Lessons from the The Satyam scandal
The Satyam scandal was a Rs 7,000-crore corporate scandal in which chairman Ramalinga Raju confessed that the company’s accounts had been falsified. On January 7, 2009, Ramalinga Raju sent off an email to Sebi and stock exchanges, wherein he admitted and confessed to inflating the cash and bank balances of the company. Weeks before the scam began to unravel with his famous statement that he was riding a tiger and did not know how to get off without being eaten. Raju had said in an interview that Satyam, the then fourth-largest IT company, had a cash balance of Rs 4,000 crore and could leverage it further to raise another Rs 15,000-20,000 crore.
Ramalinga Raju was convicted with 10 other members on 9 April 2015. 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. Ramalinga Raju and three others given six months jail term by SFIO on 8 December 2014.
Sebi on PWC
Finding PwC guilty in the Satyam scam, India’s capital markets regulator SEBI on 10 January 2018 barred its network entities from issuing audit certificates to any listed company in India for two years. SEBI has also ordered the disgorgement of over Rs 13 crore of wrongful gains from the auditing firm and its two erstwhile partners who worked on the IT company’s accounts.
Takeover by Tech Mahindra
After the fraud came to the light, the government had ordered an auction for sale of the company in the interest of investors and over 50,000 employees of Satyam Computers. It was acquired by Tech Mahindra, and was then renamed as Mahindra Satyam, and was eventually merged into the parent company. The Satyam saga eventually turned out to be a case of financial misstatements to the tune of approximately Rs 12,320 crore, as per Sebi’s probe then. Citibank froze all its 30 accounts in 2009.
Fake bills
Raju also manipulated the books by non-inclusion of certain receipts and payments, resulting in an overall misstatement to the tune of Rs 12,318 crore, shows an analysis of findings of Sebi’s probe. As many as 7,561 fake bills which were even detected in the company’s internal audit reports and were furnished by one single executive. Merely through these fake invoices, the company’s revenue got over-stated by Rs 4,783 crore over a period of 5-6 years. The probe itself continued for almost six years and found that fictitious invoices were created to show fake debtors on the Satyam books to the tune of up to Rs 500 crore.
Satyam’s top management simply cooked the company’s books by overstating its revenues, profit margins and profits for every single quarter over a period of five years, from 2003 to 2008. Not for them complex methods like derivatives accounting or off-balance sheet transactions that were used by Enron’s executives.
Keen to project a perpetually rosy picture of the company to investors, employees and analysts, the Rajus manipulated Satyam’s books so that it appeared to be a far bigger enterprise than it actually was. To achieve this, they sewed up deals with fictitious clients, had large teams working on these pet ‘projects’ of the chairman, and introduced over 7,000 fake invoices into the company’s computer systems to record sales that simply didn’t exist. For good measure, profits too were padded up to show healthy margins.
Over the years, these ghostly clients understandably never paid their bills, leading to a big hole in Satyam’s balance sheet. The hole was plugged by inflating the debtors (dues from clients) in the balance sheet and forging bank statements to show a mountain of cash and bank balances.
After several years of such manipulation, Satyam was reporting sales of over ?5200 crore in 2008-09, when it was in reality making about ?4100 crore. Its operating profit margins were shown at 24 per cent when they were actually at 3 per cent and its handsome profits on paper covered up for real-life losses. It was when the company ran out of cash (of the real variety) to pay salaries that Ramalinga Raju decided that he couldn’t ride the tiger any longer and made his confession.
How did such a big fraud escape detection?
Didn’t someone in the management notice that a good chunk of the company’s clients, projects and bank balances were actually err… missing? Good question. SEBI’s investigations show that many of them did. But they either helpfully supported the cover-up or turned a blind eye, deferring to ‘instructions from the Chairman’s office’.
