With an increasing rate of corporate
accounting frauds these days, and the names such as Enron, Worldcom and Satyam
at the top the corporate ethics and governance is really a matter of concern.
The increasing rate of financial frauds demands for a more strong and effective
system which can put forward more stiff penalties, exemplary punishment and an
effective enforcement of the laws with a good spirit. These cases bring out the
importance and need for corporate ethics and governance at a wider level.
Looking ahead to one of the top
corporate accounting frauds we will be talking about the Satyam Scandal also
knows as “INDIA’S ENRON”.
SATYAM AND ITS SILENT MOVE
What business demands? Whatever, it
may demand but not forgery of this level for sure.
Satyam, a word that means “truth” in Sankrit.
Satyam Computer Services Ltd. was founded by B.Ramalinga Raju in 1987. The
company offered a variety of consulting and information technology services
spanning various industry sectors.Satyam had offices in around 60 countries
in six continents. With a large group of IT Geeks Company had been running on
the track of grand success. In 2000, Satyam
Computer Services claimed to be the fourth largest provider of information
technology services in India, based on the amount of export revenues generated.Satyam Computer Services Limited was a
growing power in the Indian outsourced IT-services sector. Began with 20
employees the company had travelled a long path and grew rapidly as a global
business. It offered IT and business process outsourcing services spanning
various sectors. Satyam was setting an example of India’s growing success.
Satyam won a number of awards for innovation, governance, and corporate
accountability.
In 2007, Ernst & Young awarded Mr. Raj with the ‘Entrepreneur of the Year’ award.
On April 14, 2008, Satyam won awards from
MZ Consult’s for being a ‘leader in India in CG and accountability’.
In September 2008, the World Council
for Corporate Governance awarded Satyam with the ‘Global Peacock Award’ for
global excellence in corporate accountability.
Everything going really
fine where did the need for the greed came in?
Unfortunately, less than five months
after winning the Global Peacock Award, Satyam became the masterpiece of a
massive corporate accounting fraud.
The date was 7th January 2009 less than five months after winning the Global Peacock Award when the company’s chairman Ramalinga Raju confessed that Satyam's accounts had been falsified notifying board members and the Securities and Exchange Board of India (SEBI) & resigned from his seat Satyam became the masterpiece of a massive accounting fraud.
How
did the scam being handled and how did it operated for such a long run? Mr.
Raju along with the company’s global head of internal audit used a number of
different techniques to perpetrate the fraud. Using his own personal computer,
Mr. Raju created numerous bank statements to advance the fraud. To inflate the
balance sheet with balances that did not exists Mr. Raju falsified the bank
accounts. The income statements were inflated by claiming interest income from the
fake bank accounts. Mr. Raju revealed that he created 6000 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 going with Mr Raju’s hand in
hand created fake customer identities and generated fake invoices against their
names to inflate revenue; he also forged board resolutions and illegally obtained
loans for the company. The cash raised by the company through American
Depository Receipts in the United States never made it to the balance sheets.
According to CBI, the Indian crime
investigation agency, the fraud activity held its roots back in April 1999,
when the company embarked on a road to double-digit annual growth. As of
December 2008, Satyam had a total market capitalization of $3.2 billion
dollars.
Satyam
planned to acquire a 51% stake in Maytas Infrastructure Limited, a leading
infrastructure development, construction and project Management Company with
the Raju’s 37% stake. The total turnover was $350 million and a net profit of
$20 million. Raju’s also had a 35% share in Maytas Properties, another
real-estate investment firm. Satyam revenues exceeded $1 billion in 2006.
In
April, 2008 Satyam became the first Indian company to publish IFRS audited
financials. On December 16, 2008, Raju’s proposal to buy the stake in Maytas
Infrastructure and all of Maytas Properties, which were owned by family members
of Satyam’s Chairman, Ramalinga Raju, as fully owned subsidiary for $1.6
billion was given a green signal by the Satyam board, including its five
independent directors. Without the shareholders approval, the directors went
ahead with the management’s decision of acquisition. However, after investors
sold Satyam’s stock and threatened action against the management the decision
was called back 12 hours later. This was followed by the law-suits filed in the
US contesting Maytas deal. Immediately, banned from conducting business for 8
years due to inappropriate payments to staff and inability to provide information
sought on invoices by the World Bank. Four independent directors quit the
Satyam board and SEBI ordered promoters to disclose pledged shares to stock
exchange.
Soon
after finding irregularities, Investment bank DSP Merrill Lynch which was appointed
by Satyam to look for a partner or buyer for the company, ultimately blew the
whistle and terminated its engagement with the company soon after it found
financial irregularities.
On
7 January 2009, Saytam’s Chairman, Ramalinga Raju, resigned after notifying
board members and the Securities and Exchange Board of India (SEBI) that
Satyam’s accounts had been falsified.
Raju
confessed that Satyam’s balance sheet of September 30, 2008, contained the
following irregularities:
1.
He faked
figures to the extent of Rs. 5040 crore of non-existent cash and bank balances
as against Rs. 5361 crore in the books
2.
accrued interest of Rs. 376 crore (non-existent)
3.
understated liability of Rs. 1230 crore on
account of funds raised by Raju,
4.
An overstated debtor’s position of Rs. 490 crore.
He accepted that Satyam had reported revenue of Rs. 2700
crore and an operating margin of Rs. 649 crore, while the actual revenue was
Rs. 2112 crore and the margin was Rs. 61 crore”.
Raju
claimed in the same letter that “neither he nor the managing director had
benefited financially from the inflated revenues, and none of the board members
had any knowledge of the situation in which the company was placed”. The fraud
took place to divert company funds into real-estate investment, keep high
earnings per share, raise executive compensation, and make huge profits by
selling stake at inflated price. The gap in the balance sheet had arisen purely
on account of inflated profits over a period that lasted several years starting
in April 1999. “What accounted as a marginal gap between actual operating
profit and the one reflected in the books of accounts continued to grow over
the years. This gap reached unmanageable proportions as company operations grew
significantly”, Ragu explained in his letter to the board and shareholders. He
went on to explain, “Every attempt to eliminate the gap failed, and the aborted
Maytas acquisition deal was the last attempt to fill the fictitious assets with
real ones. Raju, who showed “artificial cash” on his books, had planned to use
this “non-existent” cash to acquire the two Maytas companies. As part of their
“tunnelling” strategy, holdings in company fall from 25.6% in March 2001 to
8.74% in March 2008. Furthermore, as the promoters held a very small percentage
of equity (mere 2.18%) on December 2008, the concern was that poor performance
would result in a takeover bid, thereby exposing the gap. The aborted Maytas
acquisition deal was the final, desperate effort to cover up the accounting
fraud by bringing some real assets into the business. The reason why Ramalinga
Raju claims that he did it was because every year he was fudging revenue
figures and since expenditure figures could not be fudged so easily, the gap
between “actual” profit and “book” profit got widened every year. He planned to
buy Maytas Infrastructure and Maytas Properties in order to close this gap. If
it had gone the way it was planned the “fictitious” profits could have been absorbed
through a “self-dealing” process.
The
auditors, bankers, and SEBI, the market watchdog, were all blamed for their
role in the accounting fraud.
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