Friday, January 30, 2009

Bombay 1974 Mumbai 2009- The cost of 'Living'

1974 was the year I started my formal employment. 1974 was also a year in which there was world wide depression. 1974 was the year when the Middle Eastern countries got control of the oil companies, which till then were majority owned by foreigners. As a result, oil prices spiked up nearly four fold leading to a depression. There was price control on oil in the USA. In India, jobs were hard to come by. However, by then, Indira Gandhi had created the PSU banks, which became one of the best employment opportunities. Mumbai life was tough, but still fun. In the private sector, jobs were predominantly got through influence. Let me try and pull out some numbers from my memory and place it alongside today’s prices:

(all figures in rupees)
1974 2009 change

Starting salary of a bank clerk --------- 500-------8000----- 16X
Cost of a thali in an udipi restaurant ----- 1.50 ------30.00---- 20X
A cup of tea at an Udipi---------------------0.20------ 8.00----- 40X
Taxi meter fall ------------------------------2.00------13.00----- 7X
Petrol per litre------------------------------17.00-----45.00----- 2.5X
Movie ticket at Sterling-------------------- 3.50 ----150.00----- 40X
Rice per kg--------------------------------- 2.00-------30.00------15X
Bombay Poona Deccan Queen Ticket----- 7.50-------90.00------12X
Cost of a haircut--------------------------- 2.00-------70.00------35X
Auto rickshaw min fare--------------------1.00---------9.00-------9X
Vadapav ------------------------------------0.25--------6.00-------24X
Income tax exemption limit--------------- 5K ---------150K------30X
Gold (per 10 grammes)--------------------500-------13800------28X
Penguin paperback novel------------------3.00-------150 --------50X
Rupees per US dollar----------------------7.75---------49 ---------6X

Flat in Goregaon (per sq ft) 80 7000 90X

In 1974, Indira Gandhi was boss. Today, Sonia Gandhi is boss!!

Even in those days owning a house was beyond the means of the average person in Mumbai. It continues to do so. The demand has been created by a class of super earners who have been spawned by the burgeoning financial services and other service sectors. Since the supply of flats in Mumbai is a limited one (do not include the outlying areas) the average mumbaikar has been outpriced by the super earners.

Are we better off today?
Yes, if you have your house in a decent location. If not, you will be struggling all your life and have nothing to show at the end of your working life. In those days, housing loans were not available, unless your employer gave you one. Today, the generosity of the bankers makes it possible for one to think about buying a house. Other than that, the only thing that has become cheaper is money. Too much of it going round and a few grabbing most of it. Yes, we have better infrastructure and cheaper communication methods, but beyond that the grind of the mumbaikar continues.

"Who is secure in all his basic needs? Who has work, spiritual care, medical care, housing, food, occasional entertainment, free clothing, free burial, free everything? The answer might be nuns and monks, but the standard reply is 'prisoners'"
Erik von Kuehnelt-Leddihn

Friday, January 23, 2009

Jai Ho AR Rahman

It has been a tough job identifying good news. In these times, it is great to see AR Rahman getting accolades and getting three nominations for the Oscars. Having had the advantage of listening to Rahman in Tamil as well as Hindi, all one can say is that this guy is amazing. He makes old composers look like mere arrangers. Whilst I have not yet seen the film Slumdog Millionaires, I have heard the songs. Must say that Rahman has better compositions by the dozen. We certainly do hope that he gets an Oscar or three!! Will keep our attention diverted from the small stuff like corporate frauds and political shennanigans.

Friday, January 16, 2009

Shattered Accountants

The Satyam saga has given ammunition to the Institute of Chartered Accountants of India. The institute is dominated by the local firms and they have been hard at trying to discredit and do in the foreign brand name CA firms. Satyam gives them great fodder, since it is a MNC accounting firm that is the auditor.
From my experience, I have all thru my career looked at most Indian audit firms with skepticism. In fact, we used to identify the rogues in each city and then do balance sheet analyses where required. Now the Indian lobby is hard at trying to get at the MNC firms and they have managed to get in their own nominee on the Satyam Board also.
Good fun developing.

Thursday, January 15, 2009

Diesel & Petrol prices- welcome relief

It is great to see the prices dropping. I wish the prices had been dropped even more. If kerosene can be subsidised, so can petrol. In fact, for the honest tax payer, who pays for petrol with his after tax rupees, petrol subsidy is the only thing that he can ever get back from the greedy government.
Oil companies will always be bailed out. Let us not worry about the big picture. As a salaried and disgruntled tax payer, let us pray and agitate for more petrol / diesel price cuts.

Monday, January 12, 2009

Long Live Investment Managers

Today, the Chief Investment Officer of a leading mutual fund said that his fund had exited all ihose companies where there was "questionable" accounting practices. That too in an interview on CNBC!!
Wonder why they got in in the first place, if they knew. Or is it a sudden admission that they get in to stocks without bothering to read the balance sheet and that Satyam has stirred their conscience?

Thursday, January 8, 2009

Unaccountable Accounting

Accounting is history in perspective. History is written by the winner. Accounts are written by the Managments.

