THE SATYAM SCAM

ASSIGNMENT OF CORPORATE GOVERNANCE (IC504)

Submitted to- Submitted by-

Asst. Prof. Manish Kumar Abhishek Kakoti (MCI16006)

Pritish Das (MCI16011)
Shruti Lahoti (COM19004)
Anuja Kar (COM19006)
Hopestar Thongni (19008)
CONTENT

INTRODUCTION…………………………………………………………...

THE RISE OF SATYAM COMPUTER SERVICES LIMITED………...

MOTIVE …………………………………………………………….............

BACKGROUND…………………………………………………………….

PROCEDURE……………………………………………………………….

FINANCIALS……………………………………………………………….

ROLE OF AUDITORS……………………………………………………..

AFTERMATH OF THE SATYAM SCANDAL………………………….

INVESTIGATION INTO THE SATYAM CASE: CRIMINAL AND CIVIL

CHARGES…………………………………………………………………..

CONSEQUENCES………………………………………………………….

CORPORATE GOVERNANCE ISSUES WITH SATYAM COMPUTER

SERVICES LIMITED………………………………………………………

LESSONS LEARNED FROM SATYAM SCAM……………….

INTRODUCTION
Satyam Computer Services Limited was setup by B. Ramalinga Raju along with his brother-
in-law in 1987 in a small office in Sikandrabad. Satyam Computers was a Hyderabad based IT
company. It was one of the fastest growing companies in India. The company was first to spot
opportunities in Indian outsourcing and started when the information technology in the country
was at the initial stage.
In May 1992, the Satyam Computers was listed in BSE and in 2001 it was listed in NYSE.
Apart from heading Satyam computers B.R. Raju also served NASSCOM as its chairperson
from 2006-07. He won many awards in this field. He was also awarded the golden peacock for
excellence in corporate governance in 2008. However, just after 4 months CBI charged that
B.R. Raju sent a voluntary confession letter disclosing that he cooked the books of Satyam
Computers over a period of several years to a total amount of Rs 7136 Crores.
From being India’s IT “crown jewel” and the country’s “fourth largest” company with high-
profile customers, the outsourcing firm Satyam Computers has become embroiled in the
nation’s biggest corporate scam in living memory. Mr. Ramalinga Raju (Chairman and
Founder of Satyam), who had been arrested, confessed to a $1.47 billion (or Rs. 7800 crore)
fraud, admitted that he had made up profits for years. According to reports, Raju and his
brother, B. Rama Raju, who was the Managing Director, “hid the deception from the
company’s board, senior managers, and auditors”. In order to evaluate and understand the
severity of Satyam’s fraud, it is important to understand factors that contributed to the
“unethical” decisions made by the company’s executives.
First, it is necessary to detail the rise of Satyam as a competitor within the global IT services
marketplace.
Second, it is helpful to evaluate the driving-forces behind Satyam’s decisions.
Finally, attempt to learn some “lessons” from Satyam fraud for the future.

THE RISE OF SATYAM COMPUTER SERVICES LIMITED

Satyam Computer Services Limited was a “rising-star” in the Indian “outsourced” IT-services
industry. The company was formed in 1987 in Hyderabad (India) by Mr. Ramalinga Raju. The
firm began with 20 employees and grew rapidly as a “global” business. Satyam is the fourth-
largest outsourcing firm after the three named- Infosys, TCS and Wipro. It offered IT and
business process outsourcing services spanning various sectors. Satyam was as an example of
“India’s growing success”. In 2007, Ernst & Young awarded Mr. Raju with the ‘Entrepreneur
of the Year’ award. By 2003, Satyam’