Keen to project a perpetually rosy picture of the Satyam to the investors, employees and analysts, Mr. Raju (CEO and Chairman) manipulated the account books so that it appeared to be a far bigger enterprise than it actually was. The Satyam fraud has shattered the dreams of different categories of investors, shocked the government and regulators alike, and led to questioning of the accounting practices of statutory auditors and CG norms in India. An attempt has been made to provide an explanation for various “intriguing” questions about Satyam scam, such as: What was the need to commit a fraud on such a large scale? How Raju managed to cook-up books? What was Raju’s real modus-operandi to manipulate the accounts for eight years? Why was Raju forced to blow his own whistle? Why was not there a stricter punitive action against the auditors of Satyam PwC?, etc.” Now, after thorough investigations done by the CBI and SEBI, they have unveiled the methodology by which Satyam fraud was engineered. Finally, we recommend that “CA practices should be considered as a serious crime, and as such, accounting bodies, law courts and other regulatory authorities in India need to adopt very strict punitive measures to stop such unethical CA practices”.
Creative Accounting (henceforth, CA) involves the “manipulation” of company financial records towards a “pre-determined” target. Unfortunately, few “loopholes” exist in the accounting standards, which provide “enough-rooms” for the use of CA practices. The present study of Satyam provides a “snapshot” of how Mr. Raju “master-minded” this maze of CA practices. Undoubtedly, the Satyam scam is clearly a glaring real-life corporate example of abuse of CA, in which the account books were cleverly manipulated by following the modus-operandi of creating fake invoices, inflating revenues, falsifying the cash and bank balances, showing non-existent interest earned on fixed deposits, showing ghost employees, and so on. This type of CA is both illegal and unethical. In its recent indictment of the former promoters and top managers of Satyam, various investigative agencies (viz., SEBI, CBI, CID, SFIO, etc.) in India had finally provided minute and fascinating details about how India’s largest corporate scam at Satyam was committed. An attempt has been made by the author, based on the media reports, to provide a description about the CA methodology used by the Satyam to commit the accounting fraud duly supported by evidence, wherever possible.
The Satyam Computer Services Limited (hereinafter, “Satyam”), a global IT company based in India, has just been added to a notorious list of companies involved in fraudulent financial activities. Satyam’s CEO, Mr. B. Ramalingam Raju (hereinafter, “Raju”), took responsibility for all the accounting improprieties that overstated the company’s revenues and profits, and reported a cash holding of approximately $1.04 billion that simply did not exist. “This leads one to ask a simple question: How does this keep on happening for five years, without any suspicions?” asked Bhasin [
Satyam was a “rising-star” in the Indian ‘outsourced’ IT-services industry [
Particulars
2003 - 2004
2004- 2005
2005- 2006
2006 - 2007
2007 - 2008
Avera Growth Rate (%)
Net Sales
25,415.4
34,642.2
46,343.1
62,284.7
81,372.8
38
Operating Profit
7743
9717
15,714.2
17,107.3
20,857.4
28
Net Profit
5557.9
7502.6
12,397.5
14,232.3
17,157.4
33
Operating Cash Flow
4165.5
6386.6
7868.1
10,390.6
13,708.7
35
ROCE (%)
27.95
29.85
31.34
31.18
29.57
30
ROE (%)
23.57
25.88
26.85
28.14
26.12
26
Source: www.geogit.com.
Unfortunately, less than five months after winning the Global Peacock Award, Satyam became the center-piece of a “massive” accounting fraud. Bhasin [
Indeed, the Satyam fraud activity dates back from 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 [
Exhibit 1. Satyam’s founder, chairman and CEO, Mr. Raju’s letter to his board of directors.
To The Board of Directors, 7 January, 2009
Satyam Computer Services Ltd.
From: B. Ramalinga Raju Chairman, Satyam Computer Services Ltd.
Dear Board Members,
It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:
1. The Balance Sheet carries as of September 30, 2008:
a) Inflated (non-existent) cash and bank balances of Rs. 5040 crore (as against Rs. 5361 crore reflected in the books); b) An accrued interest of Rs. 376 crore which is non-existent; c) An understated liability of Rs. 1230 crore on account of funds arranged by me; and d) An over stated debtors position of Rs. 490 crore (as against Rs. 2651 reflected in the books).
2. For the September quarter (Q2), we reported a revenue of Rs. 2700 crore and an operating margin of Rs. 649 crore (24% of revenues) as against the actual revenues of Rs. 2112 crore and an actual operating margin of Rs. 61 crore (3% of revenues). This has resulted in artificial cash and bank balances going up by Rs. 588 crore in Q2 alone. The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations ―thereby significantly increasing the costs. Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.
