ACCOUNTING FRAUD AT SATYAM COMPUTERS
3. Whistleblower Program or internal Watch
OVERVIEW
OF THE COMPANY
Satyam Computers
Services Limited (SCSL) was registered as a PVT Ltd organisation in AP in the
year 1987. Soon in the year 1991 it became a Limited Company. It became the
fourth largest IT services company in India and in the year 1995 it received a
certification for ISO 9001. Satyam computers offered a large no of services and
expertise in the fields of Development of software’s , System Embedment ,
various Engineering Services such as CAD and CAM , ERP management , EAI ,CRM
,SCM,E-Commerce and Consulting. In the
year 2001, the company was given IMC Ramkrishna Bajaj National Award for its
contribution in the field of Service.
In the year 2002
company expanded its operations into China. In the same year Satyam was cited
as 'Top choice for SAP support' by Giga Research group. In 2003 the Group announced
a new business center in Singapore and also launched a Global solution center.
Satyam was given the prestigious IBM Lotus award for its innovative knowledge
& content management solutions in the year 2003. It was also given an Outsourcing
contract by WORLD BANK worth $15 million in 2003. It inaugurated a new
development center in Mississauga, Canada in 2004. Satyam also acquired
Citisoft Plc a UK based company and Dynamics, a leading data warehousing company
in Singapore in the year 2005. In 2006 Satyam received the best performing
stock from CNBC and Excellence in cost management from ICWAI. In the year 2007,
Satyam acquired Nitor Global Solutions Ltd, a UK based company in a deal worth
$5.5 million. In the same year it established a new development centre in
Brisbane to support the fields of Local Governance, insurance, mining and
Finance. Satyam was the proud winner of Corporate Social Responsibility Award
in ASIA under the poverty alleviation category. In the year 2008, Satyam
Computers (SCSL) became the first company registered in India to list its
American Depository Receipts or Shares (ADR) on NYSE and Euronext in Amsterdam. (I M Pandey-2013)
HOW
THINGS TURNED OUT ?
SCSL had many fortune 500 companies as
clients including Unilever, Nestlé ,Cisco, GE, Sony, World Bank, GM,
United States government etc. in quite a few case SCSL had even a role in the
maintenance of its client companies
accounting and finances.
The fraud unveiled at SCSL was India’s
largest corporate scandal till date and the first casualty in the wake of
Global financial meltdown in 2007-2008. But before the fraud was detected and
made public Satyam was always under close scrutiny and watch of concerned
agencies for various conflicting reports and seemingly ill directed activities.
In early October 2008 there was a report that the company was immediately
banned from any further World Bank contracts , when it was reportedly found to
have installed spy software’s and cameras in some of the World Banks computers.
Saytam denied but late it was confirmed by the Bank In December 2008, Satyam’s
shareholders revolted the news that the company has agreed to buy two entities
which allegedly had ties to the incumbent Chairman and his Son. By the end of the year 2008 , the board of
directors refused to back the chairman and the CEO on the matter and four Board
members resigned by February 2009.
The books of
Accounts of Satyam was audited for the last many years by PriceWaterCooper (PwC)
and they just overlooked somehow the underlined fraud.
This accounting
fraud looked very obvious and basic when the then chairman and Satyam’s founder,
Mr Ramalinga Raju admitted (Rishi Mehra
-2011) the following facets about the Balance Sheet dated 30th Sept 2008:
(a) About Rs
5040 crores which consisted of almost 95% of the cash at bank as on Sept’08 was
fictitious, because of largely inflated profit margins and lots of fictitious
Assets.
(b) There
was an item under the heading of Current Assets called accrued interest to the tune of
Rs. 376 crore which did not exist
and just fabricated.
(c) There
was an understatement of a particular liability to the tune of Rs 1230 crores,
which was on account of funds arranged by him and the promoter’s family.
(d) The
balance sheet also showed Debtors position to be in excess by atleast Rs. 490
crore.
It was strange
that the extraordinarily large fictitious cash pile of bank deposits claimed by
successive Balance sheets were never verified properly and its existence on a
long term basis raised enough doubt about the quality of the audit done by
internationally known Auditors. At the same time it was also surprising for
everybody that the Board of Directors which consisted of very highly skilled
and experienced individuals did nothing
substantial to avert the potentially damning situation.
The first level of
corporate governance in a company is its board of directors itself and in case
of SCSL the board comprised of very big names including Mr Vinod Dham who
worked with INTERL corporation, professor Krishna Palepu of HBS and former
Cabinet Secretary TR Prasad. It was intriguing that such an assembly of the
intellect could not detect the fraud while it was going on .
