q3202 satyam case study ashish gahlot

8/13/2019 Q3202 Satyam Case Study Ashish Gahlot

1/13

CASE STUDY REPORT

ON

WORLDS BIGGEST ACCOUNTING SCANDAL

SATYAM COMPUTERS TRUTH LIES AND CORPORATE GOVERNANCE.

SUBMITTED TO

MRS DIYA KANDA

SUBMITTED BY

Ashish Gehlot !!"#$"%&'

N()*eet P(*+e, !!"#-/#'

0(+ish 123(4 !!"#$!#&'

A3it 123(4 !!"#'


2/13

Histo4, o5 S(t,(3 Co362te4s

Satyam Computers was founded in June 1977 as a private limited company by Ramalinga Raju along with one

of his brothers-in-law !"S Raju# $n June 1991 Satyam Computers got its first %ortune &'' Client# $n the same

year in (ugust Satyam Computers was recogni)ed as a *ublic +imited Company# Satyam went public in ,ay

199 and its issue was oversubscribed 17 times# $n July 199. Satyam entered into a joint venture with !un /

0radstreet# Satyam was awarded $S 9''1 Certification in ,arch 199 $n !ecember 199& Satyam $nfoway

was incorporated# $n ,ay 1997 Satyam became the first $ndian $2 Company to get $2(( Certification for 34Solutions# $n 5ovember 1996 Satyam became one of the first companies to enter $ndian $nternet service maret

with the launch of Satyam $nfoway8s $S* Service# $n the same year Satyam entered into a joint venture with :#

$n 1999 Satyam $nfoway became the first $ndian $nternet company to be listed on 5(S!(;# $n %ebruary '''

Satyam was declared one of 81'' ,ost *ioneering 2echnology Companies8 by


3/13

OVERVIEW O8 SCAM

$n 1B !ec# ''6 satyam met a proposal for diversification into real estate sector Satyam to buy ,aytas

*rop DE1#. bnF / &1A stae in ,aytas $nfra DE.'' mnF#

!eal to be financed by SatyamGs HsurplusI cash#

5e>t day investors outrage because of unrelated diversification and stoc prices of satyam fell down to

Rs# ?B#1 bn in a day reflecting share holders disbelief#

Raju and family own up to .&A staes in ,aytas#

Raju was siphoning the money from Satyam to ,aytas since last B years# t day and called off the decision#

RajuGs confession was followed by resignation of Srinivas vadlamani chief financial officer of satyam#

ACCOUNTING 8RAUD9

n Jan 7 Raju admitted to mis@uoting revenue cash balances and profit numbers on satyam boos forthe past few years#

%or sept @uarter satyam overstated the revenues by around E1', and overstated operating margin byE1', $nflated cash and ban balances by over E1b#

(ccrued interest of appro>imately E1'', which is non-e>istent#

nderstated liability of around E?', / verstated debtors position#

VICTIMS O8 8RAUD

1. E36lo,ee9 2hey spent an>ious moments and sleepless nights as they faced nonpayment of salariesproject cancellations#

# Clie*ts9 2hey e>pressed loss of trust and reviewed their contracts preferring to go with othercompetitors#

.# Sh(4e hol+e4s9 +ost their valuable investments and there was doubt about revival of $ndia as a preferredinvestment destination#


4/13

?# B(*1e4s9 2hey were concerned about recovery of financial and nonfinancial e>posure and recalledfacilities#

I*+i(* Go)e4*3e*t9 $t was worried about its image of the 5ation / $2 Sector affecting faith to invesor to do business in the county#

ANALYSIS 9

(s we now that satyam computer was a very well nown company and it was declared one of 81'' ,ost

