Hidden In Plain Sight

Earnings management is India Inc's worst kept secret.

In one of the numerous stories on the Enron scam, noted business writer Malcolm Gladwell cited a famous distinction between puzzles and mysteries. He writes, “Mysteries require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much.”

The Enron scam by Gladwell’s reckoning was a mystery, where all the information needed to understand the scam was hidden in plain sight. Over 3,000 special purpose vehicles and complicated multi-year energy contracts meant that even if information was around there was little understanding. And atrociously enough, it was later established that even Enron’s board and CFO did not completely understand the full implications of the deals.

Gladwell writes of the episode, “all Enron proves is that in an age of increasing financial complexity, the disclosure paradigm—the idea that the more a company tells us about its business, the better off we are—has become an anachronism.”

In case of India it was the same. It was Satyam an IT company whose earnings were one of the most heavily reported ones which saw fraud of the kind that inspired shock and awe. So does the greater frequency and depth of financial reports hides more than it reveals? It is a question worth asking.

This September, our cover story package revolves around the quality of financial reporting in India and the onus that falls on the auditors and CFOs, especially so in the context of the new operating law for India Inc—the Companies Act 2013. The responsibility on the auditors, CFOs and senior management has now increased manifold.

The September issue is rich with other great content as well. Apart from corporate governance and compliance, there is another excellent article by Hosuk Lee-Makiyama et al of ECIPE about the advanced world’s view of India’s stance at the WTO. In a poll conducted on our website we found that over two thirds of finance heads support the Modi government’s position. Here is an alternative view. Add to that a brilliant column by Robin Banerjee, MD of Caprihans India on the way ahead for CFOs.

As we gather at Kovalam this September for the Leadership Conclave, many of these issues are expected to linger on in ensuing conversations. Let us keep talking.

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