I would like the Board to know:
1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years―excepting for a small proportion declared and sold for philanthropic purposes.
2. That in the last two years a net amount of Rs. 1230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share by the lenders on account of margin triggers.
3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results.
4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T. R. Anand, Keshab Panda, Virender Agarwal, A. S. Murthy, Hari T, SV Krishnan, Vijay Prasad, Manish Mehta, Murali V, Sriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Director’s immediate or extended family members has any idea about these issues.
Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:
1. A Task Force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam: Subu D, T. R. Anand, Keshab Panda and Virender Agarwal, representing business functions, and A. S. Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampati be made the Chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.
2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities.
3. You may have a ‘restatement of accounts’ prepared by the auditors in light of the facts that I have placed before you. I have promoted and have been associated with Satyam for well over twenty years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis. In light of the above, I fervently appeal to the board to hold together to take some important steps. Mr. T.R. Prasad is well placed to mobilize support from the government at this crucial time. With the hope that members of the Task Force and the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well.
Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.
I am now prepared to subject myself to the laws of the land and face consequences thereof.
Signature
(B. Ramalinga Raju)
Source: Letter distributed by the Bombay Stock Exchange and Security Exchange Board of India. Available at www.sebi.gov.in.
as company operations grew significantly. 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” [
The unfolding of Satyam sage has been a watershed event in the Indian corporate history. According to the founder’s own public confession, Satyam had inflated its reported revenues by 25%, its operating margins by over 10 times, and its cash and bank balance by over 1 billion dollars. The magnitude of this fraud makes it by far the biggest accounting scandal in India’s history [
Shockingly, how did Raju mastermind this maze of Creative Accounting (CA) practices at Satyam? Keen to project a perpetually rosy picture of the company to the investors, employees and analysts, Raju manipulated the account books so that it appeared a far bigger enterprise than it actually was. Here, Bhasin [
A web of 356 investment companies was used to allegedly divert funds from Satyam. Under Ramalinga Raju, Satyam floated 327 companies and published inflated financials. These front companies purchased 6,000 acres of land, taken loans of Rs. 1230 crore from these companies, which were not even accounted in books. The CID investigation also revealed that Satyam had executed projects in the name of 7 non-existent companies: Mobitel, Cellnet, E Care, Synony, Northsea, Autotech and Hargreaves. All these companies had several transactions in the form of inter-corporate investments, advances and loans within and among them. One such “sister” company, with a paid-up capital of Rs. 5 lakh, had made an investment of Rs. 90.25 crore, and received unsecured loans of Rs. 600 crore.
Bhasin [
Raju maintained thorough details of the Satyam’s cooked-up accounts and minutes of meetings since 2002. He stored records of accounts for the latest year (2008-09) in a computer server called “My Home Hub.” Details of accounts from 2002 till January 7, 2009 (the day Mr. Raju came out with his dramatic 5-page confession) were stored in two separate Internet Protocol (IP) addresses. Keeping in view the media reports, Bhasin [
Raju also admitted to fudging the last financial result that the company had declared, for the period of three months ending Sept. 30, 2008. The company had reported revenues of Rs. 2700 crore, with an operating margin of 24% of revenues (or Rs. 649 crore). According to Bhasin [
So, how did Raju managed to boost revenues? Here, Bhasin [
The balance sheet of Satyam(as on September 30, 2008) carried an inflated (non-ex- istent) cash and bank balances of Rs. 5040 crore, non-existent interest of Rs. 376 crore, and understatedly ability of Rs. 1230 crore. In fact, the balance sheet carried an accrued interest of Rs. 376 crore, which was non-existent.
The promoters of Satyam regularly used to generate monthly bank statements to be fed into the bankbooks. Similarly, they also used to generate confirmations of bank balances, at the end of every quarter, against non-existent fixed deposit receipt (FDRs) and interest earned/due thereon. As Bhasin [
Indeed, falsification with regards to fixed deposit have been done since 2001-02 till 2007-08 and also for the quarter ended June 2008 and Sept. 2008. Further, Bhasin [
Items
Actual (Rs.)
Reported (Rs.)
Difference (Rs.)