*ioneering 2echnology Companies8 by


5/13

revenue statement as well as the balance sheet by misrepresenting the figurers by showing fae assets and they

were showing that they are going to buy the stae in the company nown as H,32(S $5%R(S2RC2R:I

which was not in e>istence# Satyam Computers had on !ecember 1B''6 announced that it will ac@uire two

group firms K ,aytas properties ,aytas $nfra# 2he 0oard f !irectors of Satyam had approved the founderGs

proposal to buy &1 per cent stae in ,aytas $nfrastructure and 1'' A in ,aytas *roperties#Maytas Infra2heCompany is run by the sons of Ramalinga Raju# $t was started in the late 196'Gs by Ramalinga Raju and 2he

main reason for the debacle of ,aytas $nfra is due to the debacle of Satyam# ne of the reasons for the debacle

of ,aytas properties was the then ongoing economic slowdown# 2he company has huge land bans and theprices have dropped down in the real estate significantly# !etailed analysis of Ramalinga personal computer

reveals that investment shown as fi> deposit receipt worth crores of rupees were fae and prined from the

personal device#

2he promoters decided to inflate the revenue and profit figures of Satyam# $n the event the company had a huge

hole in its balance sheet# So to fill this gap company announced (c@uisition of &1A stae in ,aytas $nfra and

1''A stae in ,aytas *roperties on 1Bth !ec ''6 but# 2he deal was not profitable for investors

$nvestors dumped SatyamGs stoc and threatened action against the management# 2his was mainly done to hide

the irregularities in the accounts of Satyam# $t is also said the close association with the political leaders is one

of the reasons# 2hey have open B''' fae ban accounts and showing that they are paying salary in that account

but those accounts were not real# 2hey have also shown that they were having &.''' employees but in reality

C$! told in court that the actual number of employees is only ?'''' and not &.''' as reported earlier and that

,r# Raju had been allegedly withdrawing $5R ' crore rupees every month for paying these 1.''' non-

e>istent employees#Company Chairman Ramalinga Raju resigned after notifying board members and the

Securities and :>change 0oard of $ndia DS:0$F that Satyam8s accounts had been falsified Company +aw 0oard

decided to bar the current board of Satyam from functioning and appoint 1' nominal directors# L2he current

board has failed to do what they are supposed to do# 2he credibility of the $2 industry should not be allowed to

suffer# hence Chartered accountants regulator $C($ issued show-cause notice to Satyam8s auditor *rice

waterhouse Coopers D*wCF on the accounts fudging#2he government nominated noted baner !eepa *areh

former 5(SSC, chief 4iran 4arni and former S:0$ member C (chuthan to Satyam8s board# ,errill +ynch

D5ow with 0an of (mericaF terminated its engagement with the company# 2he 5ew 3or Stoc :>change had

halted trading in Satyam stoc as of 7 January ''9# $ndia8s 5ational Stoc :>change had announced that it will

remove Satyam from its S/* C5M 5ifty &'-share inde> on January 1# 2he founder of Satyam was arrested

two days after he admitted to falsifying the firm8s accounts# Ramalinga Raju is charged with several offences

including criminal conspiracy breach of trust and forgery#


6/13

A*(l,sis o5 84(2+ Is U*7o)e4e+ i* th4ee 6h(ses

!. 8i4st C4(71s A66e(4

(s stoc marets around the world collapsed during ''6 the $ndian Stoc :>change the Sense> fell from a

high of over 1''' to below 6''' between January ''6 and ctober ''6# 2he enormous losses caused

investors to withdraw large amounts of cash from their investments#

Satyam continued to report positive results during ''6 and claimed success in navigating the economic crisis#

$n ctober ''6 Satyam reported net income of E1.#. million an increase of 6 percent from the same

@uarter the previous year# Satyam asserted that despite the challenging environment it continued to find

opportunities for growth#

2he first crac in the company8s reputation occurred during ctober when the


7/13

!ecember .' analysts with %orrester Research advised clients to stop doing business with Satyam because of

the fear of widespread fraud# Satyam hired ,errill +ynch to advise it on ways to increase shareholder value# 0y

January & ''9 rumors circulated about several potential mergers between Satyam and competitors# n

