Question

1) Sathyam Computer Scandal in 2009

a) Give a brief overview of the company?

b) What were the sources, schemes, and motivation of the financial statement fraud?

c) What were the factors that contributed to the fraud?

d) What was the form of Financial Statement Fraud?

e) How was the fraud detected and were there Red Flags?

f) What was the outcome of the fraud and what investigative methods were used and how were the findings communicated?

g) How could the financial statement fraud have been prevented?

Answer 1

Satyam Computers was founded in 1987. It converted into Public Ltd Co. in 1992. The company offers consulting and information technology services spanning various sectors. Mahindra Satyam is overall ranked #153 by Fortune India 500 in 2011. Satyam's network covers 66 countries and 53000 employees across six continents. It is listed in BSE, NSE, NYSE.

He is Ramalinga Raju born on September 16, 1954. A traditional agricultural family of the KSHATRIYA (RAJU) Community of Andhra Pradesh. He founded Satyam Computers and was its Chairman until January 7, 2009 when he resigned from the Satyam board after admitting to corporate fraud.

Satyam Computers Pvt. Ltd. Born. June - First Fortune 500 Client. August - Converted into Public Ltd. Co. The Big Break- Allies with Dun and Bradstreet Corp. Declared one of the 100 most pioneering technology companies by World Economic Forum.

ACHIEVEMENTS 2007:- BECOMES THE 1ST ASIAN COMPANY TO FEATURES IN THE TRAINING MAGAZINE’S LIST OF TOP 125 COMPANIES FOR LEARNING, 2008:-WON CORPORATE GOVERNANCE (INCLUDING GOLDEN GLOBAL AWARD TWICE) Top-50 Marketers Award, under the Resurgent Marketers category for 2010 by Pitch India 2011:-Mahindra Satyam BPO honored as “India’s Most Customer-Responsive BPO Company” AGC Networks The Economic Times, Ernst & Young and Nielsen etc.,

FLOATED TWO OTHER COMPANIES FOR THEIR OWN PURPOSE . WITHOUT TAKING PERMISSION OF THE SHAREHOLDERS. FAILED TO REPAY THE LOANS. TRANSFER OF MONEY.

THE BALANCE SHEET AS OF SEPTEMBER 30, 2008 SHOWED- INFLATED (NON-EXISTENT) CASH AND BANK BALANCES OF RS. 5040 CRORE (AS AGAINST RS. 5312 CORE REFLECTED IN THE BOOKS) AN ACCRUED INTEREST OF RS. 376 CRORE WHICH IS NON- EXISTENT AN UNDERSTATED LIABILITY OF RS.1230 CRORE ON ACCOUNT OF FUNDS ARRANGED BY BR RAJU.

The chairman manipulated the books by non-inclusion of certain receipts and payments, resulting in an overall misstatement to the tune of Rs 12,318 crore, shows an analysis of findings of Sebi’s probe. As many as 7,561 fake bills which were even detected in the company’s internal audit reports and were furnished by one single executive. Merely through these fake invoices, the company’s revenue got over-stated by Rs 4,783 crore over a period of 5-6 years. The probe itself continued for almost six years and found that fictitious invoices were created to show fake debtors on the Satyam books to the tune of up to Rs 500 crore.

The case, which is also called the Enron of India, dates back to 2009. Six years ago, Raju wrote a letter to the Securities and Exchange Board of India (SEBI) and his company’s shareholders, admitting that he had manipulated the company’s earnings, and fooled investors. Nearly $1 billion—or 94% of the cash—on the books was fictitious.

The problem with overstating performance is that if you want to keep growth rate looking good, the absolute extent of the exaggeration has to keep getting bigger. To take this particular example, in 2003-04 Satyam reported net sales of Rs 2,542 cr. In the four years since then, that figure was reported to have grown by 36%, 34%, 40% and 31% respectively to reach Rs 8,473 cr in 2007-08. Now, if a Rs 2,500-cr company wants to show 35% growth when it has actually grown by only say 25%, the extent of overstatement would be only Rs 250 cr (10% of Rs 2,500 cr). But if a Rs 8,500-cr company wants to do the same thing, it will have to fudge the figures by Rs 850 cr. It is also important to realise that overstating

Maytas, a real estate firm owned by Raju’s family, was proposed to be bought by Satyam for about Rs 6,400 cr and turned into a whollyowned subsidiary of Satyam. Raju has pointed out that this would have helped clean up the Satyam mess. Since Satyam would have to pay Maytas owners (the Raju family) for its shares, on paper Rs 6,400 cr would have moved out of Satyam’s books into the Raju family’s hands, while Satyam would have gained Maytas shares. This could have been an excellent way of regularising the pumping up of numbers. Here is how. One, the payment would have actually become just a formality with the Raju family technically receiving Rs 6,400 cr. But, with Satyam’s reserves and surplus having already been depleted (or, conversely, inflated) the Raju family would have got much less. But, obviously, they would not have complained. Two, this would have then given the company a legitimate opportunity – through an acquisition — to bring down the reserves to its actual level without admitting that the books had been cooked. And, nobody would have been any the wiser since only the Raju family and their close confidantes would know about this. Thus, while Satyam’s reserves would apparently have been used up to pay for the acquisition, in reality the non-existent reserves would be passed on to the Raju family. And Maytas would have found a new home. The furore over what most people perceived as a blatant overvaluation of Maytas prevented the proposed merger going through, thus closing out an opportunity for Raju to paper over the bungling in Satyam.

by 10% can overstate profit by a lot more. For instance, if actual revenues are Rs 2,000 cr and actual net profits Rs 200 cr, an addition of Rs 500 cr to revenues without changing anything else would also add Rs 500 cr to net profit. While this would mean exaggerating revenues by only 25%, the profit figure would get overstated by 250% (500 cr is twoand-a-half times 200 cr).

Sources say that, over the last ten years, the Raju brother had run over 374 companies. Out of these, about 158 odd ones, are directly under the scanner. 150 of these companies were involved in purchase of land whereas eight companies were involved in investments.

SFIO sources say that according to its findings, the Rajus were also selling their shares through four out of these eight companies. They did not want to sell the shares directly in the market because they thought that would impact the sentiment negatively and therefore they were selling their shares through these four investment companies.

As far as the companies involved in purchase of land are concerned, the money that was required was again being routed through these eight investment companies.

Another name which has emerged according to sources in the report is that Surya Narayana Raju, Ramalinga Raju’s brother. The SFIO report says he helped and abetted to the crime.

According to sources in the Serious Fraud Investigation Office (SFIO), the agency probing into the Satyam scam, the IT company’s offshore exports were inflated by over Rs 4500 crore over a period of seven years.

Further, foreign currency of Rs 1,940 crore from exports over six years was not remitted to India. Sources say the company inflated books by Rs 27,167 crore between financial year 2001 and September 2008. The inflation was done by falsifying cash, bank balances and fictitious fixed deposits (FDs). Adding to this, inflation was done by understating liabilities and overstating debtors.

In essence, the company had been cooking its books to show higher revenues and lower liabilities, thereby grossly overstating the profits of the firm as well as its reserves.