SATYAM SCANDAL A Case Study PDF

CASIRJ Volume 5 Issue 8 [Year - 2014] ISSN 2319 – 9202
SATYAM SCANDAL (A case study)
Author- chanchal
Designation- Assistant Professor
Email: chanchal010880@yahoo.co.in
ABSTRACT :- World is not only just going through economic crisis but also ethical crisis
with the Corporate frauds, Accounting scandals, Mismanagement, Bribes and many more. From
Enron, WorldCom and Satyam, it appears that corporate accounting fraud is a major problem
that is increasing both in its frequency and severity. Research evidence has shown that growing
number of frauds have undermined the integrity of financial reports, contributed to substantial
economic losses, and eroded investors confidence regarding the usefulness and reliability of
financial statements. The increasing rate of white-collar crimes demands stiff penalties,
exemplary punishments, and effective enforcement of law with the right spirit. The fraud
committed by the founders of Satyam in 2009, is a testament to the fact ―the science of conduct
is swayed in large by human greed, ambition, and hunger for power, money, fame and glory.
Unlike Enron, which sank due to ―agency problem, Satyam was brought to its knee due to
tunneling effect. The Satyam scandal highlights the importance of securities laws and CG in
emerging markets. Indeed, Satyam fraud spurred the government of India to tighten the CG
norms to prevent recurrence of similar frauds in future. Thus, major financial reporting frauds
need to be studied for lessons-learned and strategies-to-follow to reduce the incidents of such
frauds in the future.
PAPER TYPE-Article
INTRODUCTION: Satyam is the fourth largest IT Company in India. The CEO of the
company Ramlinga Raju has made a scam of around $2 billion. There has been a lot of
controversy regarding the misuse of the post by the CEO of the company. The fake number of
jobs which was shown by the CEO was an abuse of power and it was a clear violation of the
prevailing laws in India. This gives the impression that in India the power and position is what
matters and the people in the top position make a clear violation of the rights provided to them.
International Research Journal of Commerce Arts and Science

http://www.casirj.com Page 78
This scam has seriously affected the corporate bodies in India. The role of an incorporated
company is to satisfy desires of investors, and to channelize their investment. But most of the
time entrepreneurs play with money of the investors. There are laws to safeguards investors
interest but the Satyam scam has raised the question on the fundamental role of the government
and corporate governance. On 16th December, 2008 Satyam board got the approval for
acquisition of Maya’s Infrastructure and Maya’s Properties (companies owned by his relatives).
However the company could not go on with the investment plan due to resistance by the
investors. Between 25th and 28th December, 2008, 3 independent directors of Satyam board
resigned and later on Mr. Raju confessed to fraud in the form of misappropriation in the balance
sheet of the company.
BACKGROUND :-
In 1987, B. Ramalinga Raju ("Mr. Raju") formed Satyam in Hyderabad, India with fewer than 20
employees. Ironically, Satyam means "truth" in the ancient Indian language Sanskrit. The
company specializes in information technology, business services, computer software, and is a
leading outsourcing company in India. Satyam immediately experienced success after it issued
an initial public offering on the Bombay Stock Exchange in 1991. Established on 24th June 1987
by B. Ramalinga Raju and his brother-in-law, D. V. S. Raju, Satyam Computer Services Limited
was incorporated in 1991 as a public limited company and also got its first Fortune 500 client,
Deere and Co. In a short span of time, it became a leading global consulting and IT services
company spanning 55 countries before nemesis caught up with it. It was one of the few Indian IT
services companies listed on the New York Stock Exchange. It was ranked as India‘s fourth
largest software exporter, after TCS, Infosys and Wipro. The 1990s were an era of considerable
growth for the company. It also caused the formation of a number of subsidiary companies such
as Satyam Renaissance, Satyam Info way, Satyam Spark Solutions and Satyam Enterprise
Solutions; Satyam Info way (Sify) incidentally became the first Indian internet company to be
listed on the NASDAQ. Satyam acquired a lot of businesses and expanded its operations to many
countries and signed MoUs with many multinational companies in the new millennium. Satyam
added feather after feather to its cap by becoming the first company in the world to start a
programme known as the Customer-Oriented Global Organization training in May 2000, signing
contracts with numerous international players such as Microsoft, Emirates, TRW, i2

