Satyam Scam

1. Satyams Company profile:-

In 1987, B. Ramalinga Raju (“Mr. Raju”) formed Satyam in Hyderabad, India with fewer than 20 employees Satyam means “truth” in the ancient Indian language Sanskrit. The company was specialized in information technology; business services, computer software, and is a leading outsourcing company in India. Satyam computer offers consulting and information technology services to various sectors. Satyam immediately experienced success after it issued an initial public offering on the Bombay Stock Exchange in 1991. Satyam was also listed in NEW YORK STOCK EXCHANGE in 2001 & in EURONEXT Amsterdam stock exchange in 2008. Satyam computers converted into public limited company in 1991. The company grew quickly during the 1990s and 2000s as more and more companies around the world looked to India for outsourcing solutions. It eventually became the fourth largest outsourcing company in India. The business community recognized Satyam as a global leader in information technology outsourcing. At the peak of its business, Satyam employed nearly 50,000 employees and operated in 67 countries. 2. Satyams achievements:-

Satyam was as an example of India’s growing success. Satyam won numerous awards for innovation, governance, and corporate accountability. Following are the satyams achievements:- * In June 1991 satyam made 185 clients from first fortune 500 companies * In 1994 satyam made allies with Dun & Brad Street Crop an USA based company * In 2000 satyam was declared one of the 100 most pioneering technology companies by world economic forum * In 2006 satyam Ranked no. 1 in the ASTD Award (American Society for Training and Development) * On April 14, 2008, Satyam won awards from MZ Consult’s for being a leader in India in corporate governance and accountability. Satyam’s CFO issued a press release noting the award and stating, “These awards recognize this commitment to keeping the market and our investors informed, having our financial information be clearly and easily understood by stakeholders, and complying with increasingly strict regulatory environments.” “Additionally, our high rankings show that we are committed to being a responsible corporate citizen that leverages best practices wherever possible.”

3. Who is B. Ramalinga Raju?

Ramalinga Raju was born on September 16, 1954 in Andhra Pradesh. He founded Satyam Computers and was its Chairman until January 7, 2009 when he resigned after admitting to commits corporate fraud. Mr. raju have won following awards:-

* In 2007, Ernst & Young awarded Mr. Raju with the Entrepreneur of the Year award. * Mr. raju awarded by Dataquest IT Man of the Year Award in 2000. * Mr. raju also have got Asia Business Leader Award in 2002. * In 2007 He also won Ernst & Young Entrepreneur of the Year which was revoked when accounting fraud in satyam was unraveled. * In September 2008, the World Council for Corporate Governance awarded Mr. raju 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.

4. Overview of the scam:-

In early 2009 satyam scam came to light which is the biggest scam in Indian corporate history which rocked the Indian stock market. Mr. Raju of satyam group manipulated the accounts to a disaster which he admitted later. Financial scandal to the tune of Rs 7800 crore in Satyam took the world by surprise, leaving the investors and the clients of Satyam in lurch. The most alarming aspect of the scam was that the company’s financial records have been fudged for the “LAST SEVERAL YEARS”. The books of accounts of the company for the past several years that had been audited by the internationally reputed firm of Auditors, PRICE-WATER-HOUSE-COOPERS were fake. Balance sheet of Satyam Carries non existing cash and bank balances of Rs 5040 Crores. An accrued interest of Rs. 376 crore which is non-existent. Debtors over stated by Rs 490 Crores. Liability understated by Rs 1230 Cr. * Mr. Ramalinga Raju has admitted that he has been laying whole world, employees of company and most important investor from around the world building up Indian biggest fraud in corporate history. * He also admitted that Maytas deal was the last ditch effort to get value for the fictitious assets.

5. How the scam started to unravel:-

As stock markets around the world collapsed during 2008, the Indian Stock Exchange, the SENSEX, fell from a high of over 21,000 to below 8,000 between January 2008 and October 2008. Satyam continued to report positive results during 2008 and claimed success in navigating the economic crisis. In October 2008, Satyam reported net income of $132.3 million, an increase of 28 percent from the same quarter the previous year. Saytam asserted that, despite the challenging environment, it continued to find opportunities for growth. During an October conference call reporting earnings, one stock analyst drew attention to large cash balances in non-interest bearing bank accounts. The analyst expressed concern about the large balances and expressed reservations about the accuracy of the numbers. Investors ignored the analyst’s comment and the stock price rose with the reports of positive earnings and revenue growth.

In December 2008, Satyam’s Board of Directors unanimously approved the purchase of Maytas Properties and Maytas Infrastructure, two companies unrelated to the information technology field. At the time, Mr. Raju stated that he and the Board anticipated that the market would “be delighted” by the two transactions as it would provide Satyam with greater diversification. However, investors were outraged over the transactions because Mr. Raju’s family held a larger stake in Maytas Properties and Maytas Infrastructure than it did in Satyam. Shareholders viewed the transactions as an attempt to siphon money out of Satyam into the hands of the Raju family. Satyam quickly aborted the transactions, but the incident still caused significant damage to Satyam’s reputation as a well-managed company.

After the incident, chaos ensued. Analysts immediately soured on the company and put sell recommendations on its stock. Satyam’s shares dropped nearly 10 percent and four of the five independent directors resigned. On December 30, analysts with Forrester Research advised clients to stop doing business with Satyam because of the fear of widespread fraud. Satyam hired Merrill Lynch to advise it on ways to increase shareholder value. On January 7, just hours before Mr. Raju disclosed the fraud, Merrill Lynch sent a letter to the stock exchange indicating that it was withdrawing from its engagement with Satyam because during the course of its representation it learned of material accounting irregularities.

On January 7, 2009, Mr. Raju disclosed in a letter to Satyam’s Board of Directors that he had been manipulating the company’s accounting numbers for years. Mr. Raju said the manipulation started out small, and grew larger by the year. In the letter he stated, “It was like riding a tiger, not knowing how to get off without being eaten.” Mr. Raju stated that eventually, the stress of hiding the fraud grew too much for him to bear.

6. Modus operandi :-

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. The modus operandi can be explained with the help of following points:-

a. Fake accounts
b. Role of auditors
c. The MAYTAS Acquisition

a. Fake accounts

Mr. Raju and the company’s global head of internal audit used a number of different techniques to perpetrate the fraud. Satyam overstated income nearly every quarter over the course of several years in order to meet analyst expectations.Using his personal computer, 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. 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. 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 overstated assets on Satyam’s balance sheet.

Mr. Raju overstated debt by 490 CR. The actual debt WAS Rs.2161 CR., But the debt was shown Rs.2651.36 CR. The cash balance in bank was inflated by Rs. 5040 CR

The actual cash in bank was Rs. 321 CR., but raju showed Rs. 5312.62 CR. In bank account. Mr. raju also showed an interest of Rs. 376.34 CR., Which never accrued. Satyam also underreported liabilities on its balance sheet.

satyam liability understated by Rs. 1230 cr., Which was arranged by mr.raju Rs.496 cr.

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. One particularly troubling item concerned the $1.04 billion that Satyam claimed to have on its balance sheet in non-interest bearing deposits. According to accounting professionals, a reasonable company would have either invested the money into an interest bearing account or returned the excess cash to the shareholders. The large amount of cash thus should have been a red flag for the auditors that further verification and testing was necessary. Furthermore, 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.

c. The MAYTAS Acquisition

Maytas infra and Maytas properties were property Development Company founded in 2005.Maytas infra and Maytas properties firms owned by the sons of Raju. In December 2008, satyam planned to buy the Maytas to fill the gap in the balance sheet.The Raju family directly owned about one-third each in the two companies it planned to acquire i.e. 8.61% in the two companies. Satyam announced that it planned to acquire Maytas Properties Pvt. Ltd for $1.3 billion, or Rs 6,214 crores, and a 51% stake in Maytas Infra Ltd for $300 million, a move that was largely going to benefit the Raju family that has promoted all three firms, and which was strongly criticized by analysts and fund managers. This deal of acquisition was difficult to digest. Because if the deal had gone through, it would have consumed the entire surplus cash on the books of Satyam. The company management said the Acquisition will diversify the company’s revenues beyond its core software services business, which shocked analysts and investors, who saw little relation between Satyam’s core software operations and the realty and infrastructure business of the two firms.

7. Impact of scam:-

Due to the scam in satyam Jobs of over 50000 people were at risks who were working in satyam. Satyam scam tampered the India`s global image, as the satyam was globally recognize company and listed in international stock exchanges. Indian stock market fell dramatically due to satyam scam and many investors incurred high amount of losses. On Jan 6th saytam share reported biggest single day fall of 175 Rs. Satyam’s largest shareholder, Aberdeen AMC, dumped the shares of satyam. The Fund Houses such Swiss Finance Corp, Mauritius Ltd, Aberdeen International India, also sold shares of satyam. After the revelation of scam SEBI said that, if Saytam found guilty, its license to work in India may be revoked. The New York Stock Exchange also halted trading in Satyam stock after the confession of Mr. Raju. Satyam stock was also being removed from National Stock Exchange’s S&P CNX Nifty 50-share index from Jan 12. Reliance Capital Ltd replaced Satyam in the main index. Satyam were also excluded from the CNX 100 index, CNX 500 index and the CNX IT index. Due to the satyam scam The GDP of the country also fell by 0.4%. Satyam scam also caused I.T sector to suffer a downturn.

8. Regulatory action:-

* New board of directors were appointed.

After the discovery of scam Mr Deepak Parekh, Mr Kiran Karnik, and Mr C. Achutan were mandated by the Government to shoulder the uphill task of crisis management at the beleaguered Satyam Computer Services.

* Disclosure of pledged securities.

After Satyam, the SEBI increased disclosure obligations of promoters and controlling shareholders. Before the Satyam scandal, promoters and controlling shareholders were not required to disclose to investors if they had pledged their stock. Pledging stock is the process whereby a person offers his or her stock to a bank or other institution as collateral for a loan. The problem with a controlling shareholder pledging stock is that once the stock drops below a certain level, the drop will trigger a margin call. After receiving a margin call, the person who pledged the stock must provide additional collateral. If the person cannot provide additional collateral, the lender will liquidate the stock that the person posted as collateral, potentially causing a significant decline in a company’s stock price. This hurts minority shareholders who are unaware that the controlling shareholder had pledged his or her stock. Two weeks after Satyam’s collapse, the SEBI made it mandatory for controlling shareholders to disclose any share pledges.

* Increased financial accounting disclosure.

The SEBI also proposed requiring companies to disclose their balance sheet positions twice a year. Pre-Satyam, the regulations only required disclosure of balance sheet positions once a year. The increased reporting of companies’ balance sheets will provide investors with more information on the stability of a company’s financial position. The increased reporting requirements of balance sheets will probably eventually lead to the requirement that companies provide a statement of cash flow in its biannual reports as well. Increasing both the frequency and detail of disclosure will help provide for a more robust market check.

* Adoption of international standards.

Satyam strengthened India’s commitment to adopting International Financial Reporting Standards (“IFRS”) by 2011. Globally, more and more countries are moving towards IFRS, as currently more than 100 countries require, permit, or are converting to IFRS. Adopting IFRS will facilitate investor comparisons of financial performance across country lines and will increase confidence in the accounting numbers.

* Creation of new corporate code of conduct by Ministry of Corporate Affairs.

In addition to the new SEBI regulatory requirements, the Indian Ministry of Corporate Affairs is drafting a new corporate code for Indian publicly listed companies. The new code will apply along with the regulatory obligations imposed by the SEBI.