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What is Satyam Accounting scandal; India’s biggest corporate shame?

By Amarendra Bhushan for CEOWORLD Magazine Updated:January 7, 2009 Become a writer!

Ramalinga Raju, resignation is a positive move; siding of from chairman post is the only choice for him to prove himself. Catch the Auditors PWC, were they sleeping or just took money and signed the documents. Remember what happened to Arthur Anderson after Enron, same should happen to the bugger Audit Company of Satyam.

What went wrong in Satyam that one fine morning the conscious of Ramalinga Raju felt the tremendous burden and he revealed the scam which continued for last many years. The matter should investigate in depth. For sure this unfortunate event will affect the software firm which is yet to face the policies of Obama regarding the outsourcing.

Founder and chairman Ramalinga Raju the head of Indian outsourcing firm Satyam Computer Services Ltd. India’s fourth- largest software services provider resigned, disclosing that profits had been falsely inflated for years and sending its shares tumbling nearly 80 percent. Satyam serves as the back office for some of the largest banks, manufacturers, health care and media companies in the world, handling everything from computer systems to customer service. Clients have included General Electric, General Motors, Nestlé and the United States government. We will see lot of Satyam’s clients migrating to competition like Infosys, TCS and Wipro etc.
Cisco Systems Inc., which is one of the clients of Indian software services firm Satyam Computer Services Ltd., said Wednesday the developments at Satyam aren’t expected to hurt the company’s business.

“The recent unfortunate developments unfolding at Satyam are not expected to have any material impact for Cisco. At this point, we would not like to comment further and have full confidence in the government and regulatory authorities to address this matter as appropriate.”

Earlier in the day, Satyam Chairman B. Ramalinga Raju had resigned admitting to falsifying company accounts and inflating revenue and profit figures over several years.

In Another news IT industry body Nasscom today said it has no plans to disqualify Satyam Computers as a member following the accounting-fraud disclosure made by the software major’s Chairman Ramalinga Raju. Nasscom would also work with the Satyam Task Force to reach out to their customers and employees and guide them through the transition. Satyam, currently, employs over 50,000 people.

I checked the US GAAP statement prepared as on 31 March 2008, it shows a very clear statement saying bank deposits of about Rs 3400 Crores. If that is that case there are only two options possible:

a) Price waterhouse did not even bother to check if indeed bank deposits exist. Obviously documents could prove the fact but remains to be seen what auditors did

b) The amount did exist as of march 2008, but vanished subsequently into the Maytas Minehole.

Either way, it speaks volumes on internationally acclaimed Auditors and their role, corporate Governance in the company and the role of Board of Directors. If indeed the fraud is as explained by Mr.Raju, the complete BoD and the Aditors should be prosecuted for this scam.

What India needs badly is an act need is an act like the Sarbanes-Oxley Act of 2002 ,also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called Sarbanes-Oxley, to take care of avoiding such scandals in future taking place. A thorough overhaul of auditing practices will be required.

Contact Points in Satyam:

For investor queries please contact: Investorrelations@satyam.com
For media queries please contact: mediarelations@satyam.com or call +91 9845183710

Full text of Raju’s letter to the Board

To the Board of Directors,
Satyam Computers Services Ltd.

From B. Ramalinga Raju
Chairman, Satyam Computer Servcies Ltd

Dear Board Members,

It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The balance sheet carries as of September 30, 2008

a) Inflated (non-existent) cash and bank balance of Rs 5,040 crore (as against Rs 5361 crore refglected in the books)

b) An accured interest of Rs 376 crore which is non-existent

c) An understated liability of Rs 1,230 crore on account of funds arranged by me

d) An over stated debtor position of Rs 490 crore (as against Rs 2651 reflected in the books)

2. For the September quarter (Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24 per cent of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenue). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.

The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew significantly (annualized revenue run rate of Rs 11,276 crore in the September quarter, 2008 and official reserves of Rs 8.392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations – thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was the poor performance would result in a takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.