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Subject: Business Ethics and Corporate Governa


Analysis of Satyam Scam

Submitted to:

Submitted by:

Prof. Navneet Baweja

Aditya Kumar (B - 61)

Satyam Fraud - An Analysis

Overview: Satyam has been topping the media charts for the last few weeks and have been rattled by a series of shocks. The whole mayhem started with the announcement & subsequent cancellation of Maytas acquisition, it was followed by World Bank contract termination & allegation of bribery by Satyam and then came the resignation of 4 independent directors from its board. Today Ramalinga Raju delivered the coup-de-grace when he made a press release that Satyam's books were fudged; that they have been reporting inflated revenue/margins for the last few years and the stated cash reserves of $1.2B are non-existent. The overall revenue impact of this fraud was a whopping Rs.8000 Crores ($1.66 Billion). This is the biggest corporate scandal in Indian history. This whole episode has not only impacted Satyam but this has created lot of negative publicity for Indian IT and Industry as a whole and impacted its corporate reputation. Here's a summary of the misreported amounts as claimed by Raju in his letter to SatyamBoard.

The Balance Sheet carries as of September 30, 2008

Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as An accrued interest of Rs. 376 crore which is non-existent An understated liability of Rs. 1,230 crore on account of funds arranged An over stated debtors position of Rs. 490 crore (as against Rs. 2651 [cr.]

against Rs. 5361 crore reflected in the books)

by me

reflected in the books)

2. For the September quarter (02) we reported a revenue of Rs.2,700 crore and an operating margin of Rs. 649 crore (24% Of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% of revenues). This has resulted in artificial, cash and bank balances going up by Rs.588crore. What beats me about this whole incident is how can a company with $2B revenue get away with $1B+ mis-reporting/fraud. Here are some glaring questions that pop-out of this episode:

Satyam is a publicly listed company in both India and US and are bound

by Indian/US (GAAP) accounting standards. I dont know much about comprehensiveness of Indian accounting standards, However US GAAP standards and SoX regulations are very stringent(especially post-Enron scenario). They need to go through mandatory 3rd party audits as well. Given this how can Satyam fudge their books?

This whole mis-reporting has been going on for a few years now. How

can the external auditing company (PWC) make a mistake and not find this out all these years. If it has been consistently missing all these quarters then its an 'incident' not an 'accident'.

I guess most of these inflated amounts have been reported in terms of

inflated revenues (both top line & bottom line) for each of the quarters. Auditors are required to validate the customer invoice amounts, receivables, outstanding amounts, bank statements etc and tally them with each other? How can a gap of tens of millions dollars each quarter not be noticed by the auditors?

If a company claims to have $1.2B of cash reserves they need to report

and provide proofs of how the amount is invested/maintained to Auditors and also provide it as part of their regulatory filings. How can a company

conceal a whopping $1B cash surplus without showing proofs of investment?

The additional revenue reported will attract Income tax. It will be

interesting to see if Satyam paid tax on inflated amounts. Wouldnt IT department/RBI scrutinize their bank accounts, Forex transactions, annual/quarterly reports to validate the tax collections? Based on the above thoughts I feel that the auditing firm has received some kick-backs and is involved in the whole fudging exercise. There is no way this could have been pulled off without involvement of Auditor. I wouldnt also be surprised if Satyam provided falsified proof for some of these claimed investments (Auditor could infact have guided Satyam on the same so that their bases.) Next I am trying to explore what could be the possible motive behind this whole fraud. The obvious fact is that numbers were inflated to drive up the stock price. Its a no brainer that it is just a matter of time before this is exposed and when it does get exposed the stock will have a freefall and might even lead to dissolution of company(as its happening now and as it happened in the case of Enron). I am sure Raju is smart enough to understand this. If so why would he try to take this undue risk especially when he is not planning to sell any shares when the market was high (as he has mentioned in his letter)? This leads me to believe that there is a more deep underlying cause than just propping up stock price. I am not sure what it could be, this needs further investigation. The whole story around pledging stocks to financial institutions and using that money to run the company (as stated in his letter) sounds very fishy to me. I have a feeling that he took that route to realize the value for stocks without selling them in the open market and panicking the investors (The other advantage also being that since these were mortgaged when the market was high he would have got higher amounts based on prevailing stock price at that time).

I doubt if that mortgaged money made its way into Satyam operations. Im fairly certain that at least a sizeable portion of that is stacked away safely most likely outside India. Here again the question that comes to my mind is when an individual is pledging stocks and borrowing upwards of Rs.1,200 cores($250M+) how did it not come under IT purview? There is a distinct possibility that IT dept/political big-wigs could have a hand in this matter.

The Three Phases of the Satyam Scam

New Delhi: An analysis of the report by the Serious Fraud Investigation Office (SFIO) on the swindle at Satyam Computer Services Ltd shows manipulation of software, and lack of audit controls and systemic review. The fraud can be divided into three phases. For nearly three years since 1999, the firm rode on the Y2K phenomenon, which saw Indias software industry get huge orders and earn good profits. The second phase began in 2001. According to the SFIO report, the falsification of accounts started then to keep Satyams share price high. The company had gone public in 1992. Riding on the high price, Satyam promoters offloaded their shareholding in the market and used the proceeds to buy land. In fact, founder B. Ramalinga Raju had set up as many as 374 infrastructure firms and eight investment companies to help him become a land baron, the report has found. This phase continued till 2004, which was when things started going wrong. The third and final phase started sometime in mid-2007 and continued till Rajus confession on 7 January this year. During this period, the company showed huge cash balances and fixed deposits in several banks of international repute. It was, however, actually starved of funds and the promoters were desperate to raise money to keep the company afloat. On 18 December last year, two days after the Satyam board met and decided to acquire two group firmsMaytas Infra Ltd and Maytas Properties Ltd independent director Krishna Palepu received an anonymous email.

The writer went by an alias, Joseph Abraham, and has been declared the whistle blower in the case. This email laid bare the fraud. Palepu forwarded the email to another independent director, M. Rammohan Rao, who chaired the Satyam audit committee. Rao forwarded this email to S. Gopalakrishnan, partner at Price Waterhouse, the companys auditors. Gopalakrishnan 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 never took place. A new date10 Januarywas fixed. Raju knew the clock was ticking for that audit meeting could have seen the committee members pose tough questions. Raju had not taken Raos calls seeking an answer to the allegations in the whistle blowers email. Three days before the meeting, Raju confessed to Indias biggest corporate fraud.

Analysis of the scam:

These three phases shows the fall of Satyam due to unethical practices. Relationship with the stakeholders was spoiled by non fulfillment of obligations. There was no transparency in the flow of information. Shareholders were cheated as they were provided with false information related to company through their financial reports. Employees suffered due to the malpractices followed by the company. Many employees were removed from the organization. Organization even cheated the government by not paying the taxes. Satyam had poor corporate governance practices under its roof. Manipulations were done to show the performance of the company. Satyam followed unethical ways to gain success. Concept of whistle blowing should be well defined and proper policies should be formed so that it gets more encouragement. Government should take proper measures so that this kind of unethical issues should not arise again in the society which affects the values and beliefs of the people hampering its growth and development.