Satyam Scandal A case study PDF

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A case analysis, it provides details of the satyam incident...

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CASIRJ

Volume 5 Issue 8 [Year - 2014]

ISSN 2319 – 9202

SATYAM SCANDAL (A case study) Author- chanchal Designation- Assistant Professor Email: [email protected]

ABSTRACT :- World is not only just going through economic crisis but also ethical crisis with the Corporate frauds, Accounting scandals, Mismanagement, Bribes and many more. From Enron, WorldCom and Satyam, it appears that corporate accounting fraud is a major problem that is increasing both in its frequency and severity. Research evidence has shown that growing number of frauds have undermined the integrity of financial reports, contributed to substantial economic losses, and eroded investors confidence regarding the usefulness and reliability of financial statements. The increasing rate of white-collar crimes demands stiff penalties, exemplary punishments, and effective enforcement of law with the right spirit. The fraud committed by the founders of Satyam in 2009, is a testament to the fact ―the science of conduct is swayed in large by human greed, ambition, and hunger for power, money, fame and glory. Unlike Enron, which sank due to ―agency problem, Satyam was brought to its knee due to tunneling effect. The Satyam scandal highlights the importance of securities laws and CG in emerging markets. Indeed, Satyam fraud spurred the government of India to tighten the CG norms to prevent recurrence of similar frauds in future. Thus, major financial reporting frauds need to be studied for lessons-learned and strategies-to-follow to reduce the incidents of such frauds in the future. PAPER TYPE-Article

INTRODUCTION: Satyam is the fourth largest IT Company in India. The CEO of the company Ramlinga Raju has made a scam of around $2 billion. There has been a lot of controversy regarding the misuse of the post by the CEO of the company. The fake number of jobs which was shown by the CEO was an abuse of power and it was a clear violation of the prevailing laws in India. This gives the impression that in India the power and position is what matters and the people in the top position make a clear violation of the rights provided to them. International Research Journal of Commerce Arts and Science http://www.casirj.com

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This scam has seriously affected the corporate bodies in India. The role of an incorporated company is to satisfy desires of investors, and to channelize their investment. But most of the time entrepreneurs play with money of the investors. There are laws to safeguards investors interest but the Satyam scam has raised the question on the fundamental role of the government and corporate governance. On 16th December, 2008 Satyam board got the approval for acquisition of Maya’s Infrastructure and Maya’s Properties (companies owned by his relatives). However the company could not go on with the investment plan due to resistance by the investors. Between 25th and 28th December, 2008, 3 independent directors of Satyam board resigned and later on Mr. Raju confessed to fraud in the form of misappropriation in the balance sheet of the company.

BACKGROUND :In 1987, B. Ramalinga Raju ("Mr. Raju") formed Satyam in Hyderabad, India with fewer than 20 employees. Ironically, Satyam means "truth" in the ancient Indian language Sanskrit. The company specializes in information technology, business services, computer software, and is a leading outsourcing company in India. Satyam immediately experienced success after it issued an initial public offering on the Bombay Stock Exchange in 1991. Established on 24th June 1987 by B. Ramalinga Raju and his brother-in-law, D. V. S. Raju, Satyam Computer Services Limited was incorporated in 1991 as a public limited company and also got its first Fortune 500 client, Deere and Co. In a short span of time, it became a leading global consulting and IT services company spanning 55 countries before nemesis caught up with it. It was one of the few Indian IT services companies listed on the New York Stock Exchange. It was ranked as India‘s fourth largest software exporter, after TCS, Infosys and Wipro. The 1990s were an era of considerable growth for the company. It also caused the formation of a number of subsidiary companies such as Satyam Renaissance, Satyam Info way, Satyam Spark Solutions and Satyam Enterprise Solutions; Satyam Info way (Sify) incidentally became the first Indian internet company to be listed on the NASDAQ. Satyam acquired a lot of businesses and expanded its operations to many countries and signed MoUs with many multinational companies in the new millennium. Satyam added feather after feather to its cap by becoming the first company in the world to start a programme known as the Customer-Oriented Global Organization training in May 2000, signing contracts with numerous international players such as Microsoft, Emirates, TRW, i2 International Research Journal of Commerce Arts and Science http://www.casirj.com

