It seems, with the number of accounting frauds exposed in recent years, that company execs–such as Mr. Raju of Satyam Inc.–still believe that they can manipulate numbers on income statements and balance sheets to their advantage without being caught.
“Mr. Raju admitted that the September quarter accounts for last year included a non-existent cash and bank balances of Rs50.40bn ($1bn), non-existent accrued interest of Rs3.76bn and other irregularities.
In the September quarter alone, the operating margin was shown as 24% of revenue compared with an actual operating margin of 3%, due to inflated revenue and profit figures.” – FT.com
The fallout from the exposure of these falsified accounts has included a drop in Satyam’s stock price of 80% and the expectation that the company will go bankrupt. However, it is not these consequences that are interesting to me, its the fact that companies can and do get away with accounting fraud.
The fact that huge, well-respected international audit firms such as PriceWaterhouseCoopers, who audited Satyam for years, are able to overlook discrepancies in reported financial figures presents a huge problem. It is the job of these auditors to dig for background information on companies’ transactions in order to confirm what has been reported. There has been a history in recent years of companies–such as Worldcom and Enron–falsifying the assets portion of their balance sheets and the expenses portion of their income statements and getting away with it. If these audit firms are not able to improve their investigative work, companies will continue capitalizing on the their incompetence.