Satyam fraud, unravelling the mystery
7 Jan 2009 morning, I tune into CNBC TV 18 and the host Udhayan Mukherjee is there commenting on the up move of Satyam and saying it may be capped at around Rs.180 / 190 levels.
Capped it did and started moving southwards to a bottomless pit. Why?
Because, the Chairman of Satyam, Ramalinga Raju decided to make a confession of sorts as he was unable to keep his conscience (?) quite for very long. We don’t know how long he was trying to keep his conscience shut before he decided to listen to conscience. But, in his confession letter, he has told for several quarters he was repeatedly fudging the books to overstate profits and assets.
I went through his confessions in detail. I was discussing with few friends of mine. I as also my friends were aghast that the auditors of the company did not detect this fraud earlier. The auditors of Satyam are not a small name, they are a reputed name and one of the Big Four (the way things are unfolding, that list may soon become Big Zero).
The fraud was committed not once. The confession only reveals about the peak level of the fraud. It was being perpetrated on a continuous basis over many quarters or several years. If the Company needed growth in revenues and profits, they got it, the desired profit was just few book entries away. They most likely made these entries during the last week of the reporting period so that the invented profits filled the blanks perfectly for analyst purposes.
And then, they were on the television bullshitting to the analysts about the minor percentage point changes in the revenue numbers, overheads etc. etc.
It is all well if they were a small company, audited by another small firm of auditors.
Satyam was a big and strong company (till yesterday, I want to stress, because, they are now in distress) and audited by one of the big four as already told. It is required to strictly adhere to the stricter IFRS (International Fianancial Report Standards) and GAAP (Generally Accepted Accounting Practices) norms before the accounts were certified.
I have first hand experience of the audit style of atleast three of the Big Four firms. I can tell for sure that these firms have high quality standards for conducting audits. Though they conduct their audit through sample testing procedures, they ensure that an extended check is performed where the sample fails to meet the expected results.
Hence, it was bemusing to me how Satyam could have indulged in accounts fudging without getting detected by the auditors.
Before we can get into the exact, probable, modus operandi of Mr. Raju, let us see how a company can fraudulently inflate its profits and how that gets detected by the auditors.
a) Book sales belonging to the subsequent year in the current year by pre-dating the invoice. This is like catching the tiger by the tail. Unless the sales improves, the Company will have to follow the same thing in the subsequent years as well to ensure that the profit trend is maintained. (The auditors can detect this by matching the dates of invoices, shipment advises, gate passes, delivery receipts., physical stock verification reports, debtors confirmation etc.)
b) Book bogus sales to inflate profits in one year and show return sales in the subsequent year. This is again like catching the tiger by the tail as the quantum will have to be increased each year to compensate for the additional charge coming in the subsequent year due to return sales. (The auditors can detect this by checking the invoices, subsequent year sales returns, debtor confirmations, stock tally etc.)
c) Book bogus other income. This is done to inflate the profits and mostly to as a money laundering exercise: Unaccounted money is laundered into the books by showing income for no actual service rendered. (Auditors can detect this by seeing the actual documents supporting the other income and by comparing with the expertise available in the company to provide such services)
d) By not booking purchases or overheads. Companies try to inflate profits by not booking purchase of material or overheads: This again has to be covered up in the subsequent year when the creditors are to be paid. (Some of the ways in which the Auditor can find these include, comparison of the purchases with physical stock, quantitative tally of stocks and consumption, trend analysis of overheads between two periods, obtaining creditor’s confirmation, bank reconciliation statements to check for amounts paid but not accounted in books which will be hanging as a difference between bank balance as per books and as per the bank statements for a given cut-off date)
In all the cases of inflation of sales in the books, the company will credit the sales account to increase the sales and pass the debit to a debtor account to show receivables. The problem here is that the receivables has to be squared off either by reversing the sale or by writing off as most fraudulent companies do not introduce cash to square of the receivables for bogus sales.
However, Mr. Ramalinga Raju has introduced a new gambit in this (like we have a opening called “Indian Gambit” in chess, we can refer to this henceforth as “Satyam Gambit”).
It shows the clever manner in which the fraud was crafted by Mr. Raju.
As a Chartered Accountant, I have seen profit getting inflated by bogus booking of sales which in turn will also inflate the debtors. These debtors will remain sticky/ irrecoverable as no real sales support them. Companies will get rid of such debtors following one of the following three methods,
a) write off the debtor
b) reverse the bogus sale (and book a new one so that a new debtor is created)
c) resort to money laundering to square off the bogus debtors
Such bogus sales, if the quantum is high, will not escape the auditors eyes as they will scrutinize the receivables, seek for confirmation of the balance, will analyze the debtors to see if they are one off customers or frequent buyers etc.
