Wednesday, 7 January 2009

Riding the Tiger

The Indian software company Satyam's Chairman, B. Ramalinga Raju, tendered his resignation yesterday after admitting accounting irregularities. In a letter he talks about inflating cash balances and over-stating profits (2008Q3 operating margin being an actual 3% against a reported 24%). It would appear that his attempt to cover this up by acquiring assets from his son’s infrastructure and property companies was thwarted by shareholders, such that it would appear that he had no choice but to fess up.

The Satyam share price fell over 70% as a result, but more importantly, the disclosure has knocked the reputation (I think unfairly) of the whole Indian offshore software and services industry. This story can be found on the
FT with some good coments on Holway’s TechMarketView.

Mr Raju describes the past few years as "like riding a tiger, not knowing how to get off without being eaten" – a comment similar to those I’ve heard from senior directors of UK software companies that have failed in the past. Although the Satyam problem does not appear to revolve around revenue recognition or capitalisation of R&D costs, these are areas open to easy manipulation in the accounts of software companies to give misleading results. Once started, it is difficult to stop without fessing up – unless there is an external reason or opportunity like a major acquisition to hide the problem.

With the current economic gloom, shareholders are expecting poorer results from companies. How many companies will use this current period to unwind some of their accounting excesses – revaluing assets, writing off capitalised developments or providing for bad debts?

Perhaps some other Chairmen will be taking the opportunity to step off the tiger over the coming months.....

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