Cash and Bank Balances
321
5361
5040
Accrued Interest on bank FDs
Nil
376.5
376
Understated Liability
1230
None
1230
Overstated Debtors
2161
2651
490
Total
Nil
Nil
7136
Revenues (Q2 FY 2009)
2112
2700
588
Operating Profits
61
649
588
larger than life picturesque image year-after-year in the minds of millions of gullible investors whose fate underwent a depressive spin.”Satyam’s balance sheet (as on Sept. 7, 2008) carried an accrued interest of Rs. 376 crore, which was non-existent. These figures of accrued interest were shown in balance sheets in order to suppress the detection of such non-existent fixed deposits on account of inflated profits. As shown above in
By using the IT skills in-house and tampering with the invoice management system (IMS) of the company, a software module that was internally developed states (Bhasin) [
From the above, an intriguing question that arises here is: “how were the fake invoices created by subverting the IMS?” In the IMS system, there is a mandatory field earmarked “Invoice Field Status”. Unless this is filled, processing of the order does not go ahead. So, what Raju & Company did was to use two alphabets “H” (Home) or “S”
Financial Year
Amount as per Balance Sheet/Trial Balance
Amount as per Bank Confirmation
Amount Falsified
2001-02
1243.15
5.43
7000.00
2002-03
1252.37
0.00
1252.37
2003-04
1465.33
1.89
1446.46
2004-05
1801.47
5.97
1795.50
2005-06
1906.47
1.11
1795.50
2006-07
3364.94
5.65
3308.41
2007-08
3316.93
8.53
3308.41
Sept. 2008
3318.37
9.96
3308.41
Source: SFIO Report published in the Pioneer (New Delhi), May 4, 2009, p 10.
(Super) in the Invoice Field Status to process the entry. The invoices, thus created were “hidden” from the view of those who ran the finance units. There were about 74,625 invoices generated in the IMS between April 2003 and December 2008. About 7561 invoices out of 74,625 had “S” marked in their invoice field status. Out of this, 6603 were also found on the company’s Oracle Financials software system, to make it seem like these were actual sales. Entries into this system get reflected straight in the Profit and Loss Statement. The balance of 958 invoices remained in the invoice state, and therefore, within the IMS system―they were not keyed into the Oracle enterprise-ware. The total revenues shown against these 7561 fake invoices were Rs. 5117 crore. Of this, sales through the “reconciled” 6603 invoices were about Rs. 4746 crore. The CBI has also found that “sales were inflated every quarter and the average inflation in sales was about 18%. After generating fake invoices in IMS, a senior manager of the finance department (named Srisailam), entered the 6,603 fake invoices into Oracle Financials with the objective of inflating sales by Rs. 4746 crore. By reconciling the receipts of these invoices, the cash balances in the company’s account were shown at Rs. 3983 crore.
The CBI officers have concluded that “the scandal involved this system structure being bypassed by the abuse of an emergency ‘Excel Porting System’, which allows invoices to be generated directly in IMS … by porting the data into the IMS.” This system was subverted by the creation of a user ID called “Super User” with “the power to hide/unhide the invoices generated in IMS.” By logging in, as Super User, the accused were hiding some of the invoices that were generated through Excel Porting. Once an invoice is hidden the same will not be visible to the other divisions within the company but will only be visible to the company’s finance division sales team. As a result, concerned business circles would not be aware of the invoices, which were also not dispatched to the customers. Investigation revealed that all the invoices that were hidden using the Super User ID in the IMS server were found to be false and fabricated. The face values of these fake invoices were shown as receivables in the books of accounts of Satyam, thereby dishonestly inflating the total revenues of the company.
To quote Bhasin [
Interestingly, the charge-sheet filed by the investigators is of the view that Satyam employees remained underutilized. For instance, the utilization level shown in the latest investor update by the company is about 74.88% for offshore employees. However, the actual utilization was 62.02%.This clearly shows that the bench strength was as high as 40% in the offshore category. Further, as a result of underutilization, the company was forced to pay salaries to associates without jobs on hand, which increased the burden on company’s finances. Even in the onshore category, the bench strength was around 5% (of total staff).
Indeed, it started with Raju’s love for land and that unquenchable thirst to own more and more of it. Satyam planned to acquire a 51% stake in Maytas Infrastructure Limited for $300 million. The cash so raised was used to purchase several thousands of acres of land, across Andhra Pradesh, to ride a booming realty market. It presented a growing problem as facts had to be doctored illegally to keep showing healthy profits for Satyam that was growing rapidly, both in size and scale. Unfortunately, every attempt made by Raju to eliminate the gap ultimately failed. Cashing out by selling Maytas Infrastructure and Maytas Properties to Satyam for an estimated price of Rs. 7800 crore was the last straw.