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Volume 5 Issue 8 [Year - 2014]

ISSN 2319 – 9202

Technologies and Ford, claiming the privilege of being the first ISO 9001:2001 company in the world certified by BVQI, and earning the name as a global company by opening offices in Singapore, Dubai and Sydney. In 2005, it acquired a 100 per cent stake in Singapore-based Knowledge Dynamix and 75 per cent stake in London based Citisoft Plc. Satyam was a company on the fast track to success and has justifiably earned for itself a name for consulting in the area of strategy right through to implementing IT solutions for customers. At the peak of its business, Satyam employed nearly 50,000 employees and operated in 67 countries. Satyam was as an example of India's growing success. Satyam won numerous awards for innovation, governance, and corporate accountability. In 2007, Ernst & Young awarded Mr. Raju 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 corporate governance and accountability. In September 2008, the World Council for Corporate Governance awarded Satyam with the "Global Peacock Award" for global excellence in corporate accountability. Unfortunately, less than five months after winning the Global Peacock Award, Satyam became the centerpiece of a massive accounting fraud.

PROBLEM BEGIN :Problems in Satyam begin when on December 16th, 2008; its chairman Mr. Ramalinga Raju, in a surprise move announced a $1.6 billion bid for two Maytas companies i.e. Maytas Infrastructure Ltd and Maytas Properties Ltd saying he wanted to deploy the cash available for the benefit of investors. The two companies have been promoted and controlled by Raju‘s family. The thumbs down given by investors and the market forced him to retreat within 12 hours. Share prices plunges by 55% on concerns about Sat yam’s corporate governance. In a surprise move, the World Bank announced on December 23, 2008 that Satyam has been barred from business with World Bank for eight years for providing Bank staff with ―improper benefits‖ and charged with data theft and bribing the staff. Share prices fell another 14% to the lowest in over 4 years. The one independent director since 1991, US academician Mangalam Srinivasan, announced resignation followed by the resignation of three more independent directors on December 28 i.e. Vinod K Dham (famously known as father of the Pentium and an ex Intel employee), M Rammohan Rao (Dean of the renowned Indian School of Business) and Krishna Palepu (professor at Harvard Business School). At last, on January 7, 2009, B. Ramalinga Raju International Research Journal of Commerce Arts and Science http://www.casirj.com

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announced confession of over Rs. 7800 crore financial fraud and he resigned as chairman of Satyam. He revealed in his letter that his attempt to buy Maytas companies was his last attempt to ―fill fictitious assets with real ones‖. He admitted in his letter, it was like riding a tiger without knowing how to get off without being eaten. Satyam’s promoters, two brothers B Ramalinga Raju and B Rama Raju were arrested by the State of Andhra Pradesh police and the Central government took control of the tainted company. The Raju brothers were booked for criminal breach of trust, cheating, criminal conspiracy and forgery under the Indian Penal Code. The Central Government reconstituted Satyam's board that included three-members, HDFC Chairman, Deepak Parekh, Ex Nasscom chairman and IT expert, Kiran Karnik and former SEBI member C Achuthan. The Central Government added three more directors to the reconstituted Board i.e., CII chief mentor Tarun Das, former president of the Institute for Chartered Accountants (ICAI) TN Manoharan and LIC's S Balakrishnan. A week after Satyam founder B Ramalinga Raju’s scandalous confession, Satyam’s auditors Price Waterhouse finally admitted that its audit report was wrong as it was based on wrong financial statements provided by the Satyam’s management. On January 22, 2009, Satyam’s CFO Srinivas Vadlamani confessed to having inflated the number of employees by 10,000. He told CID officials interrogating him that this helped in drawing around Rs 20 crore per month from the related but fictitious salary accounts. Andhra Pradesh State CB-CID raided the house of Suryanarayana Raju, the youngest sibling of Ramalinga Raju who owned 4.3 per cent in Maytas Infra, and recovered 112 sale deeds of different land purchases and development agreements. Senior partners S Gopalakrishnan and Srinivas Talluri of the auditing firm PricewaterhouseCoopers (PwC) were arrested for their alleged role in the Satyam scandal. The State‘s CID police booked them, on charges of fraud (Section 420 of the IPC) and criminal conspiracy (120B).