This scandal also
raised questions about the way outsourcing companies are being regulated and
particularly audited. The failure of regulatory authority was so complete that
it was joked that a blind and deaf man would have easily found it, if he wanted
it to.
Starting in the financial year 2006, Mr B
Ramalinga Raju raised money by hypothecating or pledging his family’s
shareholding in the company which was little over 8% to outside lenders to
secure collateral loans. He then reinvested the money so garnered back into the
company to cover up the shortfall of revenue and profits. Then the Global financial meltdown happened,
share prices fell by more than 40% and
thus Lenders became jittery and began selling the collateral . This aggravated
the already grim situation and at this juncture B Ramalinga Raju tried to buy
two other companies promoted by the family into Satyam’s fold for a reported
$1.6 billion. This could have wiped the fictitious assets such as cash and had
the potential to bring more assets into the fold but the scheme could not go through
because of staunch resistance from lenders as well as other investors
(particularly institutional investors).
Indian Stock market Regulator (SEBI) launched
an investigation into the fraud in December 2008 .At the same time US
Authorities raised objections and concerns with the statutory Auditor Price
Waterhouse, whose parent company was listed in US , regarding its audit of
Satyam,after their visit to the company headquarters in early 2009.
According to Mr B
Ramalinga Raju, the cover-up was started as an attempt to keep under disguise
the poor Quarterly results of the company. In a letter to the Board of
Directors of the company in Early January 2009 he clearly admitted to inflating
the latest quarterly result that the company came out with in SEPTEMBER 2008.
He admitted that in that Quarter the company reported a revenue of 2700 crores
and an operating profit (EBIT) of 649 crores amounting to almost 24% margin
where as the actual results were a revenue of 2217 crores and an operating
profit (EBIT) of 61 crores only which
amounted to only 3% margin. This resulted in an artificial cash inflow of
almost 588 crores in the Q2 of 2008-2009 FY.
Fabricated Balance Sheet and Income (P/L Account)
Statement of Satyam: As of September 30, 2008
(Rs. in crore)
Actual Reported
Difference
Cash and Bank
Balances 321 5,361 5,040
Accrued Interest
on bank FDs Nil 376.5 376
Understated
Liability 1,230 None 1,230
Overstated Debtors
2,161 2,651 490
Total Nil Nil 7,136
Revenues (Q2 FY
2009) 2,112 2,700 588
Operating Profits 61 649 588
When
further audit were done later it was found out that only the operations of SCSL
was continued to be exaggerated and not the same was done with any of the
subsidiaries. Over a period of last one year alone revenues were shown in
excess by 3,000 crores (Actual 8,392
crores and shown as 11,276 crores) and reserves were inflated as well.
Because
of the staggering amount of difference between these two figures , the company had
to carry some additional resources and various other non operational assets to
justify the exaggerated amount of operations in case there is a probe and thus
the operating costs got bigger by the day and accentuated the matter further.
Every attempt was
made to reduce and even completely eliminate the gap. But they failed. Because
the promoters only held 8% of the stock , they feared the failure to increase
revenue will lead to the company being taken over and thus they tried in a last
ditch attempt to infuse more assets and slush out the nonexistent cash by
bringing in some from outside. That’s when they tried to buy the family owned
Maytas infrastructure to its fold and infuse cash. Once Satyams problem was
solved they can settle for cash to paid to Maytas, and more importantly the can
be made much later without burdening the cash flows. But others resisted.
Immediately after the confessions made by Raju the shares of
the plunged by 80% from a high of Rs 544 in may 208 to Rs 11.50
in January 2009. In NYSE , Satyam’s shares was selling at $29.10 in july 2008 but
by contrast in March 2009 they drastically fell to US $1.80. This amounted to investors
losing more than $2.82 billion in investment.(BBC News, 2009).
WHO WAS IMPLICATED?
a. B. Ramalinga Raju (chairman): He claimed in his letter to the Board that
nobody else was aware of the fraud and particularly BOARD was innocent.
b. Audit Firm PwC.
This Audit firm audited
Satyam’s books starting from the year 2000 till 2009. Several experts criticized
the auditors in very harsh words for
failing to detect the fraud particularly the existing non-interest-bearing
deposits of more than $1 billion.
According to many professionals,
any worthwhile auditing firm would have discovered and questioned the logic
behind having such an enormous amount in non-interest bearing assets. This should have been seen as a red flag by
PWC and it failed to do so. Further, it was apparent that the auditors did not independently try to verify for
a few years with the banks in which the management of Satyam claimed to have these
deposits” (Blakely, 2009).
c. DSP Merrill Lynch: This
US company advised Satyam for the last ten years regarding issue of
new shares and reportedly helped the company’s listing in US.
WHO
THE SCANDAL AFFECTED?
