Track that cash: Bumping up of revenues is one of the most common crimes

Less than a year ago, SembCorp Logistics, a Singapore-based firm, got a rude shock. It discovered that the top managers at its Indian subsidiary, SembCorp Logistics (India), had systematically cooked the books. Revenues had been inflated and expenses misclassified. The dressing up of balance sheet was first detected when a qualified accountant from Singapore was sent to India as Deputy Managing Director in April 2003. And when accountants and lawyers from Deloitte & Touche and Drew & Napier, respectively, started their investigations, the true extent of deception at SembCorp Logistics (India) was discovered. Between 2000 and 2002, profits had been bumped up by Rs 38.80 crore, and expenses of Rs 7.5 crore had been incorrectly classified as fixed assets prior to 2002. In a press release put out on July 28 last year, the Singapore-based parent revealed what had happened: "It was found that certain individuals in the finance department of (SembCorp Logistics) India had artificially inflated revenue and expense figures through the creation of fictitious documents, invoices and journal entries."

While SembCorp Logistics may be the first foreign firm to have publicly announced mismanagement at its Indian subsidiary, it is hardly the only such victim. Two years ago, Xerox found that its Indian accounts had been misreported. The CEO and the CFO of the company had to pay huge fines and were also banned from practising accountancy. More recently, in March 2004, there were rumours of financial irregularities at Adidas India. The company's Managing Director, Chief Operating Officer, and the Chief Financial Officer all left. A spokesman of Adidas India, however, denied that anything had been amiss and that the departure of the top team had anything to do with the rumours.

Out of Sight...

Fudging of accounts is by no means a new phenomenon, and subsidiaries of multinationals are no exception. In fact, most auditors will tell you that this has been going on for years. So why all the hoopla now? For one thing, post Enron, WorldCom, et al, and the passing of the Sarbanes Oxley Act in the US that makes global CEOs and CFOs owners of subsidiary accounts, the penalties of oversight, intentional or otherwise, can be telling. Says Sunil Chandiramani, National Director, Risk & Business Solutions Practice, Ernst & Young India: "Indian subsidiaries of global companies can be either very large or very small. Until recently, the smaller ones sometimes flew under the radar because from a significance perspective, they did not have top management focus. But now, everyone's started looking at financial matters from a risk management perspective. So even if the subsidiary is very small, but it is putting the company to risk, it must be taken care of."

But what makes the MNC subsidiaries in particular easy game? Blame it on a host of factors. One obviously is the physical distance: more often than not, the headquarters is based several thousand miles away, making day-to-day monitoring impossible. Another is inadequate systems of checks and balances. But here's the interesting bit: Not all managers who end up dressing up their performance do so to enrich themselves. More often than not, it's simply the pressure to perform that leads them astray. What seems to have added to the pressure is the linking of pay to performance, with performance being defined largely in financial terms. Says R. Sankar, Country Manager, Mercer hr Consulting: "This system is good, but it has its downsides. A large percentage (between 40 per cent and 60 per cent) of top management compensation is linked to performance. Therefore there is an incentive to abuse the system and produce figures that help their bonuses." Adds Amit Mukherjee, Partner, Ambit Corporate Finance: "It is a natural instinct. It happens all over the world, not just in India."

It's probably a convenient excuse, but the fact remains that trade management in India is not always black and white. Take transfer pricing. The challenge is to determine what the fair transfer price is, be it imports or exports. But any auditor will tell you that the transfer price is often determined by what suits the management, and not what it ought to be. Then, there are certain practices that are considered par for the course in industry. Like booking sales when they haven't been sold, but are at the dealer's. Says an auditor at one of the Big Three: "For most FMCGs, the April quarter is a washout. Fudging accounts happens mostly in the fourth quarter and, in fact, 80 to 90 per cent of sales happen in the last seven days of every quarter."

''Since performance is linked to compensation, management has an incentive to abuse the system'' R. Sankar/Country Manager/Mercer HR

Checks and Balances

Is there anything that the absentee parent can do to prevent managerial shenanigans? Lots (See 6 Steps To Preempt Deception). Create a system that, if not inviolable, sets off early alarm bells when rules are not being followed. For instance, if there is consistent growth quarter after quarter, or stocks seem to concentrate at a handful of dealers, or sundry debtors are increasing, then it may be worth investigating. But to create a fairly foolproof system, a number of things must fall into place. It starts with people. Do thorough reference checks of top managers you hire. Ask not just how he or she succeeded in work place, but also how that person handled failure. Ask if that person is prone to taking short cuts to achieve targets. Does he bring out the bad news early enough, or does he wait for it to reach a head before informing his seniors?