Asked how he could have had no clue about something as basic as Satyam’s bank balances, the company’s ex-CFO, Vadlamani Srinivas, claimed that it was the company’s chairman and managing director who made decisions on investing all surplus cash. They also chose to safe-keep all the bank statements in their office, making them available only when the accounts were prepared.
But didn’t the CFO notice the yawning gap between the bank balances in the accounting system and the ones provided by the chairman’s office? He was too busy with ‘investor relations work’ to look into accounting issues, was his reply. Now we know what CFOs of large corporations do!
But can you bamboozle those watchdogs, the auditors?
You can, SEBI’s investigations show. The errors in Satyam’s financial statements were certainly not small, rounding-off errors. And they had been a part of the published financial statements for five to eight years. Yet both Satyam’s internal as well as statutory auditors didn’t bring it to anyone’s notice.
Well, the internal auditor hauled up by SEBI has frankly admitted that he did notice differences in the amounts billed to big clients such as Citigroup and Agilent when he scoured Satyam’s computerised accounts. But when he flagged this with Satyam’s finance team, he was fobbed off with the assurance that the accounts would be ‘reconciled’. Later, he was ‘assured’ that the problems had been fixed.
As to the external auditors who are supposed to look out for investors, they seem to have been quite a trusting lot. While verifying bank balances, they relied wholly on the (forged) fixed deposit receipts and bank statements provided by the ‘Chairman’s office’. The forensic audit reveals differences running into hundreds of crores between the fake and real statements as captured by the computerised accounting systems. But for some strange reason, everyone, from the internal auditor to the statutory auditors, chose to place their faith in the ‘Chairman’s office’ rather than the company’s information systems.
Did Ramalinga Raju not take ‘even a rupee’?
In his confessional letter, Ramalinga Raju has claimed that while he inflated numbers to present a rosy picture to outsiders, neither he nor the managing director sold any shares nor took ‘even a rupee/dollar’ from the company.
But SEBI’s investigations have clearly led it to conclude otherwise. In its order last week, it makes the point that the Rajus, by consistently inflating Satyam’s growth rates and profits, duped millions of investors who invested in its stock on the strength of its published financials.
What is more, while being fully aware of the fictitious financials, the Rajus transferred 1.57 crore of their own shares to related entities through off-market transactions. SEBI alleges that these shares, valued at over ?543 crore, were in turn sold in the stock market, netting a neat profit. The promoters also pledged another 6.2 crore shares to raise loans and cash amounting to ?1253 crore. Top managers such as Vadlamani Srinivas (CFO), G Ramakrishna (VP-Finance) and VS Prabhakara Gupta (Head-Internal Audit) also sold shares valued at ?4.5 crore between 2003 and 2008.
Finding these top managers guilty of unfair manipulation of stock prices and insider trading, SEBI has asked them to deposit their ‘unlawful gains’ of ?1850 crore, with 12 per cent interest, with the regulator within 45 days. They have also been barred from associating with the securities markets in any manner, for the next 14 years.
So, will Satyam’s investors get back their money?
Ha, well, there’s the catch. They probably won’t. To start with, one needs to watch if Raju & Co do indeed comply with SEBI’s order, instead of making interminable appeals to the Securities Appellate Tribunal and the courts. But even if they do, SEBI may have a difficult time finding the millions of investors who were at the receiving end of the Satyam scam.
After all, hundreds of investors are bound to have transacted on the Satyam stock between 2003 and 2008 believing its financials to be rock-solid. In retrospect, they were all victims of this fraud.
But even if you narrow the universe of victims to investors who actually held the Satyam stock when the scam broke, they are likely to have either sold their shares at severely depressed prices or swapped their shares when Satyam was bought over and then merged into Tech Mahindra.
Therefore, all they can have now is the satisfaction of knowing that the investigators have, Hercule Poirot-style, delivered a grand expose of the villains and why they did it. Meanwhile, Ramalinga Raju is awaiting trial for criminal breach of trust alleged by the CBI in a special court.