Immediately following the declaration by Raju
of the fraud, Merrill Lynch terminated its contract with SCSL , Credit Suisse relegated SCSL to
third tier and the license of PWC to operate in India was revoked. All the
awards given bestowed on SCSL was stripped off (Agarwal and Sharma, 2009).
Some of the parties affected by the scam,
according to Manoharan (2011), were:
• More than 60,000 Employees of Satyam dealt
with nightmares, non payment of salaries, the spectrum of losing their jobs.
• Clients of Satyam seemed to lost their
Trust in SCSL. Many fortune 500 clients like Cisco, Telstra and World Bank cancelled their
contracts with immediate effect.
• Shareholders who lost their investments
lost faith in the system.
• Bankers and lenders were on tenterhooks for
the timely recovery of their claims and a possible financial and non-financial
exposure.
HOW
IT COULD HAVE BEEN AVOIDED?
Accounting frauds are
related to manipulative financial reporting with intentional misstatement,
missing correct figures knowingly and failing to disclose information correctly
and with the sole intention of deceiving the end users. The world has seen its
share of accounting frauds but they can be avoided with the help of following
precautions:
1.
People in charge must understand in general why employees or managerial
personnel create fraudulent behaviour and take part in financial frauds. People
commit some because they are under pressure or they do it to relieve pressure
without getting caught and have justification to make a fraud. Better internal
controls and fine leadership will mitigate the problem.
2.
Internal control and audit:
Internal audits are a constant operation to contain frauds and helps
evaluating the processes more precisely and thus assessing the procedures to
see whether the control systems in place are adequate or not. If necessary they
bring to light the needs of revision and solutions.
3. Whistleblower Program or internal Watch
In every organisation employees must be
encouraged to voice their opinion to a designated committee or seniors. And at
the same time it shall be ensured that the grievances are heard and dealt with.
If somebody brings up or notices an unethical behaviour , he/she must not be
punished. That way internal watch works.
4. Independent Audit
Frauds made by low level
employees can be detected through internal audits and higher management checks.
But it’s difficult catch the big guns by internal audit alone. Thus there is a
need to have independent auditors to check senior management and tricky
transactions.
5. Minimize cash
transactions:
This thing is of utmost importance. Each company shall demarcate the
policy by which employees are allowed to handle cash themselves. If the amount
exceeds the denoted one then they must get seniors approval to do it. And in case of directors
and others a disclosure to the BOARD of DIRECTORS is a must. At no instance a
person disbursing cash shall be from the person in charge of Accounts.
6. Reconcile various
Accounts regularly: the Auditors must audit and make reconciliation of
statements of cash and bank balances physically and must make sure there is no
discrepancy in them. All the bank accounts and credit transactions be
reconciled and reported.
7. Surprise Audits and
checks: Audit committees and
independent Auditors must conduct surprise audits of Books of Accounts and
transactions which occur more discretely. Surprise checks shall also be
conducted for Different branches and offices regularly to keep fraudsters under
check.
In more instances internal
Employees and officers are the ones who indulge in frauds. This happens because
of the oversights on the part of the management and auditors and also because
of the lack of internal controls in place.
CONCLUSIONS
The management culture at Satyam, when it was
dominated by one man , that of their chairman , symbolized an unethical corporate
culture. He not only disregarded but also manipulated the BOD. There was urge
on his part to impress the investor and thus compelled him to fudge the
results. He was under pressure. But at the same time the independent experts
sitting at the Board turned a blind eye to what’s happening around them and did
not have a clue. The board almost connived
with his actions and turned itself to a blind spectator, where as they shall
have seen the real picture and rectified or advised the true sense into it; the
lure of big and fat salary and other form of compensations further encouraged
such behaviour. In the end they allowed their behaviour to have destroyed the
trust of the investors and the image of nation as well.
Michael
Useem, management professor at Wharton noted that Satyam case was little bit
unusual in a way that it is listed in NYSE. It’s difficult to get funding at
low cost in India thus there was this necessity to issue ADRS in US Market. By
entering into the US market Satyam accepted the possibility of greater scrutiny
and higher amount ethical governance yet the scandal happened at the company.
According to his opinion the issue was indeed disturbing.
But Indian IT sector has come a long way since and
overcome the inadvertent situation tactically by being more transparent.
In the month of June ,2009, the company named itself
Mahindra Satyam after it was taken over after a SEBI led well rounded bidding
process by the MAHINDRA GROUP in the month of April ,2009.Finally the company
merged into the flagship MAHINDRA company TECH MAHINDRA in 2013. The eventual
merger was much delayed due to a pending income tax claim of Rs 2700 crores . When merged the new entity
created India’s fifth largest technology company with annual revenue of over
$3billion.
SAMARESH CHHOTRAY
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