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Project Incharge BFIA 1st Semester Shaheed Sukhdev College of Business Studies Roll No……………… Date : 16-Aug-2010

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The Satyam Scam
Accounting Scandal
The Satyam Computer Services scandal was publicly announced on 7 January 2009, when Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified.

On 7 January 2009, 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 S 5,040 crore (as against S 5,361 crore reflected in the books). An accrued interest of S 376 crore which was non-existent. An understated liability of S 1,230 crore on account of funds was arranged by himself. An overstated debtors' position of S 490 crore (as against S 2,651 crore in the books). For second quarter Satyam reported a revenue of S 2700 Crores and an operating margin of S 649 crores (24% of revenues) as against actual operating margin of S 61 crore (3% of revenue) Actual operating margin was S 61 crore but reported S 649 crore.

 

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.

How he Cooked up his Books
His financial statement for last few years were modified and cooked up as follows; 

Showed employees as 53000 but actually had 40000 and withdrew S 20 crores as salary every month.

 Asked the banks to issue duplicate FD receipts on account of lost original receipts and inflated cash and bank balance in his books.
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As selling of shares by promoters had to be disclosed to SEBI he pledged his shares which is not required to be disclosed anywhere. Debtors were overstated by S 490 crores generating false sales receipt through specially programmed software which also generated the acceptance report by the so called customers. Paid huge sums to the independent directors and not even one director attended all the board meetings (source from media) He understated liability amounting to S 1230 on account of funds arranged by himself.

How it was revealed
Maytas acquisition In 2008, Satyam attempted to acquire two infrastructure companies (Maytas Infrastructure and Maytas Properties) founded by family relations of company founder Ramalinga Raju for $1.6 billion, without taking shareholders in confidence and despite concerns raised by independent board directors. Both companies are owned by Raju's sons. Due to protest by shareholders and support of media SEBI had to review the deal. Satyam's investors lost about S 3,400 crore in the related panic selling. The USD $1.6 billion (S 8,000 crore) acquisition was met with uncertainty as Satyam's shares fell 55% on the New York Stock Exchange. R. Raju was forced to cancel the deal and three members of the board of directors resigned on 29th December 2008. Actually this was last attempt of Raju to bridge the gap between the actual assets and fictitious assets through the Mayta’s assets.

 Raju Brothers arrested and chief financial officer Srinivas Vadlamani was arrested.  The Income TAX dept is independently probing the accounting fraud in Satyam with a focus of tax deducted at source and BENAMI Deals.

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 Investigation of CID revealed that there only 40000 employees were actually working as against 53000 shown in books.  As many as 12 lawsuits have been filed against Satyam computer in US courts, charging the Indian IT firm with duping thousands of American investors out of billions of dollars.  Cases on Price Waterhouse Coppers were held but they were later released on account of their faith on the information produced by Satyam.

The Ministry of Corporate Affairs said that the government has referred the financial incompetent by Satyam Computer Services to the Serious Frauds Investigation Office (SFIO). Satyam’s Board of Directors was dissolved and a new board including prominent personalities like Deepak Parekh, KIRAN KARNIK, C ACHUTAN, TARUN DASS, TN MANOHARAN and SB MAINAK are among other 3 board members appointed by the Government.

 Satyam board has appointed GOLDMAN SACHS & AVENDUS as its Investment Bankers.

Recently, Mahindra Group Acquired Satyam and Renamed it to Mahindra Satyam. Merrill lynch and world bank terminated their contracts with Satyam.

Own Comments
Fraud was committed to avoid change in management and takeovers by majority shareholders as the promoters held a small percentage of share in the company. There excessive competition and to survive in market Directors had to show an improved performance on regular basis. There was negligence on part of auditors as they totally relied on the information provided by Satyam. This was well crafted scam but acquiring of Maytas didn’t work as Raju didn’t took Shareholder in confidence.

Bibliography   
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