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SATYAM SAGA Background: A company named "Satyam" (Truth, in Sanskrit) inspired trust.

The IT boom in India, was fuelled by young, middle-class, educated, budding Indian entrepreneurs and Western firms anxious to outsource to take advantage of high-skill, low-wage worker. This trend created a new breed of businessmen for the 21st century and generated many fortunes literally overnight. Byrraju Ramalinga Raju - founder and former chairman of Indian IT giant Satyam Computer Services - was one of these new millionaires. The son of a farmer from a middle class family with an American MBA degree and a 1999 Ernst & Young Entrepreneur, Raju started Satyam and worked his way to make the company a top 5 Indian IT firm with clients in 60 countries. Satyam is listed on the New York Stock Exchange (NYSE) and the Bombay Stock Exchange. Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate






Compliance Issues, which was stripped from them in the aftermath of the scandal. The Satyam Computer Services scandal was publicly announced on 7 lanuary, 2009, when Chairman Ramalinga Raju confessed that

Satyam's accounts had been falsified. Company Chairman Ramalinga Raju resigned after

notifying board members and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been falsified. Raju confessed that Satyam's balance sheet of 30 September 2008 contained: Inflated figures for cash and bank balances of Rs.5,040 crore (US $ 1.04 billion) (as against Rs.5,361 crore (US $ 1.1 billion) crore reflected in the books). An accrued interest of RS. 376 crore (US $ 77.46 million) which was nonexistent An understated liability of RS. 1,230 crore (US

$ 253.38 million) on account of funds was arranged by himself An overstated debtors' position of Rs. 490 crore (US $ 100.94 million) (as against Rs. 2,651 crore (US S 546.11 million) in the books) Raju claimed in the same letter that neither he nor the managing director had benefited financially from the inflated revenues. He claimed that none of the board members had any knowledge of the situation in which the company was placed. He stated that: "What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of Rs. 11,276 crore (US $ 2.32 billion) in the September quarter of 2008 and official reserves of Rs. 8,392 crore (US $ 1.73 billion). As the promoters held a small percentage of equity, the

concern was that poor performance would result in a takeover, thereby exposing he gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. It was like riding a tiger, not knowing how to get off without being eaten." Although B. Ramalinga Raju has sought to take full responsibility for cooking Satyam accounts, it is now clear that' operation fudging' at the company was a complex exercise and was meticulously planned and executed with

precision. There were scores of meetings with dozens of people to falsify the accounts of the company that was listed on the New York Stock Exchange. Talluri the Srinivas two and S.



auditors arrested in the scam, have told cops that the agenda used to be clear in the meetings though the word fudging was not used. Everyone present was aware of the motive of the meetings which was to falsify the accounts, they said during their

interrogation. The meetings were usually chaired by Ramalinga Raju himself but in his absence Rama Raju, his brother, or Srinivasa Vadlamani, the chief financial officer, would officiate. It is not known whether the PW auditors told police the identify of other company managers who were regular at these meets. But the auditors said that the internal audit department of Satyam with qualified chartered accounts was fully aware of the goings on. The fudging of accounts had been on for the last six years, the auditors revealed. The two external auditors are also believed to have confessed that it was because of this environment that instead of independently verifying Satyam's balance with the banks they accepted written statements by the company management. The statement, in the form of a letter was usually signed by Rama Raju or Vadlamani. They also told the Crime

Investigation Department (CID) sleuths that they approved the accounts of Satyam because of

Ramalinga Raju's 'towering presence' and did so without ever questioning him. "We did not dare raise questions when the client was a reputed company. Moreover, Ramalinga Raju himself took personal interest in the accounts," one of the auditors told CID sleuths. The investigating agency arrested Srinivas and Gopalakrishnan on January 23 on the charges of cheating and criminal conspiracy after the falsification of accounts of Satyam Computer Services Ltd. came to light. The CID posed over 100 questions including whether thy were aware of the falsification of accounts, how long the fudging of accounts happening, the role of former chairman,

managing director, chief financial officer, and whether the company offered them bribes to certify accounts and if Ramalinga Raju forced them to sign on audit reports and why the remuneration of PWC had shot up in the last few years.







then-board members elected Ram Mynampati to be Satyam's interim CEO. Mynampati's statement on Satyam's website said: "We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand united in their commitment to customers, associates, suppliers and all shareholders. We have gathered together at Hyderabad to strategize the way forward in light of this starting revelation". On 10th January, 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors. "The current board has failed to do what they are supposed to do. The credibility of the IT industry should not be allowed to suffer" said the then Corporate Affairs Minister. Chartered accountants regulator ICAI issued show-cause notice to Satyam's auditor PricewaterhouseCoopers (PwC) on the accounts fudging. On the same day, the Crime