Showing such receivables becomes difficult in the case of a big company like Satyam as they will have a relatively smaller number of customers contributing to significant portion of total revenues of the company. Any bluff will be quickly caught as high profile customers will be quick to respond to balance confirmation requests.
So Mr. Raju did his master stroke. He booked bogus income, most likely with fictitious companies and cleared off the debtor balances by showing collections and there by increasing the cash and bank balances.
How can one get actual collections from fictitious companies? No, he didn’t make any actual collections. He just got some more book entries made to clear the debtors and transferred the debits to bank balances.
If something remains in debtors, it will raise questions from many quarters, starting from the auditors to the Board of Directors to the analysts to institutional investors to (at least) some of the intelligent retail investors.
If the debtor balance is converted into Bank balances? No one is going to doubt. In fact, people will become more happy to see the swell of cash. The Company will be valued higher it is sitting on a huge pile of cash.
Mr. Raju, had to however, overcome one more problem. Normally, auditors will ask for confirmation balances for the bank balances shown by the company. How did he get away for so many years without having actual bank balances? Or how did he produce the needed confirmation to the auditors for these balances? Did the auditors (one of Big Four, mind you) overlook seeking confirmation of balances?
To me that is impossible. Auditors though by definition are not “bloodhounds” but are “watchdogs”, they minimum become a nagging wife if confirmation for significant balances are not received. They will qualify such things in their audit report and also will draw the attention of lack of confirmations to the Board of Directors and Audit Committee.
So how could Mr. Raju convinced the auditors. Mr. Raju, most likely did one more clever thing.
He raised some personal money. He didn’t sell the Satyam shares for this purpose (note that he has told in his confessions that he has not sold any shares in the market). Instead he pledged the shares with the banks and raised cash. That cash, either he sent using illegal route abroad to get back as software sale realizations or simply made book entries for recoveries and went to banks to create deposits in the name of Satyam Computers.
This exercise must have started on a small scale in the beginning. With a favorable bull market, he could have also easily raised the money needed by pledging the shares. (This is how the unaccounted liability of Rs.1,000 odd crore (Rs.10 billion) started to accumulate – personal cash used for making deposits for company will create assets for the company but no liability is created).
But, as the expenses in Satyam balooned and as the requirement to meet the investor expectations in terms of revenues and profits increased, Mr. Raju might have resorted to this fudging route more often that the inflated bank balances reached the confessed high of Rs.5,040 crore (US $ 1 billion) over a period of several years.
At this manipulation high and falling Satyam stock price, it should have become difficult for Mr. Raju to prove to the auditors the existence of the bank balances. But, as I already told, the auditors would have also become (atleast one) nagging wife seeking for confirmation of balances.
So, what how did he over come this problem?
I think, he would have used the limited cash at his disposal (Rs.1,000 crore (Rs.10 billion) is limited cash if you look to plug the gap of Rs.5,000 crore (Rs.50 billion)), to create bank balances for Satyam Computers close to the quarterly reporting dates by creating and closing multiple deposits while keeping the proof of making the deposits to convince the auditors.
The auditors, could have possibly, accepted such proofs and partial confirmations and most likely would have documented accepting such evidence with their reasoning.
Another great benefit of such deposits for Mr. Raju was that he could show accrued interest on such deposits and boost the profits. (This explains the bogus accrued interest of Rs.3.7 billion confession 
– how nice to have a bogus deposit and also have the added benefit of interest from such deposits).
Still two questions remain to be answered.
Question 1. Knowing that Mr. Raju perpetrated fraud of such a magnitude, how can he be such philanthropic to give Rs. 1 billion of his own money to the Company?
Question 2. How he would have planned to take it out from the Company?
Maytas deal is one answer. By going ahead with that acquisition, he would have converted a major portion of the non-existent bank balances as “inflated” investments and also taken away the Rs.10 billion real cash available (funded by him). With inflated acquisition price, this would not have hurt him at all.
But, why the confession now. Two reasons, one is very interesting and I must thank my friend for highlighting this.
1. Maytas deal failed, the Satyam share price had further fallen, making it difficult for Mr. Raju to further raise cash to fill the Rs.50 billion gap in the Balance Sheet.
