Cheaper money worldwide for over 10 years has forced Investors scurrying for yields. It created enormous demand for equities and high yield bonds. Almost everyone wanted to become “instant reach” in the instant age of Instant coffee (Nescafe), Instant Mail (eMail), Instant money (ATM Card), Instant Credit (Credit cards), Instant car or scooter (Car loans), Instant girl or boy friend (Internet Chat), Instant Baby (Instant pregnancy via artificial insemination), Instant Marriage (before Registrar), Instant food, Instant death (in bomb blast) etc. We are now living in an instant age.
God and nature has taken a back seat. The demand for “instant return” created another breed of crooks and scoundrels, Con Men, who labeled themselves as self styled “Professionals”.
When I was a stock broker, however good I was, I detested my clients calling me a “professional”. I used to tell them – “you made money in your life, so you are the real professional not me. If we had money as much as you had, we would not need any client”. We brokers always look for OPM, pronounced as Opium, a drug, a narcotic that is equally addictive. It reminded me Danny DeVito’s witty movie OPM = Other People’s Money. He tells everyone about money “Easy come, Easy go”. Our forefathers used to advise us – “Hard earned money never disappears, Easy one does.” The instant coffee does not taste or smell better than slowly brewed percolated coffee. Hard earned money follows same pattern.
The crooks that have surfaced now are seen in every country. You found Rama lingam Raju of “Satyam” in India. He was still better than other two crooks that have just surfaced in USA. Madoff who stole $ 50 billions from investors and Alan Stanford $ 8 billions by selling bogus CD or Certificate of Deposit promising 14% return in US dollars.
This reminds me again, the case of CRB Capital from India that went bankrupt a few years ago. Many investors in Hong Kong were lured to invest into this company promoted by a Chartered Accountant Mr. C R Bhansali. He had approached me to find clients assuring 30% return in US$ for investing into India when the market was teetering around 2800 level. My best client asked for my opinion and referred him to me for follow up. I asked him the following questions for which he did not have any reply.
Q: To make 30% post tax return, you must make 35% gross. In that case, you should make at least 50% to make 15% return for yourself for handling the investment. If you can make such an easy return in highly depressed market, why do you need clients from Hong Kong? You can invest your own money and take all gains. Why settle for 15%?
Within months the company folded up. Hong Kong investors lost over US$ 10 millions!
Satyam’s Raju was better than Madoff and Stanford in USA. A British soldier investor killed himself for losing his life savings with Madoff. Hey, why did you kill yourself, soldier! You could have gone to USA and shot that bastard instead of killing yourself.
A royal family’s member in France, a billionaire, also killed himself for investing his client’s money into Madoff. He must be a decent guy. The name of the criminal Madoff was not inspiring either. What did the US government do? Nothing. How could he have lost $ 50 billions? It is not small money. It should be easily traceable. But nay, the agencies like FBI is useless. It would not take more than 10 days to find out where the money had gone.
Robert Allen Stanford, the banker, was not even arrested nor criminal charges filed against. He was under house arrest, not even formally charged. That scorpion was smiling with big eyes, baggy s suits, and monkey teeth. Look at the US government. They could throw into Guantanamo Bay jail some bearded British Islamic guy for suspected role in terrorism, hold him without trial for 7 years, and torture him to the extreme third degree, whereas fully documented and complained about fraudster of $8 billions, Allen Stanford, goes unnoticed. Such hypocrisy in the name of democracy, human rights and justice? A person like Stanford should have been stripped and flagged publicly in a baseball stadium.
What is the common factor in above frauds? The Auditors or so called Chartered Accountants in India or Certified Public Accountants in USA. The Institute of Chartered Accountants of India takes pride in strict graduation result of 2% to show the world that they are breeding the best persons as Chartered Accountants. Is this the quality they are churning out? The institute itself must be condemned for not enforcing strict accounting standard on its members.
As rule, I never invest into companies headed by Chartered Accountants as CEO or Chairman or Executive Director. They know very well where they can follow the practice of “green accounting” called creative accounting. In layman’s language it is called “Fraudulent Accounting”. Almost all mega frauds are clearly abetted by the members of this noble profession – that is what they call. Even prostitutes call their profession as noble profession.
- LTCM (Long Term Capital Management , tagged $ 1 trillion)
- Enron (tagged billions of dollars),
- WorldCom (also tagged for billions of dollars)
- Satyam Computers Services Ltd.
- Stanford International Bank Ltd. and Stanford Trust Company Ltd. in US /Antigua / Barbuda)
were all audited by the CPA of large and reputed companies. The CFO of these companies was all CPA. The investors should trust the accounts of companies headed by these Chartered Accountants or CPA with extreme caution. I do not even touch them or even look at them.
Let us now look at the role played by the statutory auditors of Satyam Computers.The annual report of Satyam also make interesting reading. Their accounts were audited by Price Waterhouse in India which is a branch or audit arm of reputed International accounting firm Price Waterhouse Coopers. Look at the following figures extracted from the Audited Annual Report for 2007 of Satyam Computer Services Limited.The subject matter of the fraud is that the company never had Bank deposit of Rs 3308 crores (=US$ 750 millions at then prevailing rate of exchange) reported in its balance sheet for several years. Such huge balances are never held in cash – they are always in bank accounts. How could they have misses such major item from their audit trail?
