Decoding Satyam scandal

Satyam Computer Services was founded in 1987 and by 2008 had revenues of over $2 billion, employing 52,000 IT professionals across the world. It was one of India's five top IT companies, and focused on the enterprise segment.

The case, which is also called the Enron of India, dates back to 2009. Raju wrote a letter to the Securities and Exchange Board of India (SEBI) and his company’s shareholders, admitting that he had manipulated the company’s earnings, and fooled investors. Nearly $1 billion—or 94% of the cash—on the books was fictitious.

Mr. Raju and the company’s global head of internal audit used a number of different techniques to perpetrate the fraud. “Using his personal computer, Mr. Raju created numerous bank statements to advance the fraud. Mr. Raju falsified the bank accounts to inflate the balance sheet with balances that did not exist. He inflated the income statement by claiming interest income from the fake bank accounts. Mr. Raju also revealed that he created 6000 fake salary accounts.

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

Greed for money, power, competition,
success and prestige compelled Mr. Raju
to “ride the tiger”, which led to violation
of all duties imposed on them towards the shareholders.

In December 2008 Satyam planned to acquire a 51% stake in Maytas (satyam in reverse) Infrastructure Limited, a leading infrastructure development, construction and project management company for $300 million. Here, Raju  had a 37% stake.

The Satyam board, including its five
independent directors had approved the
founder’s proposal to buy the stake in
Maytas Infrastructure and all of Maytas
Properties, which were owned by family
members of Satyam’s Chairman, Ramalinga Raju, as fully owned subsidiary for $1.6 billion. Without shareholder approval, the directors went ahead with the management’s decision.The decision of acquisition was, however, reversed twelve hours after investors sold Satyam’s stock and threatened action against the management.

On 7 January 2009, Saytam’s Chairman, Ramalinga Raju, resigned after notifying board members and the Securities and Exchange Board of India (SEBI) that Satyam’s accounts had been falsified. Raju confessed that Satyam’s balance sheet of September 30, 2008, contained the following irregularies: “He faked figures to the extent of Rs. 5040 crore of non-existent cash and bank balances as against Rs. 5361 crore in the books, accrued interest of Rs. 376 crore (non-existent), understated liability of Rs. 1230 crore on account of funds raised by Raju, and an overstated debtor’s position of Rs. 490 crore. He accepted that Satyam had reported revenue of Rs. 2700 crore and anoperating margin of Rs. 649 crore, whilethe actual revenue was Rs. 2112 crore andthe margin was Rs. 61 crore”.

Global auditing firm, PricewaterhouseCoopers (PwC), audited Satyam’s books from June 2000 until the discovery of the fraud in 2009. Several commentators criticized PwC harshly for failing to detect the fraud. Indeed, PwC signed Satyam’s financial statements and was responsible for the numbers in the financial statement.

A special court under India’s Central Bureau of Investigation (CBI) on April 10 held the founders and former officials of outsourcing firm, Satyam Computer Services, guilty in an accounting scam worth Rs7,000 crore ($1.1 billion). B Ramalinga Raju, the company’s former chairman, has been sentenced to seven years in jail.

In April 2009 the $14 billion Mahindra Group's IT arm, Tech Mahindra, purchased a major stake in the company and in June 2009 the company renamed itself Mahindra Satyam.