2. He has already introduced Rs.10 billion of own money into the Company. With increased shareholder activism, it had almost become certain that he will get out of the Company sooner than later. In case he had to go out, how to get back the Rs.10 billion of personal money left with the Company? Make a confession and repeat multiple times in the open letter that there is an unaccounted liability of Rs.10 billion so that that amount is secured for him, irrespective any legal tangles he gets into by the confession. This again, is a master stroke from Mr. Raju, in my view. Because, he is fully aware of the speed of legal process in India and so while the legal battles are fought with intelligent lawyers for 10 or 15 years, he can continue to enjoy the money and comforts.
Q. What about the shareholders who have seen the share price plummet today alone from Rs.180 to Rs.40 odd?
A. Do you really want to read some expletives in this blog?
Read the follow-on posts:
http://www.sathyamurthy.com/2009/01/10/satyam-ceo-arrested-and-some-government-action/
http://www.sathyamurthy.com/2009/01/07/satyam-what-the-auditors-should-check-and-report/
http://www.sathyamurthy.com/2009/01/08/satyam-what-is-the-value-left/
Please do leave your comments. Thanks!
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Excellent one and exceptional.
Welcome to my blog and thank you for the kind words.
Dear Satya
Are you sure it is Rs 1 billion (= Rs 100 crores) of Ramalinga Raju’s personal money or it is actually Rs 10 billion (Rs 1000 crores) that you are referring to in the point No.2 to the question Question 1. you have posed and answered as ? You had already mentioned that it is Rs 1000 crores in a paragraph earlier in the article.
Similarly should it it be Rs 3.7 billion (= Rs 373 crore) of accrued interest that you have mentioned in the same point.
It would be interesting to see your comment on Satyam’s balance sheet which shows an increase of short term investments from US $ 27.6 million as on Sep 2007 to US $ 717 million as on Sep 2008. On the other hand long term investments have decreased from US $ 845 million in Sep 2007 to US $ 3.9 million in Sep 2008. (Refer Google Finance data on Satyam’s financials)
Regards
A Rajasekaran
Hi,
Welcome to my blog.
Thanks for correcting me. I lost count of the numbers
It is Rs.10 billion and Rs.50 billion (for the bank balance overstatement)
Thanks again. I have corrected the error and republished it.
I will be sure looking into their balance sheet and will make a follow-up post, provided I have stuff to write after all the electronic media finishes off Satyam once for all.
Your analysis is right on.. I am not much of an accounts person, but I think what you have written is correct. BTW what is the second question?
Nikhil,
Welcome to my blog.
I have corrected the error. Thanks for pointing out. I forgot to separate the two questions which I had put as one.
Very nice blog…details are very well explained! thanks !
Excellent analysis.I still think this was not possible without blessing from auditors.
i was wondering if your name SATHYAMurthy is a coincidence? ha ha
@Satya: Great Post! Interesting analysis!
Satya,
Lets just talk about the last quarter OPM….how can it be as low as 61 crores (3% margins) ?
read the livemint article on the possibility of Ramalinga lying..
Satya,
Lets just talk about the last quarter OPM….how can it be as low as 61 crores (3% margins) ?
Its hard to believe that SATYAM has such low profits.
I think there is something amiss here.
Also I was talking to a head of a Infra major and he mentioned that MAYTAS is a huge fraud as well. The HYD Rail project bidding..check out the winner and the one who came next.. (l2-l1 is 46K Crore). There is something amiss there as well.
Hey very good analysis , with your permission i want publish this in my blog at giving credit to you .
Neatly prepared to enable easily understanding even for naive users like myself..
Also do correct my understanding on the inflated bank balances..
If someone pleadges his personal shares (not sell it in the market) with the bank and route the cash into Bank Accounts and show that Bank Balance to auditors during Fiscal Year end or what so ever..
So the Investment firms / Banks, that gave Loan to Raju based on the Satyam’s Share Value, wouldn’t they analysed the actual share value / worth of the company before giving the Loan…Were they dumb enough to take such a huge risk
[...] Satyam fraud, unravelling the mystery [...]
Please go ahead and thanks.
Regards
Yes. I am planning to change it Murthy only but still it will get related to a Hyderabadi name
Ramachandran,
Thank you.
Keep coming here.
They must have high overhead costs and most likely might have been getting the BPO contracts and software development contracts at low margins.
When they had a easy route to cook profits, why would they have bothered to make real profits? So, as long as the show went, they ran it. They wanted to dig a hole and bury this thru the Maytas deal but it was not possible. People actually thought they were siphoning out Rs.80 billion from the Company by that deal. Now we know that there was nothing to siphon.
