The rescue operation to salvage a beleaguered Satyam — its 53,000 employees, its clients, its shareholders and creditors —is now in full swing. But did things have to reach this stage? Why did none of the many systemic checks and balances — board, auditors, regulator — work to prevent such a massive fraud and collapse? Surely, prevention at an early stage of trouble is better than the ongoing resuscitation from near-death, which is more costly to implement and less likely to succeed.

But the fact is that prevention didn’t work. Internal and external auditors ought to have spotted and stopped the fraud; they ended up in likely collusion with Raju. Even if the auditors failed, market regulators ought to detect fraud perpetuated over such a long period of time — seven years by Raju’s own admission. But they did not.

Finally, when all else failed, the brutal logic of a market economy exposed the fraudsters. The financial crisis and slowdown resulted in a massive credit and cash squeeze. With no easy source of funds, it becomes impossible for firms with hollow balance sheets to survive. Satyam tried the bungled merger with Maytas, and then tried to sell out — neither worked.

The problem with the punishment meted out by free markets is that it creates massive collateral damage. Employees, investors and creditors who had nothing to do with the fraud all suffer terrible consequences. Yet the fact of the matter is that very few cases of fraud ever get detected in good times. It takes a bust to expose fraud and excess.

... contd.