It's ironic that satyam, which means truth in Sanskrit, is the scene of what is one of India’s biggest corporate scandals. While there have been many scandals before, these pale in comparison with that of satyam's.

Emerging market risks include a whole list of factors but fraud on a scale such as this is beyond these "normal”, actually expected risks. India's problem was that the private sector was smart, dynamic and most importantly honest. The government was the problem. Now we have another one. The magnitude and duration of the fraud is both stunning and deeply disturbing. 

Infosys has an impeccably honest and straightforward leadership but so did satyam it seemed. The shock comes from not only the scale of the fraud (close to 7000 Cr) but from the fact that it comes out of the industry which put India on the global business map. The IT industry, while being criticized for doing back office and BPO work, has no doubt brought prosperity and opportunity to an emerging, ambitious young generation of Indians.

The fact that the industry touted it's adherence to global standards, be it in terms of governance or facilities provided to employees makes it worse. That image is now tarnished.

While I agree that it does not represent the majority of the industry (satyam's employees are hard working, honest people), the fact remains that a lot of people had to be complicit in the fraud for it to have gone on so long and been at this scale.

A few questions,

1. What was PWC doing exactly?

There is absolutely no way that they could not have known. This is further borne out by the fact that after the botched attempt to buy maytas, Merrill lynch, which was asked to look at merger opportunities cut ties with satyam after just ten days citing "irregularities in accounting". They took ten days to find out what PWC didn’t find in 7 years?

2. How can no one else inside the company know?

I can understand that some independent directors may not have known. They may not verify the balance sheet statements simply because I don't think anyone does that but raju couldn’t have these figures on hand unless someone accounted for him. It means there are many more from top management who would know. There's no way that 7000 crores can be fabricated without someone knowing.

3. Was the margin really 3 percent?

This is really difficult to believe. What's easier to believe is that he used the profit to either a) pay down existing debt which he owed to his personal creditors or b) Use it to fund other purchases like land, or some such personal reasons. It's impossible to have such low margins in the IT industry. It may happen in the future but as business is now, there’s no way it can happen. What it means is that they money that was earned by the hard work and late nights of employees was sucked dry by raju.

4. Which banks are now in on this scandal?

The scandal will spread. NO doubt about it. The money is kept in banks. If there is no money, as raju claims, the banks should know it. This isn’t a small amount. The fact is that there definitely is some cover-up at the banks themselves. Even if forged statements were shown and the banks didn’t know this, wouldn't they have seen the quarterly statements and realized it was a big lie.

The bad news

Before we say anything about the image of the IT industry being tarnished and India Inc suffering a global PR nightmare, let's focus on those affected most - the employees of satyam. Working for an IT company I can testify that most people work pretty hard and are honest in their dealings. When you work hard and you see the company expanding at a good rate and maintaining margins, you do feel proud. They will feel duped. They’re hard worked has paid off. They have impressed customers and improved service. The customers have paid the money they deserved BUT their leader has sucked it dry. They've filled the bank and raju, along with his conspirators have drained it. That must really hurt.

The worse news.

Job cuts are imminent. It's difficult for the company to burn cash now at the rate they were before because they have no money in the bank. Innocent, hard working employees will face the brunt of the impact. Even senior managers who've spent more than a decade with the company will find that they have worked and worked and have been duped. I hope that there are no job cuts but it’s difficult to imagine such a scenario.

The crazy part.

Satyam won a corporate governance award a few months ago. Wonder what that stands for now.It seems unlikely that the awards panel looks into the authenticity of the company’s statements because that's not their job, it's the auditor's. In any case, what we've come to see is that awards may mean something, but it isn’t much. Performance in the market and the bottom line is quite clearly, THE bottom line.

The good news.

I have noticed on many message boards that satyam's employees are defiant and ready. It’s incredible to see a satyamite say - “We will script the biggest comeback in Indian business history". They realize that they're company is honest, just not the leaders. Can the turnaround happen? Probably. The company makes money. It's not a loss making business. Once the dust settles and the company starts smaller it can still come back. The short term need for cash and more importantly a strong vision is the main concern. A merger may also be an option but it looks unlikely.

Where do we go from here?

First things first. Find out what happened. No matter how long it takes. Make a big public spectacle of it. Let it ring loud and clear that there are massive consequences for trying to defraud the system. There have to be changes made to how authenticity of accounts and balance sheets are maintained. I admit this is pretty difficult, Business, no matter what anyone tells you, still runs on trust. We bill our customer by the hour. But the customer doesn’t verify whether every resource that billed on a particular day came to work or not. They can't. It's impossible. They have to trust us. We have to regard it as sacred and never attempt to breach that trust.

A little hope.

Warren buffett says - 'it's only when the tide goes out that you see who's been swimming naked'. Well the global financial crisis has taken its toll. Wall Street has been exposed for what it is and now companies that cashed in when the going was good, now face the consequences of all their bets going bad at the same time. A perfect storm if you will.

What we're now seeing is a cleansing of the global business digestive system. A detoxification. Capitalism has brought benefits, but like the saying goes - "anything worth working hard for is worth stealing". People will steal. Eventually though the tide reverses.

In the end, the tortoise does beat the rabbit. SAFE and steady wins the race.