January 7 just hours before ,r# Raju disclosed the fraud ,errill +ynch sent a letter to the stoc e>change

indicating that it was withdrawing from its engagement with Satyam because during the course of its

representation it learned of material accounting irregularities# 2he 0oard called an emergency meeting for

January 1' to address the company8s rapidly deteriorating reputation#

". Ho: the 84(2+ :(s U*7o)e4e+

n January 7 ''9 ,r# Raju disclosed in a letter to Satyam8s 0oard of !irectors that he had been manipulating

the company8s accounting numbers for years# ,r# Raju said the manipulation started out small and grew larger

by the year# $n the letter he stated L$t was lie riding a tiger not nowing how to get off without being eaten#L

,r# Raju stated that eventually the stress of hiding the fraud grew too much for him to bear#

%. Res6o*si;le P(4ties

,r# Raju was the primary individual responsible for the fraud# $ndian authorities accused ,r# Raju and

subsidiary players such as the C% a managing director the company8s global head of internal audit and ,rRaju8s brother with responsibility for the fraud and filed charges against them# (dditionally Satyam8s auditors

and 0oard of !irectors bear some responsibility for the fraud because of their failure to detect it# %inally the

ownership structure of $ndian businesses contributed to the Satyam scandal#

(. M4. R(


8/13

obtained loans for the company# $t also appeared that the cash that the company raised through (merican

!epository Receipts DL(!RsLFO1Pin the nited States never made it to the balance sheets#

,r# 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 reportedQ however during later interrogations ,r# 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 ''?# ,r#

Raju also initially asserted that he acted alone in perpetrating the fraud# Nowever as noted above $ndian

authorities also charged ,r# Raju8s brother the company8s C% the company8s global head of internal audit andone of the company8s managing directors#

;. A2+ito4s Role

lobal auditing firm *rice cess cash to the shareholders# 2he large amount of

cash thus should have been a red flag for the auditors that further verification and testing was necessary#

%urthermore it appears that the auditors did not independently verify with the bans in which Satyam claimed

to have deposits#

(dditionally the fraud went on for a number of years and involved both the manipulation of balance sheets andincome statements#


9/13

2he 0oard first came under fire on !ecember 1B ''6 when it approved Satyam8s purchase of real estate

companies in which ,r# Raju owned a large stae# 2he 0oard rescinded the approval after shareholders led a

revolt of the deal# 4rishna *alepu Rommohan Rao and "inod !ham all resigned from the 0oard within two

days of the rescission of the transaction# 2he botched transaction provided the investors with the impression that

the 0oard was not actively monitoring Satyam# %urthermore the 0oard should have caught some of the same

red flags that the auditor *ecutives auditors and $ndian

politicians# Satyam successfully emerged from the crisis through an asset sale during the spring of ''9# 2he

authorities8 swift actions also restored confidence in the $ndian securities marets#

!. Sto71 M(41et Co*se>2e*7es

2he news of the scandal roced the $ndian stoc e>changes# n the day that the scandal broe Satyam8s stoc

lost 6 percent and the Sense> inde> closed down 7#. percent# ncertainty pervaded the maret during January

as investors lost confidence in $ndia8s marets# 2he Sense> fell 1. percent between the time that problems first

emerged at Satyam on !ecember 17 ''6 and January . ''9# *oliticians feared that the loss of trust in themaret would tae years to regain#

". I*)esti?(tio*@ C4i3i*(l@ (*+ Ci)il Ch(4?es

2he investigation that followed the revelation of the fraud has led to charges against several different groups of

people involved with Satyam# $ndian authorities arrested ,r# Raju ,r# Raju8s brother 0# Ramu Raju its former

managing director Srinivas "dlamani the company8s head of internal audit and its C% on criminal charges of

fraud#

$ndian authorities also arrested and charged several of the company8s auditors *rice


10/13

$mmediately after ,r# Raju8s revelation of the fraud new board members were appointed and started woring

towards a solution that would prevent the total collapse of the firm# $ndian officials acted @uicly to try to save

Satyam from the same fate that met :nron and perienced large accounting scandals#

