Satyam Computer Scam

Index

1. SATYAM SCAM : Introduction 3

2. The Satyam Story 4
3. Capitals diverted to the real estate companies 5
4. Audit failure 6
5. What Mr.Raju took or not 9
6. Mr.Raju was set to jail 10

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Introduction:

The Satyam computers services scandal is touted as the

biggest accounting fraud in India done by the chairman
Satyam Ramalingaraju and his family members. This
scandal came into light when Ramalingaraju confessed
that the companies accounts were falsified which caused
loss to the investors to the tune of Rs.14,162 crores.

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 The Satyam Story :
 Satyam computers were established in the year 1987, by Ramalinga
Raju who came from a farming family. Satyam computers was
counted as the fourth largest Indian IT firm by revenue when, in
January 2009, founder-chairman B. Ramalinga Raju confessed to
having Misstated the
company’s earnings to the
tune of Rs.7,136 crore
(1.47$-billion dollars)over
several years by inflating
revenue and underplaying
liabilities.
 This scandal came into light
on 7 January 2009 when
Satyam Ramalinga Raju
resigned his post and
revealed his accounting fraud
that he manipulated the
company’s accounts and
thereby increasing the
revenue of the company.
Ramalingaraju caused a loss
of Rs.14,162crores to the
investors which was India’s
perhaps the world’s biggest corporate fraud case according to CBI. it is
quoted as the Enron scandal of India.
 In his letter, Raju explained his scamming operation to something that
started as a single lie but led to another as “What started as a marginal
gap between actual operating profit and the one reflected in the books
continued to grow over the years. It has attained unmanageable
proportions as the size of the company’s operations grew over the

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 years.” Raju described how an initial cover-up for a poor quarterly
performance escalated: “It was like riding a tiger, not knowing how to
get off without being eaten.”
Capitals diverted to the real estate companies :

To quote Bhasin , “One of the biggest sources of defalcation at

Satyam was the inflation of the number of employees. Founder
chairman of Satyam, Raju claimed that the company had 53,000
employees on its payroll. But according to investigators, the real
number was around 43,000. The fictitious/ghost number of
employees could be fabricated because payment to the remaining
13,000 employees was faked year-after-year: an operation that
evidently involved the creation of bogus companies with a large
number of employees.” The money, in the form of salaries paid to
ghost employees, came to around $4 million a month, which was
diverted through front companies and through accounts belonging
to one of Mr. Raju’s brothers and his mother to buy thousands of
acres of land. Making up ghost employees might sound
complicated, but investigators said it was not that difficult:
“Employees are just code numbers in your system; you can
create any amount of them by creating bogus employee IDs with
false address, time-sheets, opening salary accounts with banks,
and collecting payments through an accomplice.”
Interestingly, the charge-sheet filed by the investigators is of the
view that Satyam employees remained underutilized. For
instance, the utilization level shown in the latest investor update
by the company is about 74.88% for offshore employees.
However, the actual utilization was 62.02%.This clearly shows
that the bench strength was as high as 40% in the offshore
category. Further, as a result of underutilization, the company
was forced
to pay salaries
to

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associates without jobs on hand, which increased the burden on
company’s finances. Even in the onshore category, the bench
strength was around 5% (of total staff).

Auditors failed to trace the Irregularities:

The financial embezzlement in Satyam didn’t violate to auditing system, but

manipulated financial data according to accounting system. As long as
coincidence with regular, “Wipe the Side Ball” could be used. Audit is a
course that needs a great deal of professional judgment. The reason of this
audit failure was mainly that CAs was lack of independence, and they were
not able to keep enough professional cautiousness and professional
skepticism. In the audit procedure, CA was short of sufficient cautiousness
and professional skepticism, and was credulous to explanation of manager.
Audit models contain system-based and risk-based audit model. System-
based audit is based on internal control system. According to analyzing and
evaluating internal control system, it could achieve audit goal. According to
the risk-based model, auditing firms used a great deal of energy to analyze
trade and management risks of the clients. The control of CA profession
includes three factors: self-control, government control and independent
control. Different factors had different effects. The independence of self-
control is the lowest, independent control is the reverse. The independence
is the key to ensure audit quality, and makes public believe auditing firm.
The PWC don’t bother looking for fraud. The PWC isn’t comfortable being
watchdogs. Other considerable fact is Satyam's auditor fee, Fess jumped
from Rs 92 lakh (as stated in the consolidated balance sheet data) in 2004-
05 fiscal to Rs 1.69 crore the next year. But it was in the financial year
2006-07 when PwC's auditing fee shot phenomenally to Rs 4.21 crore. It
saw a marginal high in the last fiscal with its fee for the year 2007-08 stated

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as Rs 4.31 crore. The hike in auditing fee hasn't been as significant in other
IT majors such as Wipro and Infosys that too have crossed the crore marks
but the jump hasn't been as sharp. On any given year, Satyam's auditor
remuneration has consistently been much higher compared to other big IT
firms.

Bank loans:

Total funded loans

Six banks have Rs. 274.53-crore loan exposure

Citibank tops list with Rs. 196 crore

Ten banks have investment exposure of Rs. 12.49 crore

K.V. Kurmanath
G. Naga Sridhar

Hyderabad, Jan. 29 Eighteen banks, which include both Indian and multi-
national entities, have varying degrees of exposure to the crisis-ridden
Satyam Computer Services. The information, gathered by the Reserve Bank
of India from various banks, puts the total exposure at Rs. 660.48 crore as
on January 8 (a day after Mr B. Ramalinga Raju, the former Chairman of
Satyam Computer Services, confessed to fudging the company’s books to
the tune of Rs. 7,136 crore).

While the total funded exposure stood at Rs. 287 crore, the total non-
funded exposure was put at Rs. 373.47 crore. (Funded exposure refers to
advancement of funds as loans to a company or its subsidiaries. The non-
funded exposure is issue of letters of credit or guarantees to companies.)

When contacted, a senior RBI official said: “We can say that there is
nothing to worry about too much and the banks have enough capital to
withstand any scenario”.

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Safeguarding interests

Six banks (Citibank, HDFC Bank, Kotak Mahindra Bank, HSBC and ICICI
Bank) have an aggregate loan exposure of Rs. 274.53 crore to Satyam.
Citibank tops the list with Rs. 196 crore of total funded loans and advances,
followed by HSBC Bank at Rs. 16 crore.

Seven banks — Bank of America, Citibank, Bank of Baroda, HDFC Bank,

ICICI Bank, BNP Paribas and HSBC Bank — have non-funded exposures
totalling Rs. 373.47 crore.

This includes contingents and commitments of Rs. 118.17 crore and

marked-to-market gains of 185.29 crore on derivative contracts with the
company.

Ten banks — Bank of America, Allahabad Bank, Central Bank of India,

Corporation Bank, OBC, PNB, UCO Bank, Union Bank of India, Indian
Bank and Federal Bank — have aggregate investment exposures of Rs. 12.49
crore.

“Banks are taking steps to safeguard their securities and interests in respect
of their exposures to the Satyam group,” the RBI has assured the Union
Government.

Loans to Maytas firms

Though SBI had no exposure to Satyam, it had an exposure of Rs. 500 crore
to the Maytas firms, promoted by Mr Raju’s kin. State Bank of Hyderabad
had not extended any loans to Satyam. But it had advanced Rs. 189 crore to
Maytas Infra, the company promoted by Mr Raju’s reatives. “The loans
were given for specific projects and they are secured loans,” Ms Renu
Challu, Managing Director of SBH, told Business Line.

According to Mr R.S. Reddy, Chairman and Managing Director, Andhra

Bank, the bank has some “indirect’ exposure” to Maytas for about Rs. 45
crore. “This loan was given to a consortium where ICICI Ventures is a
majority stakeholder along with some other partners. Maytas Infra has only
15 per cent stake in the project. Even this loan is well secured,” he said.