Satyam. This word has been redefined by Ramalinga Raju. In my previous entry, I had touched on corporate governance. One of the accomplices is the accounting profession. Without their help, no management can deliver what they actually do. I doubt if any company would come out totally clean if subjected to forensic accounting. However, the belief is that the accounts are “by and large” a fair representation. There would be a few things buried, either to cover for some promoter/key management “takeaway” from the company or some non-business expenses parked out there. Every perk that is enjoyed for personal use, is, in-principle, pick pocketing of the shareholder. However, the world is by and large generous to a fault, so the accountant agrees and signs on the dotted line.

The accounting fraternity (like any other) is not without its black sheep. There are those who will get you “entries” to launder money from one colour to another, get you ‘expenses’ to lower income and siphon money and generally do your bidding at a price. I am sure all of us have met someone of this breed at some point in our lives. I have met many.

Auditors are a pitiable lot. In a typical audit, the first level check (which mostly comprises of vouching and checking the postings, the accounting heads etc) is done by the rookies. They come out with a list of ‘queries’ which is first discussed with the company’s accounts persons and some are resolved. Where explanations are not satisfactory, the ‘senior’ (who could be a partner or not) takes over. He discusses with the CFO and resolved. After this, the partner who signs will complete the signing formalities. It is physically impossible to check each and every transaction in a large firm. Most of the small things have to be taken on faith and exemplary due diligence and persistence is needed on the big ones. Time constraints and the friendly relations with the client often come in the way and result in compromises. In most cases, the auditor has to rely on his ‘gut’ feel. If he were to fight for every issue, not only will the client be lost, but also the time pressure would be another one. Often, many clients use time pressure as a leverage to push through some black holes.

It is not difficult to con the auditor. In today’s age of electronic banking, there is no “pass book” to verify. An “E” statement (which can easily be generated by anyone) is the bank statement. Bank Fixed Deposit receipts are also in ‘print-out’ forms. This also can be duplicated.

When it comes to sales, when it relates to an industry that suffers no sales tax, excise duty or any levy, it is easy to manipulate. All that is needed is a “contract” from the buyer and the invoice. You can add some or hide some. If you hide, you can divert the proceeds to a bank account that is opened by anyone with access to corporate stationery in the office. The beauty is that the auditor can only check what bank accounts/invoices are disclosed to him. There is no way to cross check. I can easily list over a hundred areas where things can be manipulated.

However, checking what is on the records should be a simple matter. In the old days, the auditors would insist on “balance confirmation” letters from bankers and debtors. The debtors sometimes do not respond. This is taken as a routine exception and no reportage happens. The practice seems to have been discontinued.

The point is that whilst there is no excuse for an auditor, the truth is that he can only be as good as the management is. A structured fraud can put paid to the best of the auditor.

The other aspect is one of knowledge of industry. Can the auditor have skills to verify the entire inventory? He can count the cash balance and verify the bank balance. Outside of this, the auditor generally does not have the expertise to check the logic, the margins etc. He can do some peer comparison of key ratios. Similarly when it comes to capital expenditure, consulting fees or any other similar matters, he has no clue. At best, he can see if there is a practice of some kind of comparative quotes that the company has obtained and check with that.

The more important issue here is one of the auditors engaging themselves in other fee earning activities from audit clients. This generally leads to conflicts as well as compromising on audit fees. In fact, in small companies and in large institutions like banks, the audit fees seem woefully inadequate in relation to the size of the business. I also wonder about what level of audit can be done in a three-month period for a bank that has a few thousand branches.

The whole thing again falls back to ‘faith’ in management. If you study any ‘Auditors Report’, you will notice so many disclaimers, which it almost amounts to an admission of total faith on the management.

I would urge the accounting profession to do the following:

1. Co-opt people who are not auditors on your governing board. These could be financial analysts with CPA, investment managers with long standing and some one from regulatory bodies like SEBI;
2. Raise the fees sufficiently to do a thorough job;
3. Ban any kind of activity other than pure audit. If consulting has to be done, then give up your Certificate of Practice and then do so. No accounting firm should have any other business;
4. Streamline the audit process in view of some lessons learnt from the Satyam affair;
5. Realise that you are working for the shareholders and not for the management. Have the balls to blow the whistle where needed.
6. Insist on compulsory rotation every two years or so;
7. Where the company is of a large size make ‘continuous audit’ mandatory.
8. Make a minimum of cross checking with counter parties mandatory. It could include vendors, customers, consultants etc
9. If a firm is caught in negligence or malfeasance, apart from debarring, give wide publicity to the fact so that the person/s involved never get any employment. Also make it illegal for any listed company to employ such a person in any capacity for life.

The regulators can also do something. Move this gamut of crime from civil to criminal. It is strange to see petty pickpockets rotting in jail and Wall Street criminals enjoying free air and investigations never reaching to any conclusion. The Fraud Office orders should be given judicial standing, so that only the Supreme Court can overturn/rule on it.

To the public at large, my advice is to depend more on the managements rather than on accounts alone. Accounts are important, for that tells you what your rupee does. However, accounts as you see are the result of a lot of makeovers that are given to make them appealing. Management reputation is a subjective thing. No doubt Satyam had a great image, with an accounting firm having chosen it for an award!!

I am sure that the Satyam saga is much more than the simplistic accounting fudge explanation given in the letter. The story has to be far more complex than that. But it has thrown the spotlight on the audit fraternity. I am sure that Satyam is not the last we have seen.

January 8th. 2009.