HOW THE FRAUD WAS UNCOVERED? Responsible Parties:- Mr. Raju was the primary individual responsible for the fraud. Indian authorities accused Mr. Raju, and subsidiary players such as the CFO, a managing director, the company's global head of internal audit, and Mr. Raju's brother, with responsibility for the fraud and filed charges against them. Additionally, Satyam's auditors and Board of Directors bear some responsibility for the fraud because of their failure to detect it. Finally, the ownership International Research Journal of Commerce Arts and Science http://www.casirj.com

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structure of Indian businesses contributed to the Satyam scandal. a.) Mr. Raju and Company Insiders' Role- Mr. Raju claimed that he overstated assets on Satyam's balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that the company claimed to own was nonexistent. Satyam also underreported liabilities on its balance sheet. Satyam overstated income nearly every quarter over the course of several years in order to meet analyst expectations. Mr. Raju created numerous bank statements to advance the fraud. Mr. Raju falsified the bank accounts to inflate the balance sheet with balances that did not exist. He inflated the income statement by claiming interest income from the fake bank accounts. Mr. Raju also revealed that he created 6,000 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 created fake customer identities and generated fake invoices against their names to inflate revenue. The global head of internal audit also forged board resolutions and illegally obtained loans for the company. It also appeared that the cash that the company raised through American Depository Receipts ("ADRs") in the United States never made it to the balance sheets. Mr. Raju initially asserted that he did not divert any of the money to his personal accounts and that the company was not as profitable as it had reported; however, during later interrogations, Mr. Raju revealed that he had diverted a large amount of cash to other firms that he owned and that he had been doing this since 2004. Mr. Raju also initially asserted that he acted alone in perpetrating the fraud. However, as noted above, Indian authorities also charged Mr. Raju's brother, the company's CFO, the company's global head of internal audit and one of the company's managing directors. b.)Auditors Role Global auditing firm Price Waterhouse Coopers ("PWC") audited Satyam's books from June 2000 until the discovery of the fraud. Several commentators criticized PWC harshly for failing to detect the fraud. PWC signed Satyam's financial statements and was responsible for the numbers under Indian law. It appears that the auditors did not independently verify with the banks in which Satyam claimed to have deposits. Additionally, the fraud went on for a number of years and involved both the manipulation of balance sheets and income statements. Whenever Satyam needed more income to meet analyst estimates, it simply created fictitious sources and it did so numerous times without the auditors ever discovering the fraud. Suspiciously, Satyam also paid PWC twice what other firms would charge for the audit, which raises questions about whether International Research Journal of Commerce Arts and Science http://www.casirj.com

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PWC was complicit in the fraud. Furthermore, PWC audited the company for nearly 9 years and did not uncover the fraud, whereas Merrill Lynch discovered the fraud as part of its due diligence in merely 10 days. The audit committee of Satyam failed its duty to act on a whistle blower’s expose. As per the investigations of SFIO, on 18 December 2008, two days after the Satyam board met and decided to acquire two group firms Maytas Infra Ltd and Maytas Properties Ltd independent director Krishna Palepu received an anonymous email by an alias, Joseph Abraham. That email exposed the fraud. Palepu forwarded the email to another independent director, M. Rammmohan Rao, Chairman of the Audit Committee forwarded that email to S. Gopalkrishnan, partner at Price Waterhouse, the company‘s auditors. Gopalkrishnan told Rao over phone that there was no truth to the allegations and assured him of a detailed reply in a proposed presentation before the Audit Committee on 29 December. That meeting did not take place. A new date 10 January was fixed. c. Board of Directors Role Satyam's Board of Directors consisted of nine members. Five members of the Board were independent as required by Indian listing standards. In its regulatory filings with the SEC, Saytam revealed that it did not have a financial expert on the board during 2008. Further, concerns later developed surrounding the Board of Directors lack of independence. The Board contained several prominent figures in the business world, a fact that likely contributed to the lack of scrutiny that Satyam received. Members of the Board included Krishna Palepu who is a Harvard Professor and corporate governance expert, Rommohan Rao, the Dean of the Indian School of Business, and Vinod Dham, co-inventor of the Pentium Processor. The Board first came under fire on December 16, 2008 when it approved Satyam's purchase of real estate companies in which Mr. Raju owned a large stake. The Board rescinded the approval after shareholders led a revolt of the deal. Krishna Palepu, Rommohan Rao, and Vinod Dham all resigned from the Board within two days of the rescission of the transaction. The botched transaction provided the investors with the impression that the Board was not actively monitoring Satyam. Furthermore, the Board should have caught some of the same red flags that the auditor, PWC, missed. Additionally, the Board of Directors should have been concerned with the knowledge that Mr. Raju decreased his holdings of Satyam significantly over the three years leading up the disclosure of the fraud. Mr. Raju's holdings fell from 15.67 percent in 2005-2006 to 2.3 percent in 2009. International Research Journal of Commerce Arts and Science http://www.casirj.com

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Volume 5 Issue 8 [Year - 2014]

ISSN 2319 – 9202

VICTIMS OF FRAUD Employees of Satyam spent anxious moments and sleepless nights as they faced non‐payment of salaries, project cancellations, layoffs and equally bleak prospects of outside employment. They were stranded in many ways – morally, financially, legally, and socially. Clients of Satyam expressed loss of trust and reviewed their contracts preferring to go with other competitors. Cisco, Telstra and World Bank cancelled contracts with Satyam. ―Customers were shocked and worried about the project continuity, confidentiality, and cost overrun. Shareholders lost their valuable investments and there was doubt about revival of India as a preferred investment destination. The VC and MD of Mahindra, in a statement, said that the development had "resulted in incalculable and unjustifiable damage to Brand India and Brand IT in particular." Bankers were concerned about recovery of financial and nonfinancial exposure and recalled facilities. Indian Government was worried about its image of the Nation & IT Sector affecting faith to invest or to do business in the country.

SATYAM TIMELINE June 24, 1987: Satyam Computers is launched in Hyderabad 1991: Debuts in Bombay Stock Exchange with an IPO over-subscribed 17 times. 2001: Gets listed on NYSE: Revenue crosses $1 billion. 2008: Revenue crosses $2 billion. December 16, 2008: Satyam Computers announces buying of a 100 per cent stake in two companies owned by the Chairman Ramalinga Raju‘s sons–Maytas Properties and Maytas Infra. The proposed $1.6 billion deal is aborted seven-hours later due to a revolt by investors, who oppose the takeover. But Satyam shares plunge 55% in trading on the New York Stock Exchange. December 23: The World Bank bars Satyam from doing business with the bank‘s direct contracts for a period of 8 years in one of the most severe penalties by a client against an Indian outsourcing company. In a statement, the bank says: ―Satyam was declared ineligible for contracts for providing improper benefits to Bank staff and for failing to maintain documentation to support fees charged for its subcontractors. International Research Journal of Commerce Arts and Science http://www.casirj.com

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December 25: Satyam demands an apology and a full explanation from the World Bank for the statements, which damaged investor confidence, according to the outsourcer. Interestingly, Satyam does not question the company being barred from contracts, or ask for the revocation of the bar, but instead objects to statements made by bank representatives. It also does not address the charges under which the World Bank said it was making Satyam ineligible for future contracts. December 26: Mangalam Srinivasan, an independent director at Satyam, resigns following the World Bank’s critical statements. December 28: Three more directors quit. Satyam postpones a board meeting, where it is expected to announce a management shakeup, from December 29 to January 10. The move aims to give the group more time to mull options beyond just a possible share buyback. Satyam also appoints Merrill Lynch to review strategic options to enhance shareholder value. January 2, 2009: Promoters’stake falls from 8.64% to 5.13% as institutions with whom the stake was pledged, dump the shares. January 6, 2009: Promoters’stake falls to 3.6%. January 7, 2009: Ramalinga Raju resigns, admitting that the company inflated its financial results. He says the company’s cash and bank shown in balance sheet have been inflated and fudged to the tune of INR 50,400 million. Other Indian outsourcers rush to assure credibility to clients and investors. The Indian IT industry body, National Association of Software and Service Companies, jumps to defend the reputat...