Technologies and Ford, claiming the privilege of being the first ISO 9001:2001 company in the
world certified by BVQI, and earning the name as a global company by opening offices in
Singapore, Dubai and Sydney. In 2005, it acquired a 100 per cent stake in Singapore-based
Knowledge Dynamix and 75 per cent stake in London based Citisoft Plc. Satyam was a company
on the fast track to success and has justifiably earned for itself a name for consulting in the area
of strategy right through to implementing IT solutions for customers.
At the peak of its business, Satyam employed nearly 50,000 employees and operated in 67
countries. Satyam was as an example of India's growing success. Satyam won numerous awards
for innovation, governance, and corporate accountability. In 2007, Ernst & Young awarded Mr.
Raju with the Entrepreneur of the Year award. On April 14, 2008, Satyam won awards from MZ
Consult's for being a leader in India in corporate governance and accountability. In September
2008, the World Council for Corporate Governance awarded Satyam with the "Global Peacock
Award" for global excellence in corporate accountability. Unfortunately, less than five months
after winning the Global Peacock Award, Satyam became the centerpiece of a massive
accounting fraud.
PROBLEM BEGIN :-
Problems in Satyam begin when on December 16th, 2008; its chairman Mr. Ramalinga Raju, in a
surprise move announced a $1.6 billion bid for two Maytas companies i.e. Maytas Infrastructure
Ltd and Maytas Properties Ltd saying he wanted to deploy the cash available for the benefit of
investors. The two companies have been promoted and controlled by Raju‘s family. The thumbs
down given by investors and the market forced him to retreat within 12 hours. Share prices
plunges by 55% on concerns about Sat yam’s corporate governance. In a surprise move, the
World Bank announced on December 23, 2008 that Satyam has been barred from business with
World Bank for eight years for providing Bank staff with ―improper benefits‖ and charged with
data theft and bribing the staff. Share prices fell another 14% to the lowest in over 4 years. The
one independent director since 1991, US academician Mangalam Srinivasan, announced
resignation followed by the resignation of three more independent directors on December 28 i.e.
Vinod K Dham (famously known as father of the Pentium and an ex Intel employee), M
Rammohan Rao (Dean of the renowned Indian School of Business) and Krishna Palepu
(professor at Harvard Business School). At last, on January 7, 2009, B. Ramalinga Raju

announced confession of over Rs. 7800 crore financial fraud and he resigned as chairman of
Satyam. He revealed in his letter that his attempt to buy Maytas companies was his last attempt
to ―fill fictitious assets with real ones‖. He admitted in his letter, it was like riding a tiger
without knowing how to get off without being eaten. Satyam’s promoters, two brothers B
Ramalinga Raju and B Rama Raju were arrested by the State of Andhra Pradesh police and the
Central government took control of the tainted company. The Raju brothers were booked for
criminal breach of trust, cheating, criminal conspiracy and forgery under the Indian Penal Code.
The Central Government reconstituted Satyam's board that included three-members, HDFC
Chairman, Deepak Parekh, Ex Nasscom chairman and IT expert, Kiran Karnik and former SEBI
member C Achuthan. The Central Government added three more directors to the reconstituted
Board i.e., CII chief mentor Tarun Das, former president of the Institute for Chartered
Accountants (ICAI) TN Manoharan and LIC's S Balakrishnan.
A week after Satyam founder B Ramalinga Raju’s scandalous confession, Satyam’s auditors
Price Waterhouse finally admitted that its audit report was wrong as it was based on wrong
financial statements provided by the Satyam’s management. On January 22, 2009, Satyam’s
CFO Srinivas Vadlamani confessed to having inflated the number of employees by 10,000. He
told CID officials interrogating him that this helped in drawing around Rs 20 crore per month
from the related but fictitious salary accounts.
Andhra Pradesh State CB-CID raided the house of Suryanarayana Raju, the youngest sibling of
Ramalinga Raju who owned 4.3 per cent in Maytas Infra, and recovered 112 sale deeds of
different land purchases and development agreements. Senior partners S Gopalakrishnan and
Srinivas Talluri of the auditing firm PricewaterhouseCoopers (PwC) were arrested for their
alleged role in the Satyam scandal. The State‘s CID police booked them, on charges of fraud
(Section 420 of the IPC) and criminal conspiracy (120B).
HOW THE FRAUD WAS UNCOVERED?
Responsible Parties:- Mr. Raju was the primary individual responsible for the fraud. Indian
authorities accused Mr. Raju, and subsidiary players such as the CFO, a managing director, the
company's global head of internal audit, and Mr. Raju's brother, with responsibility for the fraud
and filed charges against them. Additionally, Satyam's auditors and Board of Directors bear
some responsibility for the fraud because of their failure to detect it. Finally, the ownership

structure of Indian businesses contributed to the Satyam scandal.

