question archive Satyam Computer Services Ltd was founded in 1987 by B

Satyam Computer Services Ltd was founded in 1987 by B

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Satyam Computer Services Ltd was founded in 1987 by B. Ramalinga Raju. By 2009, it was India’s fourth-largest information technology company with 53,000 employees, operating in sixty-six countries. It provided a variety of services, including computer systems, customer services, and the outsourcing of accounting and finance. It had 185 of the Fortune 500 as customers and acted as a back office to such companies as Nestle, General Motors and General Electric.

On January 7, 2009, Raju sent a letter of resignation to the Board of Directors and to SEBI (the Securities and Exchange Board of India). In his letter, he outlined how he systematically falsified Satyam’s financial reports. The following was found respect to the September 2008 quarterly financial statements:

? The reported cash and bank balance of 5.36 billion rupees was overstated by 5.04 billion rupees (approximately $1 billion).

? The accrued interest of 376 million rupees was fictitious.

? There was an unrecorded liability of 1.2 billion rupees that Raju had with the company.

? The quarterly revenue of 2.7 billion rupee was overstated by 22%, and the operating margin of 649 million rupees was overstated by 91%.

He revealed in his letter that what started as small discrepancies grew and over time, reached unimaginable proportions. “It was like riding a tiger, not knowing how to get off without being eaten.” He said that he alone had perpetrated the fraud and that no one on the Board of Directors knew about it. Raju concluded his letter by apologizing for what he had done and announced that he was prepared to accept the legal consequences of his actions.

In his resignation letter, Raju said that neither he nor any of his family had profited personally form the scam; none had sold their shares or taken any money out of the company. However, it was later revealed that 13,000 of the 53,000 Satyam employees were fictitious and that Raju was siphoning off approximately $4 million monthly from the company. Furthermore, it is alleged that Raju improperly transferred large numbers of Satyam shares to his mother and younger brother.

After the announcement of Raju’s resignation and the details of the fraud, the price of Satyam’s stock fell 78%, bringing down the Bombay stock exchange, the Sensex index, by 7.3%. In April 2010, the company was sold to Tech Mahindra and renamed Mahindra Satyam.

Following the collapse of the company, people began to ask questions about the role of Satyam’s auditor, Price Waterhouse (PW), the Indian branch of Pricewaterhouse Coopers (PwC). People were wondering how PW could not detect, for example, that cash was overstated by 94%. The Indian exchange commission, SEBI, began an investigation into PW; PW had provided Satyam with clean audit opinions. The accusation is that by certifying the false financial statements as true, Price Waterhouse had misled investors.

3 Brooks. L., Dunn. P., Business and Professional Ethics for Directors, Executives & Accountants, p. 318-319, 8th Ed., Cengage Learning (2016). Page 8 of 8

(a) What, in your view, are India’s most significant corporate governance failures as shown in the Satyam Computer scandal? 

(b) Raju did not commit this fraud on his own. What types of individuals probably assisted him either actively or by keeping quiet about what they knew he was doing? 

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