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January 7, 2009 8:00 pm

IT sector moves to distance itself from Satyam

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India’s information technology outsourcing sector on Wednesday moved quickly to distance itself from the Satyam scandal.

“This is a stand-alone case of the failure of corporate governance and it is critical that it be viewed in this light,” said the National Association of Software Services Companies, the industry umbrella body.

But the industry’s clients, which include most of the Fortune 500 companies, and multilateral institutions and governments, might see it differently.

India’s outsourcing industry has emerged from humble origins a decade ago to become one of the main drivers of the country’s economic emergence, today generating about $40bn in export income each year.

The major IT groups, led by Tata Consultancy Services, Infosys Technologies, Wipro and Satyam, handled everything for overseas clients, from writing and maintaining their software, to running their hardware and executing their business processes.

Critical to the industry, however, is trust. The world’s financial institutions rely on the integrity of the outsourcing groups to ensure that their critical confidential data and systems are kept secure and running at all times.

That is where the Satyam scandal could create concern. “For the Indian outsourcing industry, a controversy of this magnitude in a vendor that employed over 50,000 employees and worked with tens of Fortune 500 customers is a risk to credibility and business flows,” the emerging markets brokerage CLSA said on Wednesday.

Suresh Senapathy, executive director and chief financial officer at Wipro, said the scandal was “deplorable”, but he believed it was not a problem specific to the IT industry. “What happened had nothing to do with the industry but to do with individuals in the company and could have happened in any other industry or any other country too,” Mr Senapathy said.

One auditor with a large firm who declined to be named said IT companies could be more vulnerable to such fraud because they are able to book part of the revenue for large projects in advance of receiving payment. This gives them the potential to dress up their books at the end of the year.

It might also be easier for IT companies to invent fictitious contracts because of the role of the heavy use of manpower in the industry.

Time sheets and other possible evidence of a project can be manipulated to create the illusion that a fictitious job has been done.

But manipulating bank statements to show a large cash balance, as Satyam did, would be difficult for any company.

Mr Senapathy acknowledged that there would be more scrutiny from clients from now on.

“All of us, as part of the system, will have to pay a price by spending a little more time to explain issues to investors and clients that previously would have been taken for granted,” he said.

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