The deal was off and they needed a grand canyon like hole to bury the fraud.
[...] the auditors who let this happen, and how did this happen? How many dropped the ball innocently? A CA attempts to answer this question (I do not fully understand what he says). I would be surprised if Ramalinga Raju is the only one [...]
[...] the auditors who let this happen, and how did this happen? How many dropped the ball innocently? A CA attempts to answer this question (I do not fully understand what he says). I would be surprised if Ramalinga Raju is the only one [...]
Hi
After reading through your detailed description of what might have transpired, I can understand the extent of conspiracy.
However, I would like to mention couple of my observations based on your message.
- Presuming what you mentioned really happened, Mr. Raju is no novice to expect that he can collect the 10 billion of unaccounted liability by just reiterating time again about this. As I am aware, no court of law would permit him to take the 10 billion from Satyam. I am sure he must have consulted his team of confidants before confessing.
- If the fact that the pledged money really was in the account of Satyam, then I think they have salvaged the damage to some extent.
- As for the auditors, I am looking forward to the comments from PWC.
Great insight, would come back again as the issue unfolds.
Great analysis. Please keep posting on this topic
Great… i haven’t read anything so detail ever on the net and this analysis kept me interested and to read-on!
To Sams point, you are right in that the law/Court would not allow him to take back his money…
but that he must have already thought of ways to get it back (post confession too unlike of
Maytas deal way prior to confession)
Again, if anyone questions: Why he wud even put his money into the company?
That should be obviously to keep up his JOB!
Probably he knew he couldn’t continue as CEO if the Board gets to know about companies real performance… & so it was a choice between as CEO – manipulating and still earning salary
or just getting fired by the Board which will also hit headlines.
If we were given a choice to lose salary for 1 yr but with guaranteed position & respect for life there after or to just resign the job today! we are in for life… we might want to lose salary for 1 yr rite, if we can just live that year with the exisiting savings and esply if we also know we cannot anyway get a job outside if we resign rite…
It is the same way Raju has thought about. As better to lose a part of own money than to lose
the position and respect! However, circumstances lead him to worser situation than he thought
he could manage and ultimately he had to confess.
[...] Thoughts, a blog written by an Indian Chartered Accountant lays out some of the top of mind issues. I follow the logic and largely agree but I remain perplexed how Raju could have gotten away with [...]
Thanx for a great article. I bet Mr. Raju levered up. He might have pledged his shares and borrowed 9 times the value.
And now of course the shares are worth very little. So sad.
I said to myself after the Madoff gig,’There’s never just one cockroach…’
I hope he didnt borrow from the mob. At least one banker seems to be in hiding.
“With Russian oligarchs as clients,” said a Viennese banker who knew Mrs. Kohn and her husband socially, “she might have reason to be afraid.”
http://www.nytimes.com/2009/01/07/business/07medici.html?ref=worldbusiness&pagewanted=all
Awesome work, made things easier to understand.
Thanks,
Tejas
you right good buddy
hey one more thing , you are quite right. he is smart ass. Legally , fraud case and being creditor are 2 different case. so he will be entitiled to his money. Other thing is I know how legal thing works in india. He will never be punished by law or by society. Take example of sanjay dutt as well nagajurna finance cheif. 100 cores clear fraud , high court stopped proceeding against him for 5 yrs. Again , he got arrested after 5 yrs , complained chest pain and stayed in hospital . Again court granted him bail. SO thats why he is not worried.
Sathya,
Good one! But I believe there is something wrong with PWC. There is no explanation from their side so far.Are you leaning towards your audit community?
I liked your other post http://www.sathyamurthy.com/2009/01/07/satyam-what-the-auditors-should-check-and-report/
It is BS if some one says that only Raju is the culprit and the auditors/accountants are innocent. The biggest crooks are the auditors/accountants in this case (No offence!).
[...] Check out this analysis, which is the best I have read or heard so far. [...]
Excellent post !
>> They wanted to dig a hole and bury this thru the Maytas deal but it was not possible. >>
If Maytas was a do or die deal why did he not go ahead despite shareholder protests. He had the unanimous board approval. Did he require any other approval at the AGM, which he feared he would not get ?
It is also hard to believe their profits were so low in reality. There is not much to distinguish Satyam from the others when it comes to capabilities, service offerings, number of H1B visas on hand etc.
I also think a really nosey and persistent auditor might have been the immediate provocation for the fax.
Very enlightening article and I must thank you for it.
A minor discussion point however. You mention that fake book entries may be detected as follows:
(The auditors can detect this by matching the dates of invoices, shipment advises, gate passes, delivery receipts., physical stock verification reports, debtors confirmation etc.)
