The scandal of Satyam Computers has been widely regarded as the debacle of the Indian Financial System. Satyam’s case has been labelled as “India’s Enron” by the Indian media (Enron was a US-based company which was inflicted with a similar accounting fraud). It is the biggest ever corporate scandal in India amounting to more than Rs.7, 000 crores and is seen as India’s Most Colossal Financial Fraud. The fraud comprehensively exposed the potholes that existed in the corporate governance of India. Ironically, Satyam means “truth” in Sanskrit.
To understand the gravity of Satyam’s fraud, it is important to evaluate the factors that contributed to the “unethical” decisions made by the company’s executives. Continue reading to understand the rise and fall of Satyam.
THE RISE OF SATYAM
Satyam Computer Services Ltd. was an IT-services company based in Hyderabad, India. It was established as a Private Company in 1987 by B. Ramalinga Raju (Chairman and Founder of Satyam; henceforth called “Raju”) and his brother-in-law, D.V.S Raju. In 1991, the firm was incorporated as a Public Limited company. The company began its business with 20 employees and rapidly grew its business. Soon, the company had acquired 53000 employees and 500 companies as its customers, becoming a leading global consulting and IT services company, spanning 66 countries. Moreover, the company was also listed in various national and international stock exchanges such as National Stock Exchange, Bombay Stock Exchange, New York Stock Exchange and others.
Satyam won many awards for innovation, governance and corporate accountability. Satyam won the “Golden Peacock Award” for the best-governed company for two years in 2007 and 2009. In 2007, Mr Raju was awarded ‘Entrepreneur of the Year’ award by Ernst & Young. Satyam became an example of “India’s growing success”. Beginning in January 2003, Satyam’s stock price showed a 300% improvement after nearly five years. The firm generated enough corporate growth and shareholder value. Satyam became a “rising star” and a recognizable name in a global IT marketplace.
No one could have imagined that a growing and successful company as this would become the centrepiece of ‘massive’ accounting fraud. From being India’s IT “crown jewel” and the country’s “fourth-largest” company with high-profile customers, the outsourcing firm Satyam Computers has become embroiled in the nation’s biggest corporate scam in living memory.
On January 7, 2009, Mr Raju in a letter to Satyam Computers Limited Board of Directors admitted to fudging the accounts of Satyam.
Between 2003 and 2008, Raju over-declared revenues of the company by creating fictitious clients and also underreported liabilities on its balance sheet. Once he had over-declared revenues he automatically ended up over-declaring profits for many years. Numerous fictitious bank statements and fixed deposit receipts were created to invest these over-declared profits somewhere. Raju along with the company’s global head of internal audit used several different techniques to create numerous bank statements to advance the fraud. With the rapid advancement in the quality of colour printers, creating fictitious bank statements wouldn’t have been very difficult.
Raju confessed in his letter that the cash and bank balances were hugely overstated. The cash and bank balances of the company as on September 30, 2008(the last time the company declared quarterly results) were at Rs 5,313 crore. The actual number was at a much lower Rs 273 crore. Declaring fictitious profits for more than half a decade had led to a massive jump in the cash and bank balances of the company. But the balances, like the profits of the company, were fictitious.
The company used up whatever “real” cash it had at a very fast rate. By the start of 2009, the company’s actual cash and bank balance of the company would have been much lower than Rs 273 crore.
Here, one must question, why did Raju reveal that he had committed a fraud? Was it out of a guilty conscience? I guess not.
One of the theories that have been put forward is that only when Raju realized that the company wouldn’t have enough money to keep paying salaries to its employees did he decide to come out with the truth. Raju even confessed in his letter: “The company had to carry additional resources and assets to justify a higher level of operations…It was like riding a tiger, not knowing how to get off without being eaten.”
Another reason that is important to note here is that between 2003 and 2008, the stock market in India had a huge bull run. The economy was also booming. And when the financial system is flush with money, it is easy to keep a scam going. Raju would not have been caught up in this position if it hadn’t been for the recessionary forces that hit the Indian markets in 2008.
Due to the advent of the global financial crisis, it became difficult to raise money. Raju tried to fill up the huge gap in Satyam’s balance sheet by acquiring 2 real estate firms – Maytas Properties and Maytas Infra. Both the firms belonged to his family business (Maytas is the opposite of Satyam).
But by the end of 2008, an era of easy money had come to an end. Raju to tried to cover up Satyam’s fictitious money by using its fake cash and bank balances to buy out the real estate firms and thus have “real” assets on the balance sheet. As Raju disclosed in his letter: “ The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones…Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed.” But this deal fell through after the independent directors on the Satyam board raised issues about an IT company taking over real estate assets.
THE ROLE OF AUDITORS OF SATYAM (PricewaterhouseCoopers)
The scandal continued for many years and involved both the manipulation of balance sheets and income statements. Whenever Satyam needed more income, it simply created “fictitious” sources and it did so numerous times, without the auditors ever discovering the fraud.
It is not tough to understand that PwC was involved in the scam because PwC, who audited the company’s accounts for nearly 9 years, could not uncover the fraud, whereas Merril Lynch discovered the fraud as part of its due diligence in merely 10 days.
So, what happened to PwC? Though PwC failed in its job nothing happened to PwC as compared to the gross negligence and involvement in the fraud.
Ultimately, the Raju brothers and auditors were sentenced to prison and were charged a huge sum as a penalty. After the fraud came to light, the company was auctioned and taken over by Tech Mahindra. The scam highlighted the importance of securities laws and corporate governance in emerging markets like India. Following which, the Government and SEBI took multiple steps to tighten the grip on such perpetrators in the future.
The other article in this series: