BSE's Top 50 may be worst at accounting

The best thing about the Satyam episode, as far as investors are concerned, is that it forced more companies to clean up their account books and governance practices.

Rakesh Rai        Print Edition: February, 2010

The best thing about the Satyam episode, as far as investors are concerned, is that it forced more companies to clean up their account books and governance practices. With the stocks of companies perceived to be flouting prudent corporate governance practices—particularly real estate companies— taking a beating, India Inc had little choice but to take notice. "We find that the incidence of creative accounting has abated in 2008-9 compared to the previous financial year. This could be due to the corporates' apprehensions after Satyam. It could also be that in a bear market year like 2008-9, corporates' incentive to flout the accounting rules were muted," says Saurabh Mukherjea, head (Indian equities), Noble Group. Unfortunately, this means that as more companies look at tapping the market, the holier-than-thou act that India Inc has been putting up may be on its way out. If the 'incentive' to cook books is indeed back, investors need to be more careful.

SectorPer cent of 50 worst companiesProbability of fudging books (per cent)
Housing-related
16
25
Healthcare
12
21
Capital goods
10
14
Metal, metal products & mining
10
21
Information technology
8
12
  Source:Noble
In a recent report, Noble Group has evaluated the accounting practices for 313 BSE 500 companies. Sixty-three BSE 500 financial services sector companies were excluded because they do not lend themselves to the forensic accounting techniques used and 124 companies were excluded because their consolidated financial statements for the past two financial years were not available.

According to the report, the sectors where creative accounting was the most popular in 2007-8 were housing, including firms related to real estate, construction and cement), information technology and capital goods (such as companies in construction, power T&D and materials). In 2008-9, there was a shake-up in the defaulter list. Healthcare replaced IT among the worst performers. Also, the top 50 stocks in the BSE 500 (by market capitalisation) were the most likely segment of the market to have a company in Noble's creative accounting "blacklist of the 50 worst companies" for 2008-9.

The bottom line? Check out the consolidated annual statements that a company provides. Pay particular attention to revenue, expense and cash pilferage, the three most common ways of manipulating accounts.

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