Satyam Scam





Introduction


Corporate Scams are often
considered as the “tip of the iceberg” as there exists huge negligence in
respect of corporate governance behind every scandal. In order to control such
negligence, the corporate governance systems of different countries have been transformed.
In India, the loophole in the corporate governance system can be evident from
the scandal of Satyam Computer Services Limited. A continuous accounting
manipulation and paying salary to 13000 ghost employees have resulted in
one of the largest business scams in India.













Background of Satyam
Computer Services Limited


In 1987, B Rama Raju, and B
Ramalinga Raju established Satyam Computer Services Limited with the objective
of providing software services to the companies. The services that the company
was offering after the incorporation were IT consultancy services, client
relationship management services, supply chain management services, business
intelligence services and business process management services. From its
inception, the company had shown rapid growth in revenue. Due to this reason,
the stock price of the company had reached at Rs. 300 in October 2008 on the
Bombay Stock Exchange. In this context, it is to be noted that the company was
listed with BSE, NSE, NYSE, EURONEXT and DOW.





Career Snapshot of B.
Ramalinga Raju


B. Ramalinga Raju, who was
the main accused of the Satyam case, was born in a family of a farmer in
Bhimavaram, Andhra Pradesh. He was a B.Com graduate and had an MBA degree.
After completing the Master's degree from the USA, he ventured into different
businesses including hotel business and cotton mill. He had made his
entrepreneurial debut with Rs. 9 crores in 1983. However, the investment was
not profitable enough and as a consequence of this, he entered into real estate
and construction business and established Maytas  Infra Limited. This was
the first step towards the ambitious corporate life of B. Ramalinga Raju. We
can understand this if we go through the interview of B. Ramalinga Raju with
Deccan Chronicle (1998), where he started his corporate ambition of running his
business in 50 countries with more than 50,000 employees. In this regard, it
can also be added that B.Ramalinga Raju had unfettered access to the Chief Minister
of Andhra Pradesh Chandra Babu Naidu and due to this he had all facilities at
the political and bureaucrats level, which added a different dimension to the
life and career of B. Ramalinga Raju.





Rise and Fall of Satyam

Rise of Satyam


As stated above, Satyam
Computers Services Limited was formed in 1987 and it had only 20 employees at
this stage. Initially, the company’s main operation was to provide IT and
business services to different companies. In January 2003, the stock price of
Satyam Computers was Rs. 138.08, which claimed to the level of Rs. 526.25 in
March 2008. In addition, the Annual Compound Growth Rate of the company was
35%, which was the highest growth rate among the IT companies in India. The
company had reported an operating profit of 21% in 2008, which was
significantly high as compared to the other industry players not only in India
but also in the global context. At this stage, Satyam Computers Services
Limited was awarded for Financial Disclosure Procedures, Technology
and Corporate Governance.      





Fall of Satyam


The success story of Satyam
was continued until the end of 2008. In this regard, it is to be noted that on
the 16th of December 2008, B. Ramalinga Raju had made a proposal to the Board
to acquire two group companies, Maytas Properties and Maytas Infra. In response
to the proposal, the Board of Directors of the company had approved and the company purchased the two companies at a purchase consideration of $1.6
billion, however, at the time of buying the stake, the net worth of the two companies
was $225 million.


Before elaborating the
discussion, it is required to be noted that Maytas Infra and Maytas Properties
were under the chairmanship of B. Ramalinga Raju’s sons. In this regard, it is
also said that due to the global financial crisis, the IT industry was in a
downturn and B. Ramalinga Raju wanted to use the funds of the IT business for
the infrastructure and real estate businesses. He was also blamed for using the
company assets for his family businesses. On the basis of such allegations,
government agencies took the charge to verify the books of accounts of the
company. On 22nd January 2009, CID submitted its report in the court. Before
this, B. Ramalinga Raju wrote a letter to the Board Members. Through this letter, Raju confessed that there had been an accounting manipulation for a
long period of time.





Manipulation in the
Accounting Reports


The letter of Raju
disclosed all the manipulations that he had made over the past few years. The
following are the extract of the accounting manipulations that had been made
and reported by the company:


  • The debtors of
    the company were overstated     

  • Actual cash and
    bank balance was overstated by $0.06 billion

  • Interest paid on
    fake accounts for around $77.46 million

  • Liabilities of
    the company was understated by $1.23 billion

  •  The company reported a revenue of Rs.
    2700 crore, however, the actual revenue was Rs. 2112 crore

  • Operating profit
    of the company was stated as Rs. 649 crore, whereas the actual figure was
    Rs. 61 crore

  • Fictitious bills
    were raised for services, which were never rendered     

  • Paid salary to
    6000 staffs, who do not exist










In order to manipulate the
accounting reports, B. Ramalinga Raju had made proper planning and as a part of
that, some managers were given permission to have the Super User Login to
access the billing system of the company.


After the process of fake
invoice making, the amounts were added with the revenue amount. Total revenue
of Rs. 5117 were fake by this process.





Applications Used for
Manipulating the Accounts of the Company


For accomplishing the above
t6asks, the company used the following applications:


  • For creating
    project IDs, Satyam Project Repository was used     

  • The fake
    projects were created through Operational Real-Time Management (OPTIMA)

  • Fake bills were
    made through Project Bill Management System

  • The company used
    Excel Porting for accessing the accounts and hiding the invoices






Post-Scam Restructure of
Board and Acquisition of Satyam Computers Services Limited


After the scam, the Board
of Directors of Satyam Computers was reformed under the intervention of the
Government. A. S. Murthy was appointed as the new CEO. On the 13th of April 2009,
Tech Mahindra bought Satyam Computers.





Conclusion


Discussion over the “Satyam
Scam” clearly indicates that there was a lack of proper auditing, which
resulted in big accounting fraud. Thus, it can be concluded that if the audit
firms honestly perform their duty, corporate frauds can be avoided. In this
regard, it is also to be noted that SEBI plays an important role in preventing
corporate frauds through its compliances and listing regulations.