0oth :nron and change 0oard of $ndia DLS:0$LF appointed a

retired Supreme Court Justice Justice 0harucha to oversee the process and instill confidence in the transaction

Several companies bid on Satyam on (pril 1. ''9# 2he winning bidder 2ech ,ahindra bought Satyam for

E1#1. per shareless than a third of its stoc maret value before ,r# Raju revealed the fraudand salvaged

its operations#

2he ac@uisition has e>perienced a few problems# n 5ovember B ''9 shares tumbled 1' percent amid

further revelations that the fraud was almost E1 billion larger than initially thought# %urthermore the $ndian

courts brought criminal charges against one of the investigators for accepting a bribe related to the

investigation calling into @uestion whether further investigations were necessary# 0oth 2ech ,ahindra and the

S:0$ are now fully aware of the full e>tent of the fraud and $ndia will not pursue further investigations# 2he

stoc has again stabili)ed from its fall on 5ovember B ''9 and as part of 2ech ,ahindra Saytam is once

again on its way toward a bright future#

Re?2l(to4, Re5o43 (*+ the I36o4t(*7e o5 Co46o4(te Go)e4*(*7e

Corporate governance is important for economic development# Research shows that the ratio of stoc maret

capitali)ation to !* in countries that ran in the highest @uartile for corporate governance is four times higher

than stoc marets that ran in the lowest @uartile for corporate governance# *oor corporate governance

significantly hampers the ability of businesses to raise capital and impedes economic growth# :ffective

corporate governance provides for more efficient allocation of resources as the return on assets in countries

with the highest levels of corporate governance is double that of the return on assets in countries with the lowest

levels of corporate governance# $ndia has been proactive throughout its past ' years of economic liberali)ationin bringing regulations to help foster effective corporate governance that contributed to its economic growth#

$ndia immediately portrayed the Satyam scandal as an aberration to try to salvage the remaining confidence in

its capital marets# Several commentators however claimed that the scandal was not an aberration but a sign

of governance issues in $ndia# (fter the Satyam scandal investors and regulators called for strengthening the

regulatory environment in the securities marets# $n response to the scandal the S:0$ revised corporate

governance re@uirements as well as financial reporting re@uirements for publicly traded corporations listed in

the country# 2he S:0$ also strengthened its commitment to the adoption of $nternational %inancial (ccounting


11/13

Reporting Standards# $n addition the ,inistry of Corporate (ffairs is devising a new Corporate Code and is

considering changing the securities laws to mae it easier for shareholders to bring class action lawsuits#

S2??estio*s

!. Go)e4*(*7e Re5o43 I*+e6e*+e*t Di4e7to4s

2here should be always reforms in the corporate governance policies to protect the unfair business practices it

will mae easier for the shareholder to sue officers and directors and they can be protected from these type of

scams and losses#

". Dis7los24e o5 Ple+?e+ Se724ities

2he S:0$ should increased disclosure obligations of promoters and controlling shareholders# 0efore the Satyam

scandal promoters and controlling shareholders were not re@uired to disclose to investors if they had pledged

their stoc#

%. I*74e(se+ 8i*(*7i(l A77o2*ti*? Dis7los24es

2he S:0$ should propose the companies to disclose their balance sheet positions on @uarterly basis year# *re-

Satyam the regulations only re@uired disclosure of balance sheet positions once a year# 2he increased reporting

of companies8 balance sheets will provide investors with more information on the stability of a company8s

financial position#

&. I8RS A+o6tio* o5 I*te4*(tio*(l St(*+(4+s'

overnment should force the companies to adopt the $%RS D$nternational %inancial Reporting StandardsF by

(dopting $%RS will facilitate investor comparisons of financial performance across country lines and will

increase confidence in the accounting numbers#

/. C4e(tio* o5 Ne: Co46o4(te Co+e Mi*ist4, o5 Co46o4(te A55(i4s


12/13

2he $ndian ,inistry of Corporate (ffairs is should draft a new corporate code for $ndian publicly listed

companies# 2his new corporate code will mae the companies to wor legally and ethically