The Software services industry the world over does not have shipment advices, gate passes, delivery receipts, physical stock verification reports etc in the traditional manner.. This is due to the nature of the business.
Sarbanes Oxley Act (SOX) imposes a commonly acceptable accounting standard on companies in response to various scandals of recent years. It is however necessary to remember that SOX was inspired by collapse of or by accounting scandals in product companies and not service companies.
In addition, protection of public interest and preservation of investor confidence rests on the twin pillars of SOX and a framework for Corporate Governance. One without the other is not sufficient. Compliance audit for distributed companies – clearly Satyam has presence in 5 continents – is necessarily more complex. It is not clear altogether how the quarterly audits were conducted.
This episode, regrettable as it is, is fraught with implications for the accounting profession in India.
Hi Satya:
Just thought of looking more of Satyam Scam and found yours a perfect fit to diagonise the reality. I think this confession came after a pressure on him, otherwise, there is no one in the world to worry about the numbers. But in news papers, different numbers are pubished as to the fraud, some one simply says Rs.7000 crores and Raju said about Rs.5000+ crores. What is correct will be known only after a review & certification of past accounts by some genuine auditors.
thanks for an indept analysis, I would like permission to post on my blog as I collect these kind of details for future reading
Thanks a lot for the nice explanation – never understood how these scandals are carried out.
One thing I find curious is that in his letter to the board he had mentioned multiple times that he alone is responsible and no one else. So from reading your detailed explanation it looks like there has to be a huge amount of paper work and manual clerical (but meticulous) work that had to be done to keep it all in sync and I cannot imagine a CEO with all his other busy duties scooping down to do all that work. Or are other people’s work covered ? Or maybe they were all kept in the dark in such a way that no one got enough grudge work to put the pieces together ?
Hi Sin,
Welcome to my blog.
My pleasure. Kindly try to give a link back.
Krishna,
Welcome to my blog.
It is impossible for the CEO to carry out all this alone. It is 100% sure that more people are involved. Mr. Raju has tried to save his colleagues who acted on his instructions. But, all of them will be soon in the media glare.
Dear Sunderindia,
Welcome to my blog.
The fraud mentioned as Rs.5,000 crore (Rs.50 Billion) only talks about the “cash hole”. The total fraud is Rs.7000 crore (Rs.70 billion). I think the confession came now because he is no longer able to manage the hole, especially after the Maytas fiasco. He might have also been stripped of some independence within the company (even before resignation) in the day to day management toward the end of December 2008 quarter.
With the December 2008 quarter already passed and the hole not plugged, he might have know the inevitable and so came out in the open. So the pressure is because he could not find ways to do the cover-up for this quarter.
RC,
Welcome to my blog.
Mr. Raju, no doubt, had the approval of Board for the Maytas deal, but for winning at the AGM he needed shareholder support. He was not having the majority stake to influence the outcome at the AGM. So, when the institutions and funds holding stakes didn’t like the deal, he had to backtrack.
I do not think he would have been prompted by the Auditors for the confession. It should be due his inability to plug the hole for December 2008 quarter, most likely due to reduced freedom at Satyam. (http://www.sathyamurthy.com/wp-admin/edit-comments.php?p=559)
Hi Triplicani,
Very nice posting. Though assumptions prevailing through out the posting, I could see that those all are logical and will only be surprised if anything changes from the actual reports.
I think you have gone the NDTV way of presentation. May be unintentional but real simple one.
I have been thinking on different lines in the same matter but I see somewhere at the end we meet.
From a CA angle your assumption might fall more inline with the actuals while mine can be seen in more practical real life way.
I will post my thoughts too shortly here.
Thanks for the good simple post once again.
Vijayasarathy R
Very well analyzed. Raju was a smart man.
Satya
Excellent analysis. But this could have been easily detected if the auditors just followed normal auditing practices. Confirmation of balances which auditors send directly to the crs and drs could have easily nailed the scam. But its still too early to comment as the we don’t have the full details as of now.
Triplicani
Thank you for this analysis.
Best Wishes
Welcome Trailblazer and thank you.
R Sridhar,
Welcome to my blog and thanks for the feedback.
I am sure Auditors would have gone through the process of asking and taking confirmations from the bankers directly. However, when you deal with banks abroad, it is quite possible that cooked confirmations were provided. We will know only after PWC comes out with their side of the story. But, they are in a precarious position right now.
Kamesh,
Welcome to my blog and thanks.
