A Walk to Remember !

One fine afternoon, I and my friend started our journey to the classroom for the first lecture of corporate governance course here in the last term. We started our usual discussion on how we want the course to be (given that it is the last term), how the prof. would be, how much the workload be, given that she will be teaching us for the first time and no one has any idea how she teaches as she has recently joined the institute.

On our way to classroom, walking down the corridor (devoid of any 2nd year student and full of the anxiety of final placements of the batch); my friend notices that the new professor is behind us, possibly towards the same classroom to take the first lecture of her course. He hinted the same towards me, and we came to an instant agreement (rarely arrived at between two MBA grads on any damn topic and that too at a lightening speed!) that we should mark our words and discuss limited stuff in the remaining part of our journey to the classroom. At once I thought why not discuss something really good on Corporate governance and act smart and then I realised that I was suffering from ‘Bounded Rationality’.

Gradually we realised that the distance between the prof. and us was slowly reducing and my friend was continuously keeping a watch on the developments like a manager trying to foresee what will happen in the immediate future. And then we started “moderating” our behaviour to look like ‘normal’, of course we are going to be managers soon and hopefully we have learnt that art by now (we hoped!). But again the reality was far different than what we wished it to be, possibly in our last term we did not have energy or enthusiasm and we were crawling to the classroom (a part of the brain trying to justify the remaining part that we need to attend lectures) so the distance was reducing. At the same time the professor is looking forward to meet the budding managers of tomorrow in the first ever interaction that she would be having with the 2nd year students, so she was walking a little fast, maybe she did not wanted to be late for the first ever opportunity to talk to 2nd year students.

Whatever! The distance was decreasing and again the two of us came to another agreement that we needed to speed up, the classroom doors are now visible and we should be able to reach them well before we have to greet the professor. My friend glances backwards a bit trying to hide the fact that he is continuously checking on where the professor is at any point of time. Front and then Back, front and then back, it is like we are almost there, (it is like I made 5 strong points in the GD and I should be just in the next round of the process), like we are sure our speed was just right to be able to get into the classroom before encountering the professor. We were almost confident that even if we cannot make sound arguments in the case discussions this was too basic for us to fail and that even if we do not know how to calculate the financial ratios we were very sure that we calculated our speed quite accurately. We were mechanically doing the same repetitive job, look front and then back, front and then back, front and then back; sounds something like the routine job at work everyday.

Suddenly we realised that the professor was right there behind us and we could very well wish her a good afternoon just by turning back. At the same time we were puzzled as to how this could have happened and we didn’t even realised, that we did not do the same repetitive task well. We did picked up some speed or at least we thought we did or is it the complacency that has occupied our mind before we even started our managerial carrier. How can the distance reduce to such an extent despite my friend keeping a close tab on the “developments”, the shock and surprise can well be described similar to what the financial world had got when they were hit by the sub-prime completely unaware. Well the ‘right sense’ came to our mind like a ‘bail-out’ package and we turned back and greeted the professor. She smiled and said “Don’t worry guys I am not following you”.

Well she noticed that my friend was continuously keeping a tab on the “developments” and it was rather obvious that we were trying to run away. Anyway we got another ‘bail-out’ and we realised that she was carrying a lot of course handbooks for the class and that we should offer some help on the same. Like our financial industry (after the bail-out), my friend too got new boost of energy and rushed towards the classroom door and kept it open for Mad’m to enter and I decided that very moment that I am going to pen it down...... errr "pen it down" or should i say "type it up"..... whatever !!!

Rating Agencies and Accounting Firms – fixing the responsibility?

The first session of corporate governance course started on a good note, why am I terming it as ‘good’, well was some good participation from each corner of the class. During the discussions the prof. made a point that accounting frauds and false rating by rating agencies are some of the important challenges while addressing the concerns of corporate world. Well, people sounded that it is difficult to penalise monetarily the accounting and rating agencies and usual norm is to rotate the accounting firm periodically (the regulation that came in after Satyam) and refer to credit rating of a firm by multiple rating agencies.

Yes, it is difficult to quantify the penalty that should be applied to accounting or rating agencies because they are not running the business, they are dependent on the managers to provide them with the necessary documents (that too only when asked), and that the size of the client company can be even 100 times the revenue of these accounting firms and rating agencies. We cannot ask these to compensate for the fraud in these big firms, the accounting and rating agencies will go bankrupt in just 1 fraud incidence. But does that means there is no way to make them liable, financially responsible for the fraud that could have been averted by ‘due’ due diligence by these firms.

I am not sure if there are already some experimentation done in this regard in some corner of the world but surely one can come up with some logical and acceptable solution.

You can make these firm pay for the proportionate amount of their own worth in terms of damages if there happen to be a fraud e.g. an accounting company with Rs 100 crore in revenue, acting as a accountant for a Rs 10,000 Cr company. Take a case that the client has done some fraud amounting to Rs 5,000 Cr, then the accounting firm should be made liable for 50% of its own worth i.e. it should be asked to pay Rs 50 Cr in terms of damages to the affected stakeholders.

Now the above argument can be contested on the ground that the accounting firm can have 10 different clients and out of which only 1 did a fraud so it is wrong to penalise the firm solely taking into account the fraudulent firm. OK lets modify the above statement a little bit, lets the total worth of all the clients of the accounting firm is Rs 1,00,000 Crore and 1 firm did a fraud of Rs 5,000 Cr in that case the accounting firm can be asked to pay Rs 5 Cr in damages. Well this can be very well too small for a accounting firm and may not make a significant threat!!!

Let us look at it differently, say that the same accounting firm has earned a total of Rs 50 Cr (present value) in term of fee towards its accounting services for the fraudulent firm. One can straight away ask the accounting firm to pay the same in damages.

Similar ideas can be put down for rating agencies as well and the final solutions (just and acceptable) can very well be a combination of the above three points or may be altogether a better option. But fixing the liability in financial terms is quite possible and can be done. May be there exists some sort of formulae that even I am not aware of; and the whole effort that I have put in while writing this is useless!