Indian Outsourcing Chief Admits Billion-Dollar Accounting Fraud
The success story of outsourcing calls to India may have come to an end with the revelation of a $1 billion accounting fraud scheme.
Satyam Computer Services, a leading Indian outsourcing company that serves more than a third of the Fortune 500 companies, significantly inflated its earnings and assets for years, the chairman and co-founder said Wednesday, according to the New York Times. The announcement roiled Indian stock markets.
Satyam maintains computer networks and provides outsourcing services for clients including Citigroup Inc., Nissan Motor Co. and Qantas Airways Ltd, Bloomberg News said.
Like in the case of Bernard L. Madoff, Satyam's chairman admitted to the fraud. Profits have been inflated for “several years,” Ramalinga Raju, the chairman, said.
The Securities and Exchange Commission was criticized by Congress this week for its failure to catch the Madoff scheme. Who's asleep at the wheel in India?
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Needless complexity?
What a surprise, huh? Another gigantic sleight-of-hand with other peoples' money. I know "lack of oversight" is serving as a terrific scapegoat, but I wonder: is it the complexity of some of these financial instruments to blame for their easy manipulation?
I recommend everyone read a piece in last Sunday's New York Times Magazine that explained the widely accepted Value at Risk (VaR) model used to measure a portfolio's (and firm's) risk. Even the SEC uses it, but some flatly call it "a fraud."
I'm wondering what others think.
Here's a link: http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?ref=magazine
From the article:
Risk managers use VaR to quantify their firm’s risk positions to their board. In the late 1990s, as the use of derivatives was exploding, the Securities and Exchange Commission ruled that firms had to include a quantitative disclosure of market risks in their financial statements for the convenience of investors, and VaR became the main tool for doing so. Around the same time, an important international rule-making body, the Basel Committee on Banking Supervision, went even further to validate VaR by saying that firms and banks could rely on their own internal VaR calculations to set their capital requirements. So long as their VaR was reasonably low, the amount of money they had to set aside to cover risks that might go bad could also be low.
Given the calamity that has since occurred, there has been a great deal of talk ... that this widespread institutional reliance on VaR was a terrible mistake. At the very least, the risks that VaR measured did not include the biggest risk of all: the possibility of a financial meltdown.