a.) Mr. Raju and Company Insiders' Role- Mr. Raju claimed that he overstated assets on
Satyam's balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that the
company claimed to own was nonexistent. Satyam also underreported liabilities on its balance
sheet. Satyam overstated income nearly every quarter over the course of several years in order to
meet analyst expectations. Mr. Raju created numerous bank statements to advance the fraud. Mr.
Raju falsified the bank accounts to inflate the balance sheet with balances that did not exist. He
inflated the income statement by claiming interest income from the fake bank accounts. Mr. Raju
also revealed that he created 6,000 fake salary accounts over the past few years and appropriated
the money after the company deposited it. The company's global head of internal audit created
fake customer identities and generated fake invoices against their names to inflate revenue. The
global head of internal audit also forged board resolutions and illegally obtained loans for the
company. It also appeared that the cash that the company raised through American Depository
Receipts ("ADRs") in the United States never made it to the balance sheets.
Mr. Raju initially asserted that he did not divert any of the money to his personal accounts and
that the company was not as profitable as it had reported; however, during later interrogations,
Mr. Raju revealed that he had diverted a large amount of cash to other firms that he owned and
that he had been doing this since 2004. Mr. Raju also initially asserted that he acted alone in
perpetrating the fraud. However, as noted above, Indian authorities also charged Mr. Raju's
brother, the company's CFO, the company's global head of internal audit and one of the
company's managing directors.
b.)Auditors Role
Global auditing firm Price Waterhouse Coopers ("PWC") audited Satyam's books from June
2000 until the discovery of the fraud. Several commentators criticized PWC harshly for failing to
detect the fraud. PWC signed Satyam's financial statements and was responsible for the numbers
under Indian law. It appears that the auditors did not independently verify with the banks in
which Satyam claimed to have deposits. Additionally, the fraud went on for a number of years
and involved both the manipulation of balance sheets and income statements. Whenever Satyam
needed more income to meet analyst estimates, it simply created fictitious sources and it did so
numerous times without the auditors ever discovering the fraud. Suspiciously, Satyam also paid
PWC twice what other firms would charge for the audit, which raises questions about whether
PWC was complicit in the fraud. Furthermore, PWC audited the company for nearly 9 years and
did not uncover the fraud, whereas Merrill Lynch discovered the fraud as part of its due diligence
in merely 10 days. The audit committee of Satyam failed its duty to act on a whistle blower’s
expose. As per the investigations of SFIO, on 18 December 2008, two days after the Satyam
board met and decided to acquire two group firms Maytas Infra Ltd and Maytas Properties Ltd
independent director Krishna Palepu received an anonymous email by an alias, Joseph Abraham.
That email exposed the fraud. Palepu forwarded the email to another independent director, M.
Rammmohan Rao, Chairman of the Audit Committee forwarded that email to S. Gopalkrishnan,
partner at Price Waterhouse, the company‘s auditors. Gopalkrishnan told Rao over phone that
there was no truth to the allegations and assured him of a detailed reply in a proposed
presentation before the Audit Committee on 29 December. That meeting did not take place. A
new date 10 January was fixed.
c. Board of Directors Role
Satyam's Board of Directors consisted of nine members. Five members of the Board were
independent as required by Indian listing standards. In its regulatory filings with the SEC,
Saytam revealed that it did not have a financial expert on the board during 2008. Further,
concerns later developed surrounding the Board of Directors lack of independence. The Board
contained several prominent figures in the business world, a fact that likely contributed to the
lack of scrutiny that Satyam received. Members of the Board included Krishna Palepu who is a
Harvard Professor and corporate governance expert, Rommohan Rao, the Dean of the Indian
School of Business, and Vinod Dham, co-inventor of the Pentium Processor. The Board first
came under fire on December 16, 2008 when it approved Satyam's purchase of real estate
companies in which Mr. Raju owned a large stake. The Board rescinded the approval after
shareholders led a revolt of the deal. Krishna Palepu, Rommohan Rao, and Vinod Dham all
resigned from the Board within two days of the rescission of the transaction. The botched
transaction provided the investors with the impression that the Board was not actively
monitoring Satyam. Furthermore, the Board should have caught some of the same red flags that
the auditor, PWC, missed. Additionally, the Board of Directors should have been concerned with
the knowledge that Mr. Raju decreased his holdings of Satyam significantly over the three years
leading up the disclosure of the fraud. Mr. Raju's holdings fell from 15.67 percent in 2005-2006
to 2.3 percent in 2009.
VICTIMS OF FRAUD
Employees of Satyam spent anxious moments and sleepless nights as they faced non‐payment of
salaries, project cancellations, layoffs and equally bleak prospects of outside employment. They
were stranded in many ways – morally, financially, legally, and socially.
Clients of Satyam expressed loss of trust and reviewed their contracts preferring to go with other
competitors. Cisco, Telstra and World Bank cancelled contracts with Satyam. ―Customers were
shocked and worried about the project continuity, confidentiality, and cost overrun.
Shareholders lost their valuable investments and there was doubt about revival of India as a
preferred investment destination. The VC and MD of Mahindra, in a statement, said that the
development had "resulted in incalculable and unjustifiable damage to Brand India and Brand IT
in particular."
Bankers were concerned about recovery of financial and nonfinancial exposure and recalled
facilities.
Indian Government was worried about its image of the Nation & IT Sector affecting faith to
invest or to do business in the country.
SATYAM TIMELINE
June 24, 1987: Satyam Computers is launched in Hyderabad
1991: Debuts in Bombay Stock Exchange with an IPO over-subscribed 17 times.
2001: Gets listed on NYSE: Revenue crosses $1 billion.
2008: Revenue crosses $2 billion.
December 16, 2008: Satyam Computers announces buying of a 100 per cent stake in two
companies owned by the Chairman Ramalinga Raju‘s sons–Maytas Properties and Maytas Infra.
The proposed $1.6 billion deal is aborted seven-hours later due to a revolt by investors, who
oppose the takeover. But Satyam shares plunge 55% in trading on the New York Stock
Exchange.
December 23: The World Bank bars Satyam from doing business with the bank‘s direct
contracts for a period of 8 years in one of the most severe penalties by a client against an Indian
outsourcing company. In a statement, the bank says: ―Satyam was declared ineligible for
contracts for providing improper benefits to Bank staff and for failing to maintain documentation
to support fees charged for its subcontractors.