Satyam had tried to buy two infrastructure company run by his sons, including Maytas, in December 2008. However, on Dec. 16, Satyam’s board cleared the investment, sparking a negative reaction by investors, which pummeled its stock on the New York Stock Exchange and Nasdaq. The board hurriedly reconvened the same day a meeting and called off the proposed investment. Unfortunately, the matter did not die there, as Raju may have hoped. In the next 48 hours, resignations streamed in from Satyam’s non-executive director, Krishna Palepu, and three independent directors. As Bhasin [
The Satyam Boardwas composed of “chairman-friendly” directors, who failed to question the management’s strategy and use of leverage in recasting the company. Moreover, they were also extremely slow to act when it was already clear that the company was in financial distress. Here, Bhasin [
Satyam board’s investment decision to invest 1.6 billion dollars to acquire a 100% stake in Maytas Properties and in 51% stake in Maytas Infrastructure (the two real estate firms promoted by Raju’s sons) was in gross violation of the Companies Act 1956, under which no company is allowed, without shareholder’s approval to acquire directly or indirectly any other corporate entity that is valued at over 60% of its paid-up capital. “Yet, Satyam’s directors went along with the decision, raising only technical and procedural questions about SEBI’s guidelines and the valuation of the Maytas companies. They did not even refer to the conflict of interest in buying companies in a completely unrelated business, floated by the chairman’s relatives,” remarked Bhasin [
With regard to the role of the “independent” directors (IDs) at Satyam, we should understand: how “independent” they actually were? It was seen that all the non-executive directors (NEDs) at Satyam have been allotted significant stock options at an unbelievable low strike price of Rs. 2 per share, and apart from this, all the NEDs have also earned handsome commissions during 2007 - 2008, as reflected by Satyam’s audited results.
Naturally, a basic question that arises here is: “how can directors who had enjoyed such a huge largesse from the Company’s promoters, had been beneficiaries of stock options given at an unbelievable strike price of Rs. 2 per share (against the ruling price of Rs. 500 per share in 2007 - 2008) and who had received such high commissions could be expected to be “independent”? According to Bamahros and Bhasin [
Name
No. of Options
Commission (in Rs.)
Krishna Palepu
10,000
1.2 millon
Mangalam Srinivasan
10,000
1.2 million
T R Prasad
10,000
1.13 million
V P Rama Rao
10,000
0.1 million
M Ram Mohan Rao
10,000
1.2 million
V S Raju
10,000
1.13 million
Vinod Dham
10,000
1.2 million
Source: Satyam’s Balance Sheet for 2007-08, Satyam Computer Services Limited, Hyderabad.
ning programs for Satyam employees on CG principles and their compliance, even if not expressly forbidden statutorily, will still place him as one having a vested interest in accepting the unethical policy of the management as a quid pro quo. As an “independent” director, he should not have accepted any consulting assignment from Satyam. “Satyam scam is one more proof that the mere compliance of SEBI’s rule of the minimum number of independent directors does not guarantee ethical practices. Corporate history of the past decade has more than clearly shown that independent directors have not served their purpose,” stated Bhasin [
Notwithstanding Raju’s confession, the Satyam episode has brought into sharp focus the role and efficacy of “independent” directors. The SEBI requires the Indian publicly held companies to ensure that independent directors make up at least half of their board strength. The knowledge available to independent directors and even audit committee members was inherently limited to prevent willful withholding of crucial information. The reality was, at the end of the day, even as an audit committee member or as an independent director, I would have to rely on what the management was presenting to me, drawing upon his experience as an independent director and audit committee member. As Bhasin [
As part of their “tunneling” strategy, the Satyam promoters had substantially reduced their holdings in company 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, as shown in
As pointed out by Shirur [
Investigations into Satyam scam by the CID of the State Police and Central agencies have established that “the promoters indulged in nastiest kind of insider trading of the company’s shares to raise money for building a large land bank.” According to the SFIO Report [
Through long and bitter past experience, some investors have developed a set of early warning signs of financial reporting fraud. Bhasin [
strongest is the difference between income and cash flow. Because overstated revenues
cannot be collected and understated expenses still must be paid, companies that misreport income often show a much stronger trend in earnings than they do in cash flow from operations.” But now, we can see there is no real difference in the trends in Satyam’s net income and its cash flow from operations during 2004 and 2005, as shown in
Particulars
March 2001
March 2002
March 2003
March 2004
March 2005
March 2006
March 2007
March 2008
Dec. 2008
Promoter’s holding
(in% - age)
25.6
22.26
20.74
17.35
15.67
14.02
8.79
8.74
2.18
Many experts cast partial blame for the CA scandal on Satyam’s auditor ‘Price Waterhouse (PwC)’ India, because the fraud went undetected for so many years. In fact, global auditing firm used Lovelock and Lewis as their agent, who audited the Satyam’s books of accounts from June 2000 until the discovery of the fraud in 2009. Several commentators criticized PwC harshly for failing to detect the fraud [
Enron.” However, Mr. S. Goplakrishnan and Mr. S. Talluri, partners of PwC had admitted they did not come across any case or instance of fraud by the company. However, Raju’s admission of having fudged the accounts for several years put the role ofthese statutory auditors on the dock.