If the $ 3308 crores of bank deposits were not verified, how about rest of Rs 683 crores in cash? How could a company keep cash balance of Rs 683 crores in 2007 and Rs 1,194 crores in 2006? It would require 7 room of the size 10’ x 10’ x 10’ to keep such huge cash in popular denomination of Rs 100. It will require 119.4 million pieces of Rs 100 currency note or 1.194 millions of Rs 100 bundle (100 pieces per bundle). It will require storage space of 7,773 cubic feet or 6 x20’ shipping containers.
Unlike US con men Madoff and Stanford, Mr. B Ramalinga Raju was an honest thief. The thieves also have unwritten code of conduct, and perhaps Mr. Raju was following that conduct.
Until today, no one knows whether he really siphoned off the cash or just inflated the balance sheets to boost his status in the info market and boost share prices.
He was also trying to glorify the image of Satyam in the market place. He valued his own company in glorifying way. Read the following extracted from the same annual report (for YE 31Mar2007)
According to self evaluation conducted by our great B Ramalinga Raju who is smiling at us alongside, the Satyam’s enterprise value was US$ 18 billions (using exchange rate prevailing then).
There were about 42,000 employees working for Satyam who were valued collectively Rs 65,668 crores. If you divide this sum by 43,000 employees, each employee of Satyam was valued at Rs 1.53 crores or Rs 15.30 million rupees or US$ 332,600 approximately.
Who says India is poor? We have 42000 Slumdog Millionaires in Satyam alone.
Now. Look at the Human Resources valuation by Satyam as follows. This is part of their Audited Annual Report for YE 31-March-2007. It is self congratulatory and self glorifying. However, it does go to show that Mr. Raju was mentally sick and was trying to project image larger than life
Conducting Audit – An Art, Science or Commerce?
Accounting is a commercial subject. However, accounting presentation is an Art and also a science. This is a new branch of commercialism. “Hybrid commerce” we should say.
How to conduct the Audit – some basic rules
These are my rules from experience. I was an investigator and vigilance officer in a nationalized bank in Mumbai – India. The very first rule is that ignore the obvious. Try to audit that area which does not attract much attention.
Most of the time, the fraudster is suggestive. He will take the Auditor for a lunch or drink and show him the important books the Auditors should see. The Auditor should do only the opposite. Everyday, before the Auditor goes for inspection, he should think what the other guy did not want him to see or verify. He should mentally make a list and check those items especially when that guy is not around.
My Experiment with Lies in Mumbai, India
I detected one major fraud in terms of number of entries, not by amount and also worked with CBI. The amount involved was only Rs 250,000 at that time (1980) but the number of fraudulent entries were over 2000 – most of the rolled over from one account to another to cover up the original fraud. Same thing is happening in Citigroup now in my opinion.
The fraud was at one of the five star hotels financed by the bank. The bank also had small branch called extension counters. Being a hotel, bank used to get lot of foreigners for encashment of travelers cheques or checks (Credit card was not popular in 1980). The branch manager will ask the visitor to open the account before he could encash the TC giving bank’s policy as reason. Since the tourist will remain there only for a day or two, the manager will start using their accounts as dummy account for his various needs.
I also used to check even ladies toilet asking woman helper to check the inside of the Female Restroom. The reason is that most of the time, the Auditors or Inspectors are male and would not dare to go that place for fear being labeled “sex maniac”. Read the following actual example in same bank in Hong Kong.
I was transferred to Hong Kong in 1984 and used to head Legal and Internal Inspection department. Our Deputy General Manager was in habit of entertaining the government officials especially from finance ministry, because the bank was owned by the Government of India. He was seeking quick promotion through such measly favors.
One fine morning, we got a message that our bank’s senior General Manager was visiting Hong Kong from Singapore. He was very strict administrator, and never liked our DGM (HK). Our DGM was terrified. The reason was – he had used bank’s advertisement budget to buy over 200 brief case and suit cases of Samsonite and other local brands to give them away to visiting officials from the Ministries. One room was full of such suitcases. He discussed with his deputy on same floor (we were located in lower floor) who showed him the great idea. He was pleased.
In the evening, we found suitcases coming down to our floor one by one, and going into “Ladies Restroom”. All suitcases were transferred there on previous evening. I asked my senior Manager what was going on. He replied that our visiting GM had habit of inspecting every inch of our premises. But he would not dare to go to Ladies restroom. So the bags and suitcases were being transferred there.
I realized at that time that I was right in inspecting Ladies Restroom in Mumbai which was being laughed at. I was 4 years ahead of other Auditors or Inspectors.
Anil Selarka (Kalidas),
Hong kongMarch 7, 2009 Article Ref: 0903-026A
for PDF file download, please visit the following links: