SATYAM FRAUD CASE

It was the biggest Fraud in the nation and also in the corporate world. It is hard to believe that one of the largest IT companies, Satyam Computer Systems, underwent such a huge fraud case. Two brothers, Mr. Raju and B. Ramalinga Raju, who were the founder of Satyam Computer Systems were arrested for further investigation in the Satyam fraud case. The chief financial officer, Srinivas Vadlamani, may join the two brothers in jail because he resigned just after B. Ramalinga Raju resigned after the fraud case. The two brothers have been charged for cheating, criminal breach of trust and forgery.

The Satyam Computer Systems is considered to be one of the leading outsourcing companies in India and it was among the top five IT companies in India. The company employs about 53,000 people and now the faith of these people is critical. And also many new engineers and technicians were recruited recently from colleges and universities in campus interview. It is doubtful whether the Satyam Computer Systems will be able to send the joining letters to all these new recruits.

The Rs. 7,100 crore fraud case of Satyam will give awareness to all the companies that there must be transparency in all the aspects within the companies. There has been a talk that some leaders of IT companies like Azim Premji will takeover the control of the company but it has not been finalized yet.

If you just want to know more on how Ramalinga Raju started losing his attention from the company, then I can relate some more information about the background of the fraud case. Well, the two sons of Raju are investing in the real estate business and recently their real estate business was not in good shape. So, Raju started using the manpower and other resources for the Satyam Company for the welfare of his sons’ real estate business. Now the four main shareholders of Satyam Company were horrified by the changing behavior of Raju and they want the attention of Raju in his company. As a result of this, the company has some setback in the IT and outsourcing field as their main concentration slightly goes to the real estate business of Raju’s sons.

Now Ram Mynampati is the interim CEO of Satyam Computer System and he is doubtful whether the company has enough funds for paying salaries to its associates for January. This is the biggest fraud case in the history of IT companies and Ram Mynampati is in a very critical situation handling the sinking company.

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 Satyam Board:

1. The Balance Sheet carries as of September 30, 2008

* Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books)
* An accrued interest of Rs. 376 crore which is non-existent
* An understated liability of Rs. 1,230 crore on account of funds arranged by me
* An over stated debtors position of Rs. 490 crore (as against Rs. 2651 [cr.] 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. 588 crore in Q2 alone.

Pls check out the complete draft of Raju’s mail in this link.


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 don’t 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. Wouldn’t 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 wouldn’t 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 are covered).

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. It’s 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. There is definitely more to it than meets the eye.

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. I’m 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 crores($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.