. Re?2l(to4, o;li?(tio*s9

overnment should have Strictness in regulatory obligations imposed by S:0$ on public listed companies so

that the companies should not follow the unfair practices and the rights of the investors should be saved and

they should not get cheated

Co*7l2sio*

SatyamGs fraud spurred the government of $ndia to tighten corporate norms to prevent investors and

safeguard the credibility of $ndia and the nationGs image across the world

(n effective whistle blower policyG in place education on ethical values criteria for remuneration to

ey personnel and strengthening of @uality review

( transformed organi)ational culture which pays highest attention to ethical conduct and moral values

will strengthen sustainable roots of the company#

2ransparency and effective auditing and regulatory checs through internal and e>ternal auditors and

monitoring agencies will help establish long lasting credibility for any company#

Corporate governance framewor needs to be implemented in letter as well as spirit# 2he increasing

rates of white collar crimes demands stiff penalties and punishment# 2he small distortions created by

few immoral e>ecutives lad far reaching negative conse@uences# Nopefully creating an awareness of the

large conse@uences of small lies may help some to avoid this trap#

Re5e4e*7es9

http://www.vccircle.com/news/technology/2009/01/09/beat-satyam-won-awards-corp-governance-internal-audit

http://papers.ssrn.com/sol3/papers.cm!abstract"id#1$%0022

http://www.mydigitalc.com/news/listed-irms-get-new-conduct-code-9$9

http://www.highbeam.com/doc/1&1-19'$92%19.html

https://login.thetimes.co.u(/!goto)rl#http*3+*2,*2,www.thetimes.co.u(*2,tto*2,business*2,industries

*2,technology*2,

http://papers.ssrn.com/sol3/papers.cm!abstract"id#%$9'
http://www.vccircle.com/news/technology/2009/01/09/beat-satyam-won-awards-corp-governance-internal-audithttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1460022http://www.mydigitalfc.com/news/listed-firms-get-new-conduct-code-949http://www.highbeam.com/doc/1G1-197492619.htmlhttps://login.thetimes.co.uk/?gotoUrl=http%3A%2F%2Fwww.thetimes.co.uk%2Ftto%2Fbusiness%2Findustries%2Ftechnology%2Fhttps://login.thetimes.co.uk/?gotoUrl=http%3A%2F%2Fwww.thetimes.co.uk%2Ftto%2Fbusiness%2Findustries%2Ftechnology%2Fhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=649857http://www.vccircle.com/news/technology/2009/01/09/beat-satyam-won-awards-corp-governance-internal-audithttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1460022http://www.mydigitalfc.com/news/listed-firms-get-new-conduct-code-949http://www.highbeam.com/doc/1G1-197492619.htmlhttps://login.thetimes.co.uk/?gotoUrl=http%3A%2F%2Fwww.thetimes.co.uk%2Ftto%2Fbusiness%2Findustries%2Ftechnology%2Fhttps://login.thetimes.co.uk/?gotoUrl=http%3A%2F%2Fwww.thetimes.co.uk%2Ftto%2Fbusiness%2Findustries%2Ftechnology%2Fhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=649857


13/13

www.indlawnews.com/rrorage.asp!asperrorpath#/ewsdisplay.asp

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*2,4510001$2$02'$'03$99$0$'$92%320%02'2%.html

http://www.pr7oom.com/news/32'23/

http://www.redi.com/money/200/oct/2$bcrisis10.htm

http://(nowledge.wharton.upenn.edu/article/paying-the-price-satyams-auditors-ace-plenty-o-8uestions/

http://(nowledge.wharton.upenn.edu/article/paying-the-price-satyams-auditors-ace-plenty-o-8uestions/

http://news.outloo(india.com/items.asp!artid#%9

www.thaindian.com/newsportal/business/ramalinga-rau-admits-to-diverting-satyam-money"1001$331.html
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q3202 satyam case study ashish gahlot

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