Investigation Department (CID) team picked up

Vadlamani Srinivas, Satyam's then CFO, for questioning. He was arrested later and kept injudicial custody. On 11th January, 2009, the government nominated noted banker Deepak Parekh, former NASSCOM chief Kiran Karnik and former SEBI member C. Achuthan to Satyam's board. Analysts in India have termed the Satyam scandal as India's own Enron scandal. Immediately following the news, Merrill Lynch (Now with Bank of America) terminated its engagement with the company. Also Credit Suisse suspended its coverage of Satyam. It was also reported that Satyam's auditing firm PricewaterhouseCoopers will be scrutinized for complicity in this scandal. The New York Stock Exchange has halted trading in Satyam stock as of 7th January, 2009. India's National Stock Exchange has announced that it will remove Satyam from its S&P CNX Nifty 50-share index on January 12. The founder of Satyam was arrested two days after he admitted to falsifying

the firm's accounts. Ramalinga Raju is charged with several offences, including criminal

conspiracy, breach of trust, and forgery. The Indian Government has stated that it may provide temporary direct or indirect liquidity support to the company. However, whether employment will continue at pre-crisis levels, particularly for new recruits, is questionable. On 14th January, 2009, Pricewaterhouse, the Indian division of PricewaterhouseCoopers, announced that its reliance on potentially false information provided by the management of Satyam may have rendered its audit reports "inaccurate and unreliable On 5th February, 2009, the six-member board appointed by the Government of India named A.S. Murthy as the new CEO of the firm with immediate effect. Murthy, an electrical engineer, has been with Satyam since January, 1994 and was heading the Global Delivery Section before being appointed as CEO of the company. The

two-day-long board meting also appointed Homi Khusrokhan (formerly with Tata Chemicals) and Partho Datta, a Chartered Accountant as special advisors. The Debate: What went Wrong Role of Auditors: There is intense debate about the role of PricewaterhouseCoopers, the external auditors of the company in clearing the accounts of Satyam. Auditors are supposed to have checked, verified cash balances, bank statements, assets with relevant confirmations. Satyam was a large company, not a street store;

PricewaterhouseCoopers is a globally reputed firm. Professional accounting bodies and police are currently examining the role of auditors in this incident minutely. Role of Directors: The Companies Act in India has stringent corporate governance requirements of board members. Yet Raju was able to steer the fabricated accounts through his board members for 6-years! This has bewildered the corporate

sector and regulators. At times, the company was holding excessive cash, as per the books. This should have invited questions by board members. In particular, independent directors, who are appointed by shareholders at the behest of the board, are selected on the basis of their reputation, knowledge, and wisdom. They are the first defense of minority shareholders. Generally they bring specialized expertise. Independent directors have to meet standards set by stock exchanges too. The Indian Government

specifically delineates the role of independent directors in safeguarding the interests of the organization and the shareholders. It is fair to expect independent directors, like Harvard Professor Krishna Palepu, the former non-executive director of Satyam, to be more guardians of corporate governance. The role of independent directors in accountability,

transparency and governance is also determined by common sense and tradition. However, whilst

independent Directors should steer the company on the right path, ensure compliances, protect minority shareholders, they principally depend on information furnished to them by auditors and lawyers. It is unfair to expect independent directors, meeting monthly or quarterly, to be undercover detectives or cops! An independent director would normally assume that audited accounts have been rigorously examined. This is more so when an internationally credible firm like PricewaterhouseCoopers - has audited the numbers. But, they need to still ask the right questions and probe. Sitting on numerous boards compresses the time an independent director has to reflect on what is happening inside the belly of a company. Corporate governance goes

hand-in-hand with the mitigation of risk, and effective risk management. There has been straws in the wind earlier. In 2006, World Bank informed the US Justice Department that Satyam might have been

involved in bribery and in 2008, suspended Satyam from bidding in future contracts. And even earlier, in a dispute going back to 1997-98', a UK Appeals Court found Satyam guilty of fraud, forgery and intellectual property right violations. Corporate integrity isn't an issue limited to accounting fraud alone. Why wasn't this information disseminated widely? To paraphrase from Ramalinga Raju's letter, the tiger was being ridden for a long time, without attempting to get off, for fear of being eaten. "None of the board members, past or present, had any knowledge of the situation in which the company is placed." The expression crony capitalism is used for nexuses between government and business. This isn't crony capitalism, but phony capitalism, with complete external and internal regulatory

collapse. The board doesn't know. External auditors don't know. Internal auditors don't know. Had there not been an acquisition deal with Maytas, when would we have known? For small

