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What the Satyam fraud taught me about my personal finance

"Raju Raju"
"Yes, Papa"
"Telling lies?"
"No, Papa"
"Cheating us?"
"No, Papa?"
"Open your balance sheet"
"Ha Ha Ha!"

You probably got this SMS that was going around. Funny or not, lets remind ourselves of the important personal finance lessons that we can learn from the Satyam episode.

1. Small problems if left unattended can grow into big problems: Satyam was faced with a small shortfall in revenues and over a few years this problem got magnified into 100s of crores of rupees.
   
   

   Similarly, if you don't deal with things that start of as small problems, like credit card debt and personal loans, you might also end up with a big and unmanageable problem that could risk destroying you financially a few years down the line

2. Keep your eye on the cash: It is still baffling forensic accountants how the cash account at Satyam could have been fudged.
   
   

   What you need to ensure is that you are always keeping an eye on your cash. What is coming in (your income), what is going out (your expenses) and what is the resulting net amount that should exist. Can you reconcile this with your bank statements? Unless you follow the cash, you might not be fully aware of places where your money is going and maybe there could even be some leakage in your finances.

3. Don't ignore budgeting and auditing: Clearly the auditors at Satyam were not doing their job well enough, otherwise they could have raised the alarm bells sooner.
   
   

   You must be aware of your own financial situation and your monthly budget. Do you know what you are spending your money on? How much? Are certain expenses recurring? Have you been over-charged? Have your credit card statements rightly charged you certain amounts and fees?

4. Question everything: It is surprising that no one at Satyam ever questioned Raju.
   
   

   Do not take everything at face value. Question things where you think you should or if they look funny to you. This should be especially true of all your statements (mutual funds, credit cards, bank account, mobile connection, cable TV etc.). Does something look out of the ordinary to you?

5. Experts can make mistakes: Many leading Indian institutions and foreign funds, so called investment professionals, were large investors in Satyam right up to the breaking news of the scandal. Do you really want to rely on the skills of the experts when their track record is poor?
   
   

   We are all human and are prone to errors of judgment. No expert saw any evidence of a scandal at Satyam. So, be sure to take the "expert opinions" of professionals with grain of salt. They don't always know where the stock market is going, where real estate prices might end up, or which company can turn out to be a fraud. Don't just follow the experts blindly.

6. Trust is difficult to earn and retain: How long will it take for Satyam to regain the trust of its shareholders, stakeholders like clients, employees, counterparties like vendors etc.? History suggests that it will be a while before companies recover from large corporate scandals, if at all they do recover. For instance, Enron no longer exists.
   
   

   Once you blow the trust of your financial counterparties, it will be challenging for you to quickly regain your original relationship. As credit scoring at the retail customer level becomes more popular, banks and lenders will have an active and real time mechanism to track and evaluate your behaviour and whether you are breaching their trust (by delaying repayments, or defaulting) or scamming them.

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