Copy of Satyam Scandal

Satyam Scandal

Summary

An Outline

• Satyam computer services scandal is a corporate scandal that took place on 7th January, 2009.
• Ramalinga Raju, chairmen and founder of satyam computers confessed that he committed a fraud accounting for about $1.47 Billion, by reporting false balance sheets.
• An FIR(First information report) has been filed immediately and all the fraudsters were respectively penalized and sentenced to imprisonment.

Company Background

• Established in 1987 and soon became the 3rd fastest growing IT company in India.
• First Indian company that has been listed in three international exchanges: NYSE,DOW and EURONEXT.
• 40,000 employees
• 9% market share
• Estimated annual Revenue $2.1 Billion
• Provider of IT services to World bank in 2003

Central Bureau of Investigation Report

• Estimated total loss to the investors due to the scandal was $2.97 Billion
• Ramalinga raju and his family members pooled illegal gains of $434.3 million
• Annual financial statement contained inflated revenue and this led to higher net worth of the company.

Confession

Raju's reasons

• The gaps in the balance sheet have reached unreachable extent and could not be filled anyhow in future.
• The differential in the real profits and the one reflected in the books was further inflated since the company had to carry additional resources and assets to justify higher level of operations, thereby significantly increasing the costs.
• It was like riding a tiger, not knowing how to get off without being eaten- Mr.Raju

Recommendations

• All the accounts with inaccuracies have to be clearly investigated and scrutinized.
• Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds
• Corporate governace has to be stronger and companies have to be careful while selecting their CEO.
• Also, separate the role of CEO and Chairman of the Board. Splitting up the roles helps avoid situations like the one at
• Satyam.

Understanding the Scam.

People who are Involved

• Ramalinga raju - Founder and Chairmen
• B.Rama Raju - Former managing director
• V.Srinivas - EX Chief financial officer
• S.Gopalakrishnana- PWC Auditor
• Talluri Srinivas - PWC Auditor
• The Indian arm of PwC was fined $6 million by the SEC for not following the code of conduct

The scam,

continued...

• In the September 2008 quarter (Q2) the reported revenue was $567 million and operating margin was $136.2 million (24 per cent of revenues), while the actual revenues were $443.5 million and actual operating margin was $12.81 million (3 per cent of revenue).
• Funds from Satyam were diverted to MAYTAS, which is a company completely owned by Mr. Raju and his family members.
• The actual number of employees is only 40,000 and not 53,000, and Mr. Raju had been allegedly withdrawing $4.2 million every month to pay these 13,000 non-existent employees

The Scam

The balance sheet as on September 30,2008 contains the following fabrications

• Inflated (non-existent) cash and bank balance of $1.05 billion (as against $1.13 billion reflected in the books)
• An accrued interest of $70 million which is non-existent.
• An understated liability of $258 million on account of funds arranged Ramalinga Raju.
• An overstated debtor position of $102 million (as against $556 million reflected in the books)

Samineni Krishna Kethana

9th June 2016