In the Indian city of Hyderabad, the promoter of Satyam Computers, Ramalinga Raju, was delivering enviable business results year after year. He kept talking about the importance of corporate governance in every forum and at every opportunity. He was also getting prestigious awards for ensuring highest governance standards. The corporate Board of Satyam was studded with stalwarts in academics, consultancy and industry.
Thousands of miles away, a financial wizard Bernard L.Madoff was assuring and ensuring higher than market returns consistently over more than ten years to his trusting customers. Many charitable institutions and university corpuses were his noteworthy customers.
Raju and Madoff in their heydays were deified by society. It was considered a rarified privilege to know them and seek their advice. Their advice was constant: "Maintain high standards of probity ; be true to yourself."
Their common tool to over-deliver on their promises was simple: cooking of accounts. The modus operandi was incredibly uncomplicated. Their guiding principle was to commit the simplest of frauds which the sharpest of minds would not even suspect.
Satyam was faking bank certificates. The auditors who had successfully investigated complicated infarctions of accounting and legal principles could not discover a simple sleight of hand. The thought of referring to the banks never crossed their mind. Would high-tech Satyam stoop so low as to indulge in a simple trickery? The auditors perished any such thought.
Bernard Madoff was performing a ponzi scheme. He was paying off the old investors from the ever growing newer investors. This is probably the only really global game. Blade companies were doing this in Kerala, plantation companies in Tamilnadu etc. Sophisticated investigators did not suspect how a fund could consistently outsmart the market. When complaints were made to SEC, the usually fastidious investigators could not find out the simple tactic adopted by Madoff. He was only feigning stock market transactions. Madoff has recently expressed his surprise that SEC could not unearth what he was doing for a long time. He has even wished that he was caught earlier so that the investors need not have lost more than 20 bn dollars. Who is more culpable, SEC or Madoff?
The lesson from Satyam and Madoff is this: "The probability of a fraud being unearthed is directly proportional to its complexity." Keep it simple, stupid.