Hi
First of all, congrats on a great post. I just wanted to add a couple of thoughts which you could include maybe in this or the next post.
On the matter of the low profit margins, I think the one thing that explains this is a statement in the letter
where Raju claimed that they were running operations to look like their inflated revenues, and therefore the profit margins were even more squeezed. So for example, in a sense, they had people and costs associated with that 2700 cr revenue figure, which if it had been true, would have 24% profit. In reality, they have much less revenue (2112 cr) and the costs associated with the 2700 crores. Thats why the margin is 3% for this quarter. If the costs are rationalized, they should be comparable margins with anyone else.
Second – a very interesting article in the Economic Times (Page 10 in Delhi edition) has an explanation for the need for fraud. Mr. Raju and his family (personally and through Maytas) are apparently one of India’s largest landowners. This land was all bought by the the shares used as collateral and therefore needed to be propped up. Since all major land deals in India are politically rigged, Mr. Raju needed to pay huge bribes. He had been paying bribes in form of land and not cash, but now since the elections are approaching, the politicians began demanding cash. This ‘confession’ has probably come under pressure to stop a major investigation of all this land-political tieup.
Vijayasarathy,
You are welcome to add your 2 cents using this comment window
It is always nice to hear new view points.
L Srini,
//The Software services industry the world over does not have shipment advices, gate passes, delivery receipts, physical stock verification reports etc in the traditional manner.. This is due to the nature of the business.//
I agree with you. I attempted to give an idea of how auditors generally verify a sale transaction.
In the case of software services, it would follow the path of, verifying the contract, billing terms (for BPO it should be transaction based charged also taking into account degree of complexity handled), billing cycle, customer acceptance of the invoice raised, logs of the transaction tracking software, serial number of the customer query handled (think of the last reply you received from a bank or insurance company for a online query made by you, didn’t it have a serial number?) etc.
I will be writing my next post on Corporate Governance. That is a phrase widely used right now.
Karan,
Welcome to my blog. Interesting thoughts.
One cannot also rule out possibilities of inflated expenses and siphoning of money out!
Hi Satya – real enlightening write up on this scam.
Question is, can CFO, other signing authorities and auditors get away from this fraud. Its quite unbelievable that Mr. Raju singularly did all this without anyone’s help.
Though I’m not an expert in accounting, do the basics – dont these guys do interim internal checks – dont department heads own up to the revenues generated – how is that no one noticed this gap all these yrs.
As I keep saying to my self, its utterly unbelievable that insiders wouldnt have noticed these gaps.
Well – technicality apart, these guys are answerable to all the stakeholders and their peers in the industry to have brought this shame.
Many people in the finance department of Satyam, starting from CFO are answerable to these frauds. See, if a Company builds a coterie of “yes men” within the finance department and carries out secret missions like these, it will fail all internal checks. Mr. Raju, to help accommodate his frauds, would have ensured that a loose system of internal controls were in place. For example, in a good organisation, every transaction prior to entry into the accounting system will be prepared by someone, verified/ checked by someone, approved by someone else and then, someone else will input it in the system while still another person will verify the accuracy of data entry and approve it in the system.
Most companies will also have authority limits for transactions that can be approved in the system.
It is possible that, for these bogus transactions, these control chains might have been not followed or the internal checks circumvented.
good post. simple and clean.
to my mind this scam could not have happened as ‘one person’. visible or not, there would have been at least two or more people in this, because like a don in a hindi movie, he certainly would have sidekicks who knew what/how/when it happened. with accounting procedures itself systematized, the fraud was probably played out in full public view all along by a set of people. Brazen it out, as they say. for all you know, the end game could well have been done to shield another half a dozen unnamed people. for jeopardising 50,000 careers at the drop of a hat [letter!], and at least 200,000 dependent people’s lives, there can be no qualms in the harshest legal action.
Dear Radhakrishnan,
Welcome to my blog.
Yes it appears like an action film. Telugu one
Hi Triplicani,
As I was watching the Press Con given by Mr. Mynampati and party, I could see that most of your analysis is matching. I will be surprised if the final chit writes off Mr. Mynampati not being in the party by M. Raju.
For no valid reasons Mr. Mynampati was discarding all the questions from the reporters with simple answers like “We have to ascertain the actual”, “I do not know where Raju is”, “We have not spoken to him after the mail from him (This is more surprising since no Board would have ignored the letter and not bothered to speak to the accused)”, “It is too early to comment on PWC”. He is very much there in the list. We surely will not be getting the actual list of group as it may include few local and central politicians.