Deposits

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Enquiries made by the RBI with the banks revealed that Satyam had
deposits of Rs. 78 crore as on January 8, 2009 (as against Rs. 65 crore on
March 31, 2008. But as per the audited (fudged) figures, the amount
was Rs. 4,274 crore).

Did Ramalinga Raju not take ‘even a rupee’?

In his confessional letter, Ramalinga Raju has claimed that while

he inflated numbers to present a rosy picture to outsiders, neither
he nor the managing director sold any shares nor took ‘even a
rupee/dollar’ from the company.

But SEBI’s investigations have clearly led it to conclude otherwise.

In its order last week, it makes the point that the Rajus, by
consistently inflating Satyam’s growth rates and profits, duped
millions of investors who invested in its stock on the strength of
its published financials.

What is more, while being fully aware of the fictitious financials,

the Rajus transferred 1.57 crore of their own shares to related
entities through off-market transactions. SEBI alleges that these
shares, valued at over ₹543 crore, were in turn sold in the stock
market, netting a neat profit. The promoters also pledged another
6.2 crore shares to raise loans and cash amounting to ₹1253 crore.
Top managers such as Vadlamani Srinivas (CFO), G Ramakrishna
(VP-Finance) and VS Prabhakara Gupta (Head-Internal Audit)
also sold shares valued at ₹4.5 crore between 2003 and 2008.

Finding these top managers guilty of unfair manipulation of stock

prices and insider trading, SEBI has asked them to deposit their
‘unlawful gains’ of ₹1850 crore, with 12 per cent interest, with the

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regulator within 45 days. They have also been barred from
associating with the securities markets in any manner, for the
next 14 years.

CEO Mr.Raju was sent to jail:

Six years after the biggest accounting fraud shook the corporate world in
India,Satyam founder B Ramalinga Raju was on Thursday sentenced to 7
years in jail and was fined Rs 5 crore by a special court in Hyderabad.

Nine other accused were also sentenced to seven years rigorous

imprisonment.

Raju had already spent 32 months in jail.

Earlier in the day, Raju and nine others were found guilty by the court on
charges of criminal conspiracy and cheating in the Rs 7000 crore scam.

Except Raju's another brother B Suryanarayana Raju and former internal chief
auditor V S Prabhakar Gupta, all the others eight accused were found guilty
under IPC sections 467, 468, 471 and 477A, relating to forgery of security,
forgery for purpose of cheating and falsification of accounts, according to V
Chandrashekhar, Superintendent of Police, CBI Hyderabad Zone.

While the accounting fraud was to the tune of Rs 7,000 crore, it had caused
an estimated notional loss of Rs 14,000 crore to investors and unlawful gains
of Rs 1900 crore to Raju and others.

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So, will Satyam’s investors get back their money?

Ha, well, there’s the catch. They probably won’t. To start with, one
needs to watch if Raju & Co do indeed comply with SEBI’s order,
instead of making interminable appeals to the Securities Appellate
Tribunal and the courts. But even if they do, SEBI may have a
difficult time finding the millions of investors who were at the
receiving end of the Satyam scam.

After all, hundreds of investors are bound to have transacted on

the Satyam stock between 2003 and 2008 believing its financials
to be rock-solid. In retrospect, they were all victims of this fraud.
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But even if you narrow the universe of victims to investors who
actually held the Satyam stock when the scam broke, they are
likely to have either sold their shares at severely depressed prices
or swapped their shares when Satyam was bought over and then
merged into Tech Mahindra.

Therefore, all they can have now is the satisfaction of knowing

that the investigators have, Hercule Poirot-style, delivered a grand
expose of the villains and why they did it. Meanwhile, Ramalinga
Raju is awaiting trial for criminal breach of trust alleged by the
CBI in a special court.

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