Most companies have audit committees, a large number of which increasingly include members from overseas, thereby making sure that subsidiary operations are not totally isolated. Internal audits need to be regularised, on a case by case basis, and the audit heads must report to the board. Then, CFOs of subsidiaries could report directly to regional CFOs rather than the local CEO. Mercer hr, for instance, has a system where the India CFO does not report to Sankar, but to the CFO in Singapore. Mercer's internal auditor from New York visits India and interacts with the CFO, clients and external auditor. Strong it systems, such as ERP systems, can also be deployed for greater transparency in accounts and reports.

The external auditors must be made to realise that they are ultimately responsible for the accounts they pass. In SembLog's case, the services of its auditors (PricewaterhouseCoopers and KPMG Consulting) were dispensed with after the irregularities were detected. Says Mukherjee of Ambit: "As far as overstating or understating accounts is concerned, the responsibility lies squarely with accounting firms. Andersen went down because of that. It is their job to see that compliances are followed. If auditors feel that it is difficult to detect irregularities, then who will detect it?"

Ultimately, it all depends on the people and the level of trust permeating through the company. A coherent policy of ethics has to be drilled in slowly. Introducing effective controls is the need of the hour, but imposing too many checks can cripple decision-making, besides imposing very high cost on companies. Because every other aspect of the business takes a backseat as everyone focuses on compliance. Notes Sankar: "Let's also admit that risk is intrinsic to business. If you introduce too many controls, business will become a bureaucracy." In other words, if you don't want your managers to cheat, don't give them the means or the reasons to.

Calling MBAs
BPOs are no longer infra-dig for hot-shot MBAs.

New face: vCustomer President Sujit Baksi (centre) with MBA recruits

The outsourcing boom is here to stay. And wagering their careers on it are MBAs from India's top B-schools. IIM Kolkata's Priya Ramanathan, for example, said no to three job offers on campus and settled for one from the Delhi-based vCustomer. Today, she is a Manager (of quality) at the 3,500-seater BPO firm. Ditto, Sohit Brahmawar, an MBA from the Hyderabad-based Indian School of Business, who declined offers in favour of vCustomer, where he's the director of operations. Finally, an industry that for long had to make do with graduates, is getting its fair share of young talent. At ISB, for example, vCustomer received 107 applications. In IIM Kolkata, it got 137. Then, there are other BPO outfits recruiting MBAs off campuses. EXL and ICICI OneSource made offers at IIM Lucknow and Bangalore, XLRI, SP Jain, FMs (Delhi) and Sybmiosis Institute, among others. EXL snagged five, and ICICI OneSource, 11. Says Brahmawar: "BPOs were the flavour of the season this year. After all, it has put India on the global map."

On their part, the BPOs are happy to get top talent. As they grow, they find that there are only so many graduate employees who make the cut for top management, which must handle crucial functions of operations, hr, business development, and process excellence (besides finance). Says Deepak Dhawan, Head of hr at EXL Service: "They bring in a professional background and management flexibility unlike the internally recruited managers who are groomed in specific domains." Adds Sujit Baksi, President, vCustomer: "The recruitment reflects management's long-term investment in the next generation of senior leadership." The entry of MBAs should also help the industry shed its image of a low-brow sweat shop.

-Supriya Shrinate

Flippin' At McDonald's
Modern School students get a taste of the real McDonald's.

Serving it up: Students at McDonald's

Teenagers are to Mcdonald's what potato is to fries. But school kids flipping (not munching) burgers at the golden arches? It happened in mid-May when 50 students from Delhi's Modern School landed up at 10 McDonald's outlets in Delhi as part of a personality development programme (PDP), a brainchild of the school's principal, Lata Vaidyanathan. For 15 days they helped make burgers, man checkout counters, supervise restaurant floors, and even handle irate customers. Says Suraj Pratap Malik, a grade 11 student: "I learnt the value of hard work and money." What's in it for McDonald's? "Apart from contributing to society, it makes for better customers who swear by our system," explains Vikram Bakshi, Managing Director, McDonald's India. But then McDonald's and children go back a long way. Founder Ray Kroc built his fortune feeding children of post-war America's baby-boomers. Buoyed by the experience, McDonald's now wants to take the programme to other parts of the country.

-Supriya Shrinate