investors, there is therefore a credibility issue about the system and future liberalization. Heart attacks apart, the US does punish misgovernance. Do we? [BibekDebroy, 2009]. Shareholders must know what the auditor has checked and how he has checked it. The auditor must, therefore, make it clear what checks and tests have been carried out for him to reach his 'true and fair' conclusions. Satyam Fraud Still a Riddle: Slow Moving Trial System Can the judicial trial for Ramalinga Raju and his associates be also placed on the fast track? That is pity. Economic offences of such magnitude certainly deserve the creation of a special court, which could expedite the trial process and deliver its judgement on Raju. The CA institute's probe on the role of external and internal auditors in the scam-hit Satyam Computer Services' case has moved a step forward. An internal committee of the Institute of Chartered Accountants of India

(ICAI) has accepted the opinion of its Director (Discipline) that the auditors were prima facie guilty of professional misconduct in the Satyam Computer case. This has paved the way for the Institute to issue separate notices to the six found 'prima facie guilty' of professional misconduct. Four persons of the statutory audit team of Pricewaterhouse, Bangalore, including Mr. S. Gopalakrishnan and Mr. Srinivasu Talluri, both partners and the two signatories to the Satyam's accounts for different financial years, have been found prima facie guilty of professional

misconduct. The other two persons in the statutory audit team who have been found 'prima facie guilty' are Mr. P. Siva Prasad and Mr. Ch. Ravindranath. Mr. Gopalakrishnan was a

signatory to the accounts of Satyam from 2000-01 to 2006-7. Mr. Talluri was a signatory to the accounts over a period from 2007-08 to September 30, 2008. Both have been found 'prima facie guilty' for failing in the duty of

carrying out statutory audit and for not qualifying their report(s) for all these years (2000-01 to 2007-8) that the financial statement does not give a true and fair view of the affairs of the company. Besides, notices are also being issued to Mr. V. Srinivasu, Chief Finance Officer of Satyam from 2000-01 to September 30,2008, and Mr. V.S. Prabhakara Gupta, head of the internal audit cell of the company and responsible for carrying out internal audit for 2000-01 to September 30, 2008 [The Hindu Business Line, September 29,2009]. The Enforcement Directorate (ED) lias attached over a third of the 786 properties owned by Raju and 131 others, including his brothers and their wives, after it established that these were obtained through the ill-gotten gains from India's largest corporate fraud. The 280-odd properties attached by the ED through a provisional order are worth RS. 200 crore on paper, but their current market value is estimated to be about Rs. 1,200 crore. The ED found that the

companies that were used to buy these properties had virtually no independent source of funding. The funds laundered by Raju and his associates were routed to these firms for purchasing real estate. The 786 properties identified by the ED were acquired between 2005 and 2008, and are spread across Andhra Pradesh, Tamil Nadu, Maharashtra, Karnataka and Uttar Pradesh. The ED is the central agency dealing with cases registered under Foreign Exchange Management Act 1999 and PMLA. It had registered the case against Raju and his family under the PMLA, which defines money laundering offences as those with money derived from any activity connected with the proceeds of crime and provides'for freezing and seizing the proceeds of crime [The Financial Express, October 9,2009]. The questions, which have been raised are what role were independent directors playing in the process of the functioning of Satyam and how far was the audit committee effective in the

transparent disclosures of financials of the company? Whether independent directors and members of the audit committee are nominated on merit as recommended by the regulator? Do these directors possess strong teeth to bite the unethical deeds of executives and promoters? It is difficult to believe the regulator or a corporate entity has any answer for these questions in the absence of proper investigations. The SEBI has taken up an investigation of several Sensex companies. However, there are more than 60,000 companies listed on the stock exchanges. Will it be possible to have a fair idea of the status of the total corporate sector in terms of their financial disclosures by studying a few companies? An important gap in the whole process of corporate governance has been the weakness in

accountability of the hoard through disclosures, which have become very crucial today in the current environment when a multitude of creative accounting practices involving inevitably

ambiguities and many alternative methods of reporting the financial effects of transactions used largely and routinely by the promoters to mislead rather than inform the shareholders and the public. In this regard the composition of the board and the monitoring role of independent directors should be the corner stone of SEBI's regulatory check [M.Y. Khan, 2009]. The SEBI report on corporate governance had expected that board members would be

homogenous in terms of expertise, functions and affiliations. It is common knowledge that boards are homogenous only in one respect and that is that they work as a gang and not as a caretaker or trustee of the companies and shareholders. There is a need for creating and promoting the culture of good corporate citizenship. As far as the quality of the expertise of independent directors is concerned, there are a few of them who can be considered as experts on the profit and loss account, balance sheet, other financial

