The fraud committed by Hyderabad-based outsourcing giant Satyam Computer Services is leading to many cries for reforms of Indian accounting rules and practices. But Credit Suisse Securities has put its own calls in the form of a “wish list.”
In a report published Monday, Credit Suisse Securities notes that — while some accounting and disclosure rules are good, and a bigger problem may be enforcement — widespread abuses must be addressed.
At the top of the list is the need to correct the existence of too-infrequent, incomplete, and late balance sheets. “Many abuses remain hidden due to lack of quarterly consolidated numbers,” Credit Suisse explains. “Subsidiary balance sheets are not always available.” It adds that lack of equity method of accounting — a global practice — for the standalone results permits misrepresentation.
The Satyam scandal, which came to light in a lengthy written statement of abuses last week by then-CEO B. Ramalinga Raju, has spread to include the arrest of CFO Srinivas Vadlamani, as well as of Raju and his brother, B. Rama Raju. At the center of the ex-CEO’s claims was that he had falsified at least a $1-billion cash position on the Satyam books. Since then, Satyam’s board members also have been ousted by the Indian government.
So perhaps that is why the Credit Suisse wish list is as long as it is.
It goes on: “ICAI (Institute of Chartered Accountants of India) should immediately work against the increasing use of direct balance sheet entries or even worse, just mention in the notes for any mark-to-market losses or impairment incurred on any assets.”
The investment bank also calls on the ICAI to reduce permitted items that can be written off in balance sheets. “Most mark-to-market losses and impairment charges should flow through P&L statements,” it argues. “We believe that investors are sophisticated enough to distinguish the non-recurring losses.”
In the near term, Credit Suisse says that companies should be made to declare all un-booked mark-to-market losses each quarter.
The bank also would like regulators to make quarterly publication of minimum balance sheet details mandatory. This should be possible given the technology tools available now, it adds. “Regulators should reduce filing time for annual balance sheets from six to maximum three-four months,” Credit Suisse says.
It also would like regulators to make consolidated account reporting mandatory for quarterly results. At the very least, income of subsidiaries in the standalone must be mandated to be included using the equity accounting rather than the dividend-based methods, it adds. “This would be in line with practices globally and materially reduce the gap between standalone and consolidated profit numbers,” it explains.
The bank also asserts that, given the abuses related to intra-company financing, regulations should be designed to make companies declare average levels of cash, near-cash investments, and loans every quarter. They also should have to detail interest income and expenses on them, and to explain if average interest cost or yield is substantially different from the prevailing rates.
Credit Suisse also would like to see more tax-related disclosures. For example, listed companies should be made to increase disclosure for any material change in the reported tax rate compared with the recent trend, it says. And companies should also declare taxes paid under major categories like capital gains, corporate taxes, and surcharges. It also calls for detailed disclosures for any material non-operating item.
Other recommendations: significant tightening of loan repayment schedule and pension funding, to prevent abuses and immediate disclosure of pledged shares.
