economically and how that advances their national security. If they’ve “connected the dots” for themselves, why can’t we, too?

The core of the American problem lies in the very nature of our system of government. A key to our constitutional design is the broad diffusion of power. The good news is that such diffusion protects citizens very well (albeit not perfectly) against abuses of government power. The bad news is that it makes fundamental reform quite difficult and, in peacetime, nearly impossible.

Only strong, sustained and dedicated White House leadership can overcome the political, institutional and bureaucratic barriers to fundamental reform. To change things for real, the next administration needs to commit itself and its resources to that task as a matter of the highest priority. In other words, we need to deal with our international economic performance with the same serious sense of purpose that we expect from the national security team headed by the commander-in-chief.

So, here is a simple scenario for either candidate to give America a fair chance to develop an effective national trade strategy:

1. Pick a vice presidential running mate with background and experience fit to be the “competitor-in-chief.” This would include knowledge of the inner workings of the Congress, the executive branch and the real as well as the financial economy.

2. Announce now that you will designate the vice president as the head of a new, improved National Economic Council. Naming the second highest elected official in the land as its head would empower the NEC to delegate tasks to executive agencies, to ensure effective coordination and strategic coherence, and to stop turf battles before they can disrupt the effort.

3. Task the NEC with devising a comprehensive plan within six months of Inauguration Day.

A decision now to address our international competitive and debt problems as a top priority of the next administration would help either candidate assure the voting public that he is serious about fundamental economic reform. It would give him a mandate for change without which he could not hope to overcome vested interests. It would give the next vice president the chance to get a running start on the agenda that could be of make-or-break importance to the administration – and the country.

Charles Blum

Labels: campaign, economic reform