disclosures and regulatory compliances. They do not understand the significance and impact of various heads of income and expenditure given in the profit and loss account and implications of variation in components of the balance sheet. For instance; high growth shown in fixed assets should reflect an increase in manufacturing capacity of the company, and a corresponding increase in production and sales. If investment has gone to real estate and financial assets, the profit and loss account should reflect an increase in income from dividend, rent, interest, etc, which is not a good sign for any manufacturing unit or unit providing information technology services. Moreover, expenditures relating to employees should increase in relation to operating income, sales and output. The board members generally do not examine these aspects. This is one example, there can be many. One can also find out the quality of assets, their productivity and diversion of funds from their targeted use.

Unfortunately, even the audit committee does not look at such information with the angle of corporate governance. The quality and structure of capital expenditure warrant a close

examination by the board as well as an audit committee. This situation warrants a merit-based constitution of the board of the companies, in particular, the selection of independent directors [M. Y. Khan, 2009]. The Satyam accounting fraud prompted market regulator SEBI to announce peer review certified auditing processes for Sensex and Nifty companies to bring in greater

transparency and accountability. This peer review process has now been further

strengthened by the decision of Institute of Chartered Accountants of India (ICAI) to make it compulsory for all listed companies to be audited by peer review-certified companies from April 1, 2009. This will instil public confidence in financial reporting, enhance

effectiveness of the audit process and ensure better quality and consistency in accounting and auditing services across a cross-section of auditing firms. The institute has selected around 1,200 firms which would do the peer review. It would also cover financial statements of companies looking for IPOs once they file the Red Herring prospectus. For companies, the peer review process would enhance the quality of attestation services and provide guidance to improve their performance and adhere to various statutory and other regulatory

requirements. The peer review would include scrutiny of an auditor's working notes by a chartered accountant and firms which are denied peer review certificates would be barred from auditing. Currently, ICAI has a peer review board with a panel of chartered accountants, which conducts scrutiny of the notes of the auditors. Corporate governance has got another shot in

the arm by the positive outcome of SEBI's disclosure requirement on pledging of shares another measure introduced after the Satyam scandal. About 500 listed companies have come forward with details concerning the shares pledged by their promoters since SEBI made it mandatory. It has helped investors, as many of their decisions are based on the disclosures which reveal how much control the promoter really has over his or her company. Earlier, promoters were not too keen to disclose shares they pledged because they fared their stock price may take a hit. With economic slowdown and credit crunch, promoters pledged their shares to mostly raise working capital but also * long-term loans to increase their holding. The market regulator has indeed played a commendable role post the Satyam fraud and. these two measures will indeed ensure higher standards of transparency in corporate India. Ten months after the Satyam scam, India's

biggest corporate fraud the investigating agencies are yet to get their act together. The process of getting B. Ramalinga Raju to court to face final charges will take quite some time. This is because a lot of work is still pending with all the four agencies tasked to track the Satyam accounting fraud. These agencies are the Serious Fraud Investigation Office (SFIO), stock market regulator Securities and Exchange Board of India (SEBI), ICAI and the Central Bureau of Investigation (CBI). So far, the only step taken by the government for Raju's trial is the plan to set up a special court for Satyam in Hyderabad. On April 7, a CBI team filed a 6,500 page charge-sheet including allegedly maiminating documents and statements against Raju and eight others who were involved in the execution of the Rs.7,800-crore fraud. But CBI acknowledges that those are not enough to book the former promoters of the company for issues like diversion of funds, their misappropriation

as well as the role played by the independent directors over the years. Those will come in the second phase, according to the agency. The nine were charged with various breaches of the IPC, including conspiracy, forgery of valuable security, cheating, falsification of accounts, using forged documents as genuine, causing disappearance of evidence etc. The present findings of CBI are enough (only) as far as the allegations in the charge sheet are concerned like conspiracy, cheating. It should be over by end of September or October. Incidentally the multi-disciplinary investigations team of CBI suspects the promoters might have diverted the funds of the company to foreign accounts in the US, Mauritius, England and even some countries in Asia. Just compare this with the $50-billion Bernie Madoff 'investment scandal in the US that came to limelight around almost the same time, in December 2008. Six months later, on June 29,2009, Madoff was handed a

150 years in prison with restitution of $170 billion, which he begun serving [The Financial Express, September 9,2009 and Mint, October 21,2009]. The CBI would question several people in the US, UK, Mauritius, Singapore, Belgium and the British Virgin Islands. It is examining a possible diversion of funds from Satyam to these countries.