TopicSatyam Scam

Presented by :- Vishal Narvekar

Company Profile• Satyam computer services limited was founded in 1987 by

Mr. B. Ramalinga Raju

• Satyam computers started with only 20 employees

• The company offers consulting and information

technology services to various sectors

• Satyam computers converted into public ltd co. In 1991

• Listed in Bombay stock exchange in 1991

• Listed in New York stock exchange in 2001

• Listed in EURONEXT Amsterdam stock exchange in 2008

• There were 52000 employees working in satyam in September

2008

• In June 1991 satyam made 185 clients from first fortune 500 companies

• In 1994 satyam made allies with Dun & Brad Street Crop an USA based company

• In 2000 satyam was declared one of the 100 most pioneering technology companies by World Economic Forum

• In 2006 satyam ranked No. 1 in the ASTD award (American Society For Training And Development)

• On April 14, 2008, Satyam won awards from MZ consult's for being a leader in India in corporate governance and accountability

Achievements

Who is B. Ramalinga Raju?• Ramalinga Raju was born on September 16, 1954 in Andhra

Pradesh• He founded Satyam Computers and was its Chairman until January

7, 2009 when he resigned after admitting to commits corporate fraud

• Awards – Ernst & Young Entrepreneur of the Year Services Award 1999.– Dataquest IT Man of the Year Award 2000 – Asia Business Leader Award 2002– Ernst & Young Entrepreneur of the Year 2007 (revoked) – Global Peacock Award for Corporate Governance 2008

(revoked )

Overview of the scam

• Accounting fraud of over 7800 crores rupees

• Past 7 years accounting books were cooked:

-Profits were inflated

-Understated liability and overstated debts

-Accrued interest (which was non-existent )

-The gap in the balance had risen due to inflated profits

• Planned to buy the Maytas to fill the gap in the balance sheet

Responsible Parties

Ramalinga Raju:Satyam Former Chairman B Rama Raju: Brother of Ramalinga Raju,

Former Managing directorV Srinivas: Ex-chief financial officer

S Gopalakrishnan: PriceWaterhouse AuditorTalluri Srinivas: PriceWaterhouse Auditor

Stock markets around the world collapsed during 2008 & the BSE fell from 21,000 to below 8,000.

The losses caused investors to withdraw funds from the stock market.

Satyams continuance positive results during 2008 , even in the economic crisis.

In October 2008, satyam reported net income of $132.3 million, an increase of 28 percent from the same quarter of the previous year.

How the scam started to unravel

Saytam asserted that, despite the challenging environment, it continued to find opportunities for growth.

During October, one stock analyst drew attention to large cash balances in non-interest bearing bank accounts & expressed concern about the large balances and the accuracy of the numbers.

Investors ignored the analyst's and the stock price rose with the reports of positive earnings and revenue growth.

In December 2008, Board of Directors approved the purchase of Maytas Properties and Maytas Infrastructure, two companies unrelated to the information technology field.

At the time, Mr. Raju and the Board anticipated that the market would "be delighted" by the two transactions as it would provide Satyam with greater diversification.

However, investors were outraged over the transactions because Mr. Raju's family held a larger stake in Maytas Properties and Maytas Infrastructure.

Shareholders viewed the transactions as an attempt to siphon money out of Satyam into the hands of the Raju family.

Satyam quickly aborted the transactions, but the incident still caused significant damage to Satyam's reputation as a well-managed company.

After the incident, satyam's shares dropped nearly 10 percent and four of the five independent directors resigned.

On december 30, analysts with Forrester research advised clients to stop doing business with satyam because of the fear of widespread fraud.

Satyam hired Merrill lynch to advise it on ways to increase shareholder value.

On january 7, just hours before Mr. Raju disclosed the fraud, Merrill lynch sent a letter to the stock exchange indicating that it was withdrawing from its engagement with satyam because during the course of its representation it found accounting irregularities.

On January 7, 2009, Mr. Raju sent letter to Satyam's Board of Directors admitting that he manipulated the company's accounts for numbers years.

What happened on January 7,2009??

Major points in letter

• On January 7, 2009, Mr. Raju disclosed in a letter to Satyam's Board of Directors that he had been manipulating the company's accounting numbers for years.

• Mr. Raju said the manipulation started out small, and grew larger

by the year.

• In the letter he stated, "It was like riding a tiger, not knowing how to get off without being eaten."

• Mr. Raju stated that eventually, the stress of hiding the fraud grew too much for him to bear.

Modus operandi

The Accounting Fraud

Role Of Auditors

The Maytas Acquisition

• Mr.Raju overstated income in every quarter for several years to meet analyst expectations.

• Mr. Raju created fake bank statements to advance the fraud.

• Mr. Raju created 6,000 fake salary accounts and appropriated the money after the company deposited it.

• The global head of internal audit created fake customer identities and generated fake invoices against their names to inflate revenue.

• Mr. Raju diverted a large amount of cash to other firms that he owned ,since 2004

Fake Accounts

Annual report of SATYAM as on September 30,2008.

Fake Balance Sheet

Particulars Amt in CR.

Investment 618.64

Current Assets , Loan & Advance

1.Sundry Debtor 2651.36

2.Cash & Bank Balance 5312.62

3.Other Current Assets- Interest Accrued On Fixed Deposits

376.34

4.Loans & Advances 502.22

CURRRENT ASSETS

LIABILITIESParticulars Amt in CR.

Current liability & provision

1.current liabilities 1669.20

ACTUAL DEBT WAS 2161CR,OVERSTATED 490 CR.

ACTUAL CASH IN BANK WAS 321, INFLATED

5040 CR.

NO ACCRUED INTEREST 376.34 CR.

UNDERSTATED LIABILITY by

1230 Cr.

Role Of Auditors

• Global auditing firm Price Waterhouse Coopers audited Satyam's books from June 2000 until the discovery of the fraud

• This fraud was not committed overnight

• It was building up continuously from over years

• Satyam paid pwc twice what other firms charge for the audit.

• They ignored some of the obvious indications of scam, which could have been caught much before it acquired the ‘massive’ status

Indications Of Scam

• $1.04 billion non-interest bearing deposits in balance sheet.

• According to accounting professionals, a reasonable company would have either invested the cash or returned the excess cash to the shareholders.

• Auditors did not verify with the banks in which satyam claimed to have deposits.

• 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 many times without the auditors ever discovering.

• Maytas infra and Maytas properties : firms owned by the sons of Raju.

• A property development company founded in 2005

The Maytas Acquisition

• The Raju family directly owned about one-third of each in the two companies.

• In December 2008 satyam Planned to buy the Maytas.

• The company management said the Acquisition will diversify the company.

• Real Plan was to fill the gap in the balance sheet.

Impact Of Scam• Jobs of over 50000 were at risk.• India`s global image was suffered.• Indian stock market fell dramatically.• Biggest single day fall of 175 Rs. On Jan 6th in saytam share. • SEBI said that, if Saytam found guilty, its license to work in

India may be revoked.• The New York Stock Exchange halted trading in Satyam

stock.• India's National Stock Exchange announced removal of

Satyam from S&P CNX & Nifty 50.• The GDP fell by 0.4%.• I.T sector suffered a downturn.

Regulatory action

• New board of directors were appointed.

• Disclosure of pledged securities.

• Increased financial accounting disclosure.

• Adoption of international standards.

• Creation of new corporate code of conduct by Ministry of Corporate Affairs.

Thank You