Satyam Fraud’s Systemic Regulatory Implications

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10 Responses

  1. Jeff Lipshaw says:

    My wife, who has been an inactive CPA since 1983, said “it’s been 25 years since I was on an audit, but I still know how to audit cash!”

  2. Satyam is of course a Sanskrit word, the nominative case of satya, “true; truth,” hence “trueness” or “realness” (for that which is true is real, and ‘being true,’ as it were, is a property of reality, properly understood). It can mean “truthfulness,” “absolute truth,” “speaking truth without distortion,” etc. I’m sure Indians are having a bit of fun with the company’s name.

  3. Lawrence Cunningham says:

    Inspired by Patrick:

    On “truth,” note that Price Waterhouse’s audit opinion for Satyam, following US auditing practice, told its board and investors that the financials “present fairly” the company’s condition and results. The UK equivalent is the phrase “true and fair view.” EU countries translate “true and fair” into national languages.

    Idiomatic complexities yield translations suggesting somewhat differing English language correspondence. For example, Italy translates the phrase as “rappresentare in modo veritiero e corretto” or “evidenza a verita,” which seem more nearly akin to “true and correct” and “straightforwardness and truth,” respectively.

    In Denmark, the idiom suggests “right-looking and according to facts;” in Portugal, “true and appropriate.” In some tongues, the notion boils down to a single word, like “real” (France, Belgium, Netherlands, and Spain) or “faithful” (Luxembourg).

    Despite variation, I doubt that there is a language in which “fairly presents” can justify a billion dollar discrepancy.

  4. A.J. Sutter says:

    “I doubt that there is a language in which ‘fairly presents’ can justify a billion dollar discrepancy” — I’m tempted to ask what language was Hank Paulson speaking to Congress ca. September 2008; but maybe there isn’t a word for anything so small as a billion dollar discrepancy in that language.

    Your comparison to Madoff is very pertinent when looked at from another linguistic angle: Ponzi schemes and other pyramid schemes are instances of “confidence schemes”. When a Big Four firm issues an audit opinion based on outsourced work, the metaphor is no less literal: the opinion rests on a pyramid of confidence in the various layers of audit and in the groups who conducted those pieces of the audit. I wonder when we’ll start to see shaky legal services pyramids, as well.

  5. Lawrence Cunningham says:

    For A.J.–

    Billion dollar rounding errors in interpretations of Secretary Paulson’s statements acknowledged, and amplifying the confidence point, I wrote in 2003, critically of the Sarbanes-Oxley Act’s express motivation to “promote investor confidence,” that this was just what Enron and other catalysts had done—they promoted investor confidence, par excellence. To which, one of the most esteemed corporate/securities law scholars in the country replied to me: ”I feel wounded, since I drafted [the language about promoting confidence].”

    Ponzi schemes, and many responsive regulatory schemes, are all about building confidence, and that response, in my view, is false. Capitalists and regulators, both, should give investors reason to have confidence, not promote confidence. Trouble is, regrettably, both have incentives to sell confidence, rather than grounds to justify it.

    You will see this in coming regulatory reforms. My conversations with Washington power brokers these weeks suggest both that (1) we all know what reforms would be optimal and (2) they don’t stand a political chance of enactment.

    I don’t mean to present as cynical; I’m an optimist, personally, professionally and financially. But realism is the thing with regulatory reform. Billion dollar rounding errors may be in our future, whatever the language.

  6. Michael Guttentag says:

    Could you blog in more detail about “what reforms would be optimal” and why they “don’t stand a chance”?

    Also, I would agree with you that “building confidence” is not a sound objective for a regulatory agency, but this language strikes me as symptomatic of a much larger confusion about how to probably characterize the goals of regulatory intervention in capital markets. I’m not sure that giving “investors reason to have confidence” is that much better. Are you referring to the accuracy of financial statements or something broader?

  7. Lawrence Cunningham says:


    Thanks for the suggestion for more detailed blogging on optimal solutions and political obstacles, which I’d like to take up. As a sample, consider merging the SEC and CFTC, a proposal that is 20 years old and would enable a more comprehensive approach to regulation of financial instruments, markets and firms. Political obstacles arise because different Congressional committees exercise oversight of the two agencies and Members have deep vested interests in maintaining the advantages that come from that oversight.

    On the difference between (a) promoting investor confidence and (b) providing grounds for investor confidence, I’m referencing the broader distinction between actions, responding to crisis, (a) taken to show the public that authorities are taking control over a crisis and thus to influence psychology and (b) taken according to a reflective analysis designed to achieve substantive objectives to benefit a targeted audience. Many crisis response actions contain examples of both.

    But sometimes the only effective step authorities have amid a crisis is a kind of “show” to influence a targeted group’s psychology. The classic example may be when Britain, facing the German bombardment of London amid World War II, lofted noisy radar interference all around the capital. This was a show of determination and signal of doing something which had no technical effect on the bombing but possible psychological effect on the bombers, and perhaps on Londoners.

    I used that example in the conclusion to my 2003 article reviewing Sarbanes-Oxley, which, in the parts that talk about promoting investor confidence, and in much of the rhetoric surrounding its enactment, sought to influence the psychology of investors. When substantive changes to address a crisis are possible, as I believe they were in response to Enron and other catalysts of SOX, focus should be entirely on those changes, without resort to psychological influence. This may be a suitable topic for a future post too, so thanks for that too.

  8. Jake says:

    Hindsight is always 20/20.

  9. MDF says:

    I’m a bit surprised on your take on mutual recognition. After all, (1) nobody is talking about letting in a weak and regulatorily under-developed market such as India (it’s Australia, isn’t it?); (2) and what are you worried about — that the foreigners will expose American investors to Ponzi schemes, inadequate disclosure, and poor investment advice? We’ve got all that covered at home.

  10. nawal kishore singh says:

    i m not very much surprised with this happenings.becouse if we see it minutely we find that we r sitting on the verge of civiliastion collapes.every one is crazy and keen to get rich quick.what would be the modus ?they donot have any pain to look into and explore for .