December 25: Satyam demands an apology and a full explanation from the World Bank for the
statements, which damaged investor confidence, according to the outsourcer. Interestingly,
Satyam does not question the company being barred from contracts, or ask for the revocation of
the bar, but instead objects to statements made by bank representatives. It also does not address
the charges under which the World Bank said it was making Satyam ineligible for future
contracts.
December 26: Mangalam Srinivasan, an independent director at Satyam, resigns following the
World Bank’s critical statements.
December 28: Three more directors quit. Satyam postpones a board meeting, where it is
expected to announce a management shakeup, from December 29 to January 10. The move aims
to give the group more time to mull options beyond just a possible share buyback. Satyam also
appoints Merrill Lynch to review strategic options to enhance shareholder value.
January 2, 2009: Promoters’stake falls from 8.64% to 5.13% as institutions with whom the
stake was pledged, dump the shares.
January 6, 2009: Promoters’stake falls to 3.6%.
January 7, 2009: Ramalinga Raju resigns, admitting that the company inflated its financial
results. He says the company’s cash and bank shown in balance sheet have been inflated and
fudged to the tune of INR 50,400 million. Other Indian outsourcers rush to assure credibility to
clients and investors. The Indian IT industry body, National Association of Software and Service
Companies, jumps to defend the reputation of the Indian IT industry as a whole.
January 8: Satyam attempts to placate customers and investors that it can keep the company
afloat, after its former CEO admitted to India’s biggest-ever financial scam. But law firms Izard
Nobel and Vianale & Vianale file ―class-action suits on behalf of US shareholders, in the first
legal actions taken against the management of Satyam in the wake of the fraud.
January 11: The Indian government steps into the Satyam outsourcing scandal and installs three
people to a new board in a bid to salvage the firm. The board is comprised of Deepak S Parekh,
the Executive Chairman of home-loan lender, Housing Development Finance Corporation
(HDFC), C. Achuthan, Director at the country’s National Stock Exchange, and former member
of the Securities and Exchange Board of India, and Kiran Karnik, Former President of
NASSCOM.
January 12: The new board at Satyam holds a press conference, where it discloses that it is
looking at ways to raise funds for the company and keep it afloat during the crisis. One such
method to raise cash could be to ask many of its Triple A-rated clients to make advance
payments for services.
FACTORS CONTRIBUTING TO FRAUD
Numerous factors contributed to the Satyam fraud. The independent board members of Satyam
(including the dean of the Indian School of Business, a Harvard Business School professor, and
an erstwhile star at Intel), the institutional investor community, the SEBI, retail investors, and the
external auditor ‐‐ none of them, including professional investors with detailed information and
models available to them, detected the malfeasance. The following is a list of factors that
contributed to the fraud:
• Greed
• Ambitious corporate growth
• Deceptive reporting practices—lack of transparency
• Excessive interest in maintaining stock prices
• Executive incentives
• Stock market expectations
• Nature of accounting rules
• ESOPs issued to those who prepared fake bills
• High risk deals that went sour
• Audit failures‐ Internal & External
• Aggressiveness of investment banks, commercial banks,
• Rating agencies & investors
• Weak Independent directors and Audit committee
• Whistle blower policy not being effective
CONCLUSION :-
The Satyam fraud has shattered the dreams of different categories of investors, shocked the
government and regulators alike and led to questioning the accounting practices of statutory
auditors and corporate governance norms in India. Severe corporate governance problems
emerge out of the above-mentioned corporate wreckage. Many of these governance problems
were noticed in several other such corporate failures in USA, UK and Europe. These countries

