Case Study Three: Satyam Computer Services – The Enron of India

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? 

Answer :

A)Raju disclosed in early January 2009 that Satyam's sales and profit figures had been exaggerated over the past few years. The disclosure deepened more questions about the company's weak corporate governance practices. The case outlines the structure of Satyam's corporate governance, its code of ethics, and the functions and obligations of various board committees, whistleblower policies, etc. It highlights the role played by Satyam's independent directors in approving the Maytas agreement and addresses their constraints. In one of the biggest frauds in the corporate history of India, B. On January 7, Ramalinga Raju, founder and CEO of India's fourth-largest IT services firm, Satyam Computers, revealed that his company had falsified its accounts for years, overstating sales and inflating profits by $1 billion.

The trend of outsourcing to India may have another potential effect, as India's IT firms manage confidential financial details for some of the largest companies in the world. However, the most important questions about corporate governance in India will be posed, and whether other businesses could pursue Satyam's Raju in exposing skeletons in their own closets.A professor of management at Wharton who has researched corporate governance in emerging economies suggests that Indian business has an advantage in arguing that the issue is confined to Satyam and is not systemic. This works to the good of the nation because, instead of India, it deflects the responsibility for such events to the way governance works in emerging economies. In response to Satyam, what regulators in India need to do is find out quickly if other companies have been doing similar things. The right approach is to deal with the topic as soon as possible and defuse it.

Corporate governance refers to the collection of structures, values, and procedures that regulate a company. They provide input on how the business should be handled or operated in such a way that it can achieve its goals and objectives in a way that contributes to the company's value and is also advantageous in the long run for all stakeholders. The fact that Satyam listed its ADRs in the United States but still had such severe governance problems makes this case especially troubling. Raju admitted that Rs. 7,136 crore in non-existent cash and bank balances, accumulated interest and errors were included in the Satyam Balance Sheet. It had also inflated Rs. 588 crores to Rs. 2,700 crores in its 2008 second quarter sales, and real operating margins were less than a tenth of the stated Rs. 649 crore. By deliberate omissions, insufficient disclosures and by willful misapplication of accounting rules, numerous accounting and financial statements were fabricated and forged. Assets were overestimated because the bank showed actual, fake deposits and interest in them as well. It is not just an indication of bad governance, but also of unethical governance by manipulating data and accounts in collaboration with external auditors to (or "intend to") siphon off public funds from the business.

It is noted that what makes the case of Satyam unique is that its ADRs have been listed on the NYSE. In developing markets, businesses have difficulty raising capital at low costs. The literature shows that in the United States, where they support a higher degree of governance in order to collect capital at a lower cost, they want to list that explanation..Corporate governance must also be in accordance with the amended Companies Act and other orders since the Satyam scandal. The position of corrupt external auditors has also been revealed by this controversy and has forced the Government to provide for controls and balances.

B)

Several people possibly supported or kept silent about Mr. Raju in perpetrating the fraud. Furthermore, the former Board of Directors and external auditors bear some blame for failing to conduct their supervisory duties to professional standards. In fraud of this nature, Raju was either helped by many people or kept silent about the fraud. This will include the CFO of the company, the Chief Auditor, and other accounting and internal audit workers, for instance. Besides, in monitoring the financial statements of the company, the board of directors and the external auditors were also partly responsible for failing to practice sufficient due care. Below parties are also responsible and assisted Raju in Satyam fraud:

PWC Auditors

•They fail to exercise proper due care in overseeing Satyam's financial report when performing audits.

•By certifying the false financial statements, PWC provided Satyam with a neat audit opinion.

Satyam's top management

-The director of finance or accountants should be aware of the overall financial performance of the business.

Satyam Board Members

-The members of the board are the ones with the ultimate power to determine the business.

-They did not expose the problems to the outside parties.

•Related parties

•Bankers got their own copy of the annual report of Satyam every year.

•When they saw enormous profits and huge reserves, however, they did not ask and speak out when they found that there was no money in the business accounts.