There are rumours that the employees of Satyam asking/protesting to sack Mr. Mynampati from the Organisation.
They are not even able to give a clear number of the employees as on date. In a company like Satyam there must definitely be a HRMS system which can provide the as on date details. Why the so-called talented team has not taken it before getting into Press Conference?
Coming to my view on the topic:
By the time Mr. Raju decided to go public, he would have easily secured few thousands of crores under his belly. If he had not come public, as you said the matter would have come out automatically and Mr. Raju will be accused and imprisoned. To avoid such bad scenarios and knowing how Indian Law and Indian Corporate Governance deals and the time frame it takes, he can always resort for some other arrangement.
Having secured huge amount of money, Mr. Raju should have thought of entering into a different line of business under some of his (Not known to public) relations. His interest towards construction business should be noted here.
Also the current market trend will go on for another 6 to 8 months. In this case to manage and run operations as it is would have been a herculean task considering there is no actual Cash/Bank balance left.
From one of the replies I notice that there might be a retrenchment of 10000 employees. Mr. Raju and team has not taken money but also made these employees life hanging. Thinking off the cost of living and job market today, I wish and pray good for all the Satyam employees to get a better & faster change.
Ultimately whether this was done for self benefits or retaining the company’s position at the top, the main factor involved here is Vitamin “M (Money)”.
Vijayasarathy,
I found the body language of Mr. Mynampati positive. However, I did find two contradictions in his address.
1. He first said the CFO is not coming to the office citing personal reasons but will be in next week. After few minutes, he said CFO has resigned and his resignation was not yet accepted by the Board. When a reporter countered him with this contradiction, he first camouflaged his reply and when another reporter once again repeated it, he cleverly wriggled out saying the CFO also has to serve a notice period and that is why he had stated that CFO will come to work next week.
2. He feigned ignorance about the net margins of Satyam, despite being a director on the Board. It is ok if that was said about the rest of the “leadership team”. But, he cannot say that he doesn’t know about the net margins, especially when he should be completely aware of the net margins from the group he was heading besides being a director. In addition, for a big company like Satyam, I would imagine that an exhaustive presentation will be made to the Board as part of a MIS dosier which should certainly include a complete drill down of margins from various business segments both at gross and at net levels. So, he could have spotted if his division margins were shown lower or higher than what he expected to see.
3. He told in the press conference that he received the mail from Mr. Raju and within 30 minutes of getting that letter all the leadership team had a conference call with Mr. Raju. Why did not ask Mr. Raju more details about the contents of the letter in that conference call? Why did not he ask Mr. Raju where he can contact Mr. Raju in case of need? How he fathomed that he might not any more need the inputs of Mr. Raju to run the business within 24 hours of Mr. Raju quitting? Why he said he didn’t know the whereabouts of Mr. Raju when he had had a conference call with Mr. Raju and most likely asked Mr. Raju how to get in touch him in case of need?
Remember Harshad Mehta and the Biscuit king Pillai. Raju’s story will be the same. Reason vested interest will take care of him beofre he spills the beans.
Good write up. (I am a chartered accountant too)I am certain that there are several companies who fudge their accounts to varying degrees.Is tehre any web site where whistle blowers can bring to light such case. In fact I know of atleast 2 companies & am itching to tell the right authorities! Punishing by publicly disgracing the concerned professionals like the CFOs & CO secys will have a salutary effect as these are the ones who give ‘ideas’ as to HOW to do it!!!
Dear CA. S K Raman,
Welcome to my blog.
Are you by any chance brother in law of Mr. T P Anand?
Regards
R Sathyamurthy
Mr SK Raman,
There is a whistle blower website, http://www.SYSTEMSURGERY.com
I think one should use the SEBI and MCA websites for this purpose.
One can also ensure action by using the RTI Act effectively; I have referred one such action tip in my post http://www.sathyamurthy.com/2009/01/10/satyam-ceo-arrested-and-some-government-action/
In the same post there is a reference to my post on the RTI Act.
Hi,
Nice explanation.
There is a possibility that govt might bail out SATYAM by providing Monetary Help ?
How far is this justified ?
There are so many people on Satyam payroll, who are getting Lavish salary. Is it justified to give the poor man’s Tax money for the employees, who spend most of it on Luxury life, pubs, bars etc…..
Sunil
Sunil,
Welcome to my blog.
Yes. I also think that it is not right for the government to give financial package to Satyam. If that is so, what is the relief given to all those companies that run their business honestly?
