Even before the dust has settled on the Enron-Andersen fiasco, we have the accounting misdeeds of WorldCom, Merck and Xerox in line. Can this happen in India? The idea is not as far-fetched as it might first seem. Readers are invited to write in with their views on the issue.
Gautam Chikermane
THE REVERBERATIONS of the accounting misdeeds of US companies have reached Indian shores. Even before the dust has settled on the Enron-Andersen fiasco, a series of new financial earthquakes, with their epicentres in the US, have begun to wreak havoc on international investors–WorldCom, which overstated profits to the tune of $4 billion; Merck, which did not account for $12 billion worth of sales; and Xerox, which claims it bribed Indian officials to get government contracts. The sheer scale of daring makes the Harshad Mehtas, the C.R. Bhansalis and the Ketan Parekhs look like petty pickpockets. Scams involving banks, stocks and allied regulators, RBI and Sebi seem like a waste of time, when so much more can be done by simply cooking the books.
Can this happen in India? Well, the idea is not as far-fetched as it might first seem. There are two institutions that participate in the publishing of balance sheets–the company’s management and its auditors. Once the balance sheet has been signed by the management, it is presented to all shareholders, and regulators like the Department of Company Affairs or Sebi (Securities and Exchange Board of India). The corruption of numbers, therefore, can be done by two sets of people–the management and the auditors. That is bad enough; what makes it worse is the ignorance of the regulators and the investors.
Opinion in Outlook Money
Showing posts with label enron. Show all posts
Showing posts with label enron. Show all posts
Saturday, June 15, 2002
Friday, March 15, 2002
Make accountants accountable
The checks and balances that govern the accountants' working are not enforced with any rigour.
Gautam Chikermane
AT RS 50,000 crore, the most valuable company on the Indian stock exchanges is Hindustan Lever. About 2.5 million of its shares are traded every day. There are 131 mutual funds–investing on behalf of hundreds of thousands of investors–that hold this company, of which 111 have it among their top 10 holdings. Together, they have invested almost Rs 2,000 crore in the company. This is aside from over Rs 10,000 crore other investors have invested. Why? Because this MNC has been among the best companies in India. Why do I say that? Consistently good performance– over the past 10 years, its sales have grown at 22 per cent and net profits at 34 per cent per annum. Who says so? The company’s accountants, A.F. Ferguson and Lovelock & Lewes. As a financial journalist, it’s my job to study the balance sheets and profit and loss statements of companies. When I pore over an annual report, I assume that the accountants who have passed the accounts written by the company have checked the numbers, tallied them and presented them so that an investor can make an informed decision to buy or sell the stock; lenders can decide whether the company has the capacity to pay back; and tax authorities can see whether it has paid the taxes due.
But what if Lever’s accountants were wrong? Worse, what if they had been conniving with the management to deliberately misinform, say, by overstating profits so that the share price did not plunge, or understating them and diverting the excess money into the pockets of the directors (and themselves)? Will the Lever stock that has appreciated over 15-fold in the past decade inspire the same loyalty in future? Will it continue to be sought after? Will it continue to be valued higher than peers Procter & Gamble or Nirma, whose PE (price-to-earnings) ratios are 20 to 25 points lower? Will it continue to attract the top talent from business schools and from across corporate India? The recent high-profile debacle of Enron has all the answers.
Column in Outlook Money
Gautam Chikermane
AT RS 50,000 crore, the most valuable company on the Indian stock exchanges is Hindustan Lever. About 2.5 million of its shares are traded every day. There are 131 mutual funds–investing on behalf of hundreds of thousands of investors–that hold this company, of which 111 have it among their top 10 holdings. Together, they have invested almost Rs 2,000 crore in the company. This is aside from over Rs 10,000 crore other investors have invested. Why? Because this MNC has been among the best companies in India. Why do I say that? Consistently good performance– over the past 10 years, its sales have grown at 22 per cent and net profits at 34 per cent per annum. Who says so? The company’s accountants, A.F. Ferguson and Lovelock & Lewes. As a financial journalist, it’s my job to study the balance sheets and profit and loss statements of companies. When I pore over an annual report, I assume that the accountants who have passed the accounts written by the company have checked the numbers, tallied them and presented them so that an investor can make an informed decision to buy or sell the stock; lenders can decide whether the company has the capacity to pay back; and tax authorities can see whether it has paid the taxes due.
But what if Lever’s accountants were wrong? Worse, what if they had been conniving with the management to deliberately misinform, say, by overstating profits so that the share price did not plunge, or understating them and diverting the excess money into the pockets of the directors (and themselves)? Will the Lever stock that has appreciated over 15-fold in the past decade inspire the same loyalty in future? Will it continue to be sought after? Will it continue to be valued higher than peers Procter & Gamble or Nirma, whose PE (price-to-earnings) ratios are 20 to 25 points lower? Will it continue to attract the top talent from business schools and from across corporate India? The recent high-profile debacle of Enron has all the answers.
Column in Outlook Money
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