NEW DELHI, Apr 12: Six years after Satyam scam, many companies still indulge in ‘aggressive accounting practices’ to dress-up their books to impress the investors and even large corporates “manage” their earnings, experts say.
According to India Ratings, there is a need for greater investor awareness and a shift in focus from quantity to quality of financial numbers to check repeat of accounting frauds like the one at Satyam, where top management inflated profits, cash balance and a host of other financial numbers.
The rating agency, whose study last year found a “significant likelihood of discrepancies in financial reporting of earnings” even by top-100 listed companies, also said that an increased investor vigil can help “discipline” the corporates.
Experts say that the findings of the study, published in July 2014, structurally remain valid even today.
The observations come in the backdrop of a special court last week convicting ten people in the Rs 7,000 crore Satyam accounting fraud, which came to light in January 2009. The scam, perpetrated by the erstwhile software firm’s founder B Ramalinga Raju, is so far the biggest ever in India.
“Some companies tend to resort to aggressive accounting practices and since most market participants focus on the quantity of earnings and not much on the quality of earnings,” said Deep N Mukherjee, Senior Director (Corporate Ratings) at India Ratings & Research.
Mukherjee, who was a co-author of the India Ratings study on ‘Quality of Financial Reporting of Large Corporates’, said that the major investor class, including institutional investors, need to be sensitised to ensure that public discourse “moves beyond discussing just the earnings numbers to opportunistic financial reporting by corporates”.
Such a mechanism would go a long way in disciplining companies and in the absence of investor awareness about such issues, “cases like Satyam could continue”, he said.
In his report last July, he had mentioned that the underlying financial health of some BSE 500 corporates was reflected through their key reported financial numbers, while certain corporates within midcaps had better financial reporting than the large caps.
“A lot of such corporates as perceived externally have world class corporate governance, however the presence of ‘bad apples’ at least statistically cannot be ruled out,” he had said.
When asked whether the findings of the study still hold true, Mukherjee said that the companies window-dress when they have to meet continuously high investor expectations or when they would like to hide disclosing unexpected bad news.
“Since markets are not expecting great earnings anyway motivation to window dress may be lower this time,” he said. (PTI)
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