The SFIO Report [
To be fair, there were probably thousands of Satyam cash accounts that had to be confirmed by the auditor, as the outsourcer has nearly 700 customers (including 185 Fortune 500 companies) in 65 countries. The audits for a company of that size would have been staggered, with millions of dollars of outstanding receivables pouring in to different locations at any given time. As Veena et al. [
When scams break out in the private sector auditors too end up on the firing line. The CBI, which investigated the Satyam fraud case, also charged the two auditors with complicity in the commission of the fraud by consciously overlooking the accounting irregularities. On April 22, 2014 “The Institute of Chartered Accountants of India (ICAI)” [
A point has also been raised about the unjustified increase in audit fees. A reference to the figures of audit fee in comparison with total income over a period of time may be pertinent.
The Price Waterhouse received an annual fee of Rs. 37.3 million (or Rs. 4.31 crore) for financial year 2007-2008, which is almost twice, as what Satyam peers (i.e., TCS, Infosys, Wipro),on an average, pay their auditors. Bhasin [
criminal conspiracy. The PwC has suspended the two partners, who signed on Satyam’s balance sheet and are currently in prison. The SFIO report also states that Pw Coutsourced the audit function to some audit firm, “Lovelock and Lewis,” without the approval of Satyam.
Year
2004 - 05
2005 - 06
2006 - 07
2007 - 08
Total Income (A)
35,468
50,122.2
64,100.8
83,944.8
Audit Fees (B)
6.537
11.5
36.7
37.3
% of B to A
0.0184
0.0229
0.0573
0.0444
Source: Annual Reports of Satyam, Percentage computed.
As Bhasin [
Moreover, Bhasin [
At its “peak” market-capitalization, Satyam was valued at Rs. 36,600 crore in 2008. Following the shocking disclosure, the traders counter saw frantic selling on the bourses and nearly 143 million shares (or a quarter of the total 575 million shares) had changed hands and finally, the shares closed down 77.69% at Rs. 39.95 at the Bombay Stock Exchange (BSE), wiping out Rs. 139.15 per share in a single day. After Wednesday’s fall, the firm’s market value has sunk to little more than $500 million from around $7 billion as recently as last June. The stock that hit its all-time high of Rs. 542 in 2008 crashed to an unimaginable Rs. 6.30 on the day Raju confessed on January 9, 2009. Satyam’s shares fell to 11.50 rupees on January 10, 2009, their lowest level since March 1998, compared to a high of Rs. 544 in 2008. In the New York Stock Exchange, Satyam shares peaked in 2008 at US $ 29.10; by March 2009 they were trading around US $1.80. Thus, investors lost $2.82 billion in Satyam.
Criminal charges were brought against Mr. Raju, including: criminal conspiracy, breach of trust, and forgery. After the Satyam fiasco and the role played by PwC, investors became wary of those companies who are clients of PwC, which resulted in fall in share prices of around 100 companies varying between 5% - 15%. The news of the scandal (quickly compared with the collapse of Enron) sent jitters through the Indian stock market, and the benchmark Sensex index fell more than 5%. Shares in Satyam fell more than 70%. The graph, “Fall from Grace,” shown in
Just a year later, the scam-hit Satyam was snapped up by Tech Mahindra for a mere Rs. 58 per share―a market cap of mere Rs. 5600 crore. In the aftermath of Satyam, India’s markets recovered and Satyam now lives on. India’s stock market is currently trading near record highs, as it appears that a global economic recovery is taking place. Civil litigation and criminal charges continue against Satyam. Shubhashish [
The Indian government immediately started an investigation, while at the same time limiting its direct participation. According to Bhasin [
pended the current directors of Satyam and allowed the Government to appoint up to 10 new ‘nominee’ directors. Subsequently, the new, six-member Board had appointed a chief executive officer and external advisors, including the accounting firms KPMG and Deloitte to restate the accounts of Satyam.”