reacted strongly to the corporate failures and codes & standards on corporate governance came to
the centre stage.
Even to a casual observer of the Satyam fiasco, the enormity of the scandal is a great eye opener.
Corporate scams and frauds committed against unwary investors have been a regular and almost
an annual feature in India. But the scale, magnitude, the reach and impact that the Satyam scam
had created is unparalleled in the corporate history of India, and as some keen corporate
observers point out, the world itself. That the reckless and couldn’t care-less’ swindlers were
operating with impunity within the Company for so long, notwithstanding the army of
professional managers, internal auditors, and independent-directors dominated board of directors,
the market regulator SEBI, the Company Law Board, the Department of Corporate Affairs and
the system of jurisprudence only go to show with what great disdain the scamsters looked at all
these institutions and authorities. There is a perception that most Indian, especially the first
generation promoters hardly make a distinction between a proprietary enterprise and a public
limited company in terms of their rights and privileges and the corresponding responsibilities and
accountability. It is a fact ―that a vast majority of Indian corporations are controlled by
promoter families which while owning a negligible proportion of share capital in their
companies, rule them as if they are their personal fiefdoms. The idea of a corporation, and the
values and principles that should guide its governance has hardly been imbibed by theses
promoters. Besides, the growth of corporate culture, not only was implanted much later in India
than in the Western countries, but also checkmated by the very same forces that make the
emergence of ethical business a difficult proportion in the Indian context. A lax administration,
ill-equipped regulatory system and terribly delayed justice delivery process only make things
easier for the corporate crooks to make a killing. It is not our case that there are more crooks in
the Indian corporate world than found elsewhere, but the overall system here is so conducive and
even attractive for them to flourish, rather than make lives difficult for them to continue their
trail of crimes.
Corporate scandals especially in the United States triggered reforms in corporate governance,
accounting practices and disclosures the world over. Enron debacle in 2001 and number of other
scandals involving large US companies around that period set in motion the corporate
governance reform process and resulted in the passing of the Sarbanes-Oxley Act, 2002. The
main objective of the Oxley Act is to repose investor‘s confidence by preventing corporate
frauds and ensuring transparency and disclosures. Similar kinds of corporate governance reforms
are needed in India too. There is need to reform corporate governance in India by taking harsh
policy measures. Even though corporate governance mechanisms cannot prevent unethical
activity by top management completely, but they can at least act as a means of detecting such
activity before it is too late. When an apple is rotten there is no cure, but at least the rotten apple
can be removed before the infection spreads and infects the whole basket. This is really what
effective governance is about.
Corporate governance framework needs to be implemented in letter as well as spirit. The
increasing rates of white collar crimes demands stiff penalties and punishment. The small
distortions created by few immoral executives lad far reaching negative consequences.
Hopefully, creating an awareness of the large consequences of small lies may help some to avoid
this trap.


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CASIRJ Volume 5 Issue 8 [Year - 2014] ISSN 2319 – 9202

SATYAM SCANDAL (A case study)

International Research Journal of Commerce Arts and Science

International Research Journal of Commerce Arts and Science

International Research Journal of Commerce Arts and Science

International Research Journal of Commerce Arts and Science

structure of Indian businesses contributed to the Satyam scandal.

International Research Journal of Commerce Arts and Science

International Research Journal of Commerce Arts and Science

International Research Journal of Commerce Arts and Science

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