Hi Triplicani,
Its a nice analysis . But here what do i think is that there must some involvement by the third parties for sure. Which helped the Company in recording bogus sales and then later Raju would have paid them by illegal route then takes back the sane from them as sales collections. But here the biggest questions lies is how come he has shown 3300 crore as a FD..There must some mystery behind this and I am sure going forward we will know these details…
Quite impressive explanation. The points highlighted above are evident and i feel the explanation is near to perfect.
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Hi Triplicani,
I didn’t get your views on the future of PWC. How can I as an investor rely on figures that they audit saying it represent a true and fair view of whats happening. Lets say they are the Auditors of a Company that i have holdings in.
Julian,
I am unable to give a true and fair view of future of PWC. However, I can say that if all of their quality procedures were properly followed, Satyam would not have happened.
Reliability of PWC’s report in other Companies depends upon their internal systems and procedures that blows the whistle when a procedure or a set of procedures is/ are not properly followed by a team.
In my view, you cannot single out PWC when you ask about reliability of audit certification. The question should extend to every single audit firm. Check out who were the auditors for IT Factory a company that collapsed in Germany.
I think I answered your question in one of the previous comment replies as under:
Satyam fraud, unravelling the mystery…
I tune into CNBC TV 18 and the host Udhayan Mukherjee is there commenting on the up move of Satyam and saying it may be capped at around Rs.180 / 190 levels….
Hi,
Thanx for explaning in detail, i just want to clarify whether the inflated profit would have made satyam to pay more tax or declare dividend
Hi,
I read your article about Satyam Computers Fraud recently. Sorry for the delayed reply. But there are still some unclear stories about this scam.
STORY I (ANOTHER SENSATIONAL NEWS WHETHER GIRLS CAN DO PARTY OR NOT? WHERE IS THE PARTY TONIGHT?
Hope by this time, we (Media,our country) might have shifted our focus on some other sensational issue as Ramalinga Raju’s episode.
STORY II (WHERE ALL MONEY HAD GONE?)
The question to be answered is where is actually the hundreds of millions of investors’ money. Who has taken all the money of the investors’ hard earned money. Some of them would have now to the streets having lost their life savings and roti, kapda aur makan!
Thanks to Mr.Ramalinga Raju and his team mates and also to the politicians like Mr.Chandrababu Naidu and Mr.Rajasekara Reddy for tarnishing Indian Image to the world countries, which have believed in the economic growth of India.
Like in all other sensational issues, the heat was there for some time and all of us have forgotten this, as if there was not at all an incident like this happened ever before. That is our great power ( Marappom… Mannippom..!)
Only if our Government imposes heavy penalties on companies for doing things which are neither ethical nor legal, that is, the so called “white collar crimes”, things will never change. Companies like Satyam will fall to ditch as it is correct.
Only we have to be careful while walking on the road. I find there is no reason to pity Mr.Ramalinga Raju or those who are in his line, as they have to pay for their sins. Any ways, thanks for indeapth details about the Satyam Computers.
GOSI….
(GOD ONLY CAN SAVE INDIA…!)
Sir,
you have given some extra-ordinary information which is very helpfull for a learner but sir there is a little problem i found is that since i am a simple student i find little hard to swallow up the meaning of all the terms related to aacounts. besides this great work sir.
regards,
suchitra
Dear Author,
One more thought which is lingering in my mind for a long time is about the other hypothetical dimension to this episode which is yet to be looked into by various agencies and I want to share the same through your blog so that readers can contribute on this aspect.
Is there any possibility to issue new share certificates or bogus share certificates with some share certificate numbers by violating all Company practices through the connivance of the Company Secretary as was being done with the collusion CFO in fudging company accounts?
By this he can pledge more number of shares with the banks so that he can have more money in his hand. Also he can give these shares to all the politicians like a complimentary pass and they can in turn cash it on market and all without spending even a pie from his own pocket. Why I am telling all these because he is a master crook with out any same and I am sure he will l go to any extend to quench his greed.
Ramesh
sarbanes oxley internal audit…
I can’t believe I missed this! I’m going to have to do some more reading me thinks….
Hi Satya,
What is your opionion as of today about satyam.
Yesterday close was $3.62.
As Tech Mahindra has stepped in – where do you see this share in next 6 months
Sunil,
I go with the markets. Tech Mahindra might have bought it bit expensive one thought but then they are a very good group in building good companies.
They are now axing surplus staff. Soon this share will come back to Index stocks. It will still be a multi-bagger even from this levels in the changed circumstances.
gr88 article Satya… thanks a lott for explaining this so well !
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