“The Satyam fraud has highlighted the multiplicity of regulators, courts and regulations involved in a serious offence by a listed company in India. The lengthy and complicated investigations that were followed up after the revelation of the fraud has led to charges against several different groups of people involved with Satyam,” says Bhasin [
All the accused involved in the Satyam fraud case, including Raju, were charged with cheating, criminal conspiracy, forgery, breach of trust, inflating invoices, profits, faking accounts and violating number of income tax laws. The CBI had filed three charge- sheets in the case, which were later clubbed into one massive charge-sheet running over 55,000 pages. Over 3000 documents and 250 witnesses were parsed over the past 6 years. A special CBI court on April 9, 2015 finally, sentenced Mr. B. Ramalinga Raju, his two brothers and seven others to seven years in prison in the Satyam fraud case. The court also imposed a fine of Rs. 5 crore on Ramalinga Raju, the Satyam Computer Services Ltd’s founder and former chairman, and his brother B Rama Raju, and Rs. 20-25 lakh each on the remaining accused. The 10 people found guilty in the case are: B. Ramalinga Raju; his brother and Satyam’s former managing director B. Rama Raju; former chief financial officer Vadlamani Srinivas; former PwC auditors Subramani Gopalakrishnan and T. Srinivas; Raju’s another brother, B Suryanarayana Raju; former employees (G. Ramakrishna, D. Venkatpathi Raju and Ch. Srisailam); and Satyam’s former internal chief auditor V.S. Prabhakar Gupta.
The Satyam scam was clearly a glaring example of “abuse” of CA, in which the account books were cooked up. The purpose was to inflate the share price of the company and sell the promoters holding at inflated price. As a result of this fraud, the share of the company fell drastically thus, wiping out Rs. 9376 crores of investors’ wealth in just one single day. Moreover, Satyam investigators have uncovered “systemic” insider trading. The ED claims to have found prima facie evidence against Raju and others of violating the Prevention of Money Laundering Act. Sources at the SFIO revealed to the Press that several institutional investors dumped shares in the firm on “large scale” up to two days before Ramalinga Raju confessed to “wildly” inflate the company’s assets and profitability. Most of the sales seemed to have taken place after Satyam failed in the bid to acquire Maytas Infra and Maytas Properties. Even to a casual observer of the Satyam fiasco, the enormity of the scandal was a great eye-opener.
The CA scam committed by the founders of Satyam is a testament to the fact that the science of conduct is swayed in large by human greed, ambition, and hunger for power, money, fame and glory. Bhasin [
Now, it is amply clear that the Satyam scam was plotted at the top and driven by Ramalinga Raju and his brother. They were the key players in the plot to falsify the accounts and hide the bottom-line truth from everyone. It is also clear that all the culprits―from Raju down to the finance guys―did everything possible to give SEBI and other investigative agencies a run-around and delay the verdict. This is what explains, why it took more than five and a half years to close an open-and-shut case. It took nearly 2 years, involvement of multitude of investigation agencies and over 200 experts, to assess the total damage of the scam perpetrated by Raju. Now, the final figure is a shade under Rs. 8000 crore. A special CBI Court in Hyderabad on April 9, 2015 finally, sentenced all the 10 people who involved in the multi-crore accounting scam and was found guilty of cheating, forgery, destruction of evidence and criminal breach of trust. At last, almost the six-year-old case has reached its logical conclusion. This includes the founder and the Chairman of the company B. Ramalinga Raju. The Court pronounced a 7-year jail term for the founder and also imposed on Raju a fine of Rs. 5 crore. Undoubtedly, the Indian government took quick actions to protect the interest of the investors, safeguard the credibility of India, and the nation’s image across the world.
The Satyam scam, involving the misuse of CA, has shattered the dreams of different categories of investors, shocked the government and regulators alike, and led to questioning the accounting practices of statutory auditors and CG norms in India. The accounting scandal at Satyam has raised several governance questions about the company’s board and its auditors. The most perplexing question is: “Why did not the oversight mechanisms at Satyam uncover the fraud sooner?” One CG expert claims that a lax regulatory system in India bears at least some of the blame. Here, Bhasin [
Bhasin, M.L. (2016) Creative Accounting Scam at Satyam Computer Limited: How the Fraud Story Unfolded? Open Journal of Accounting, 5, 57- 81. http://dx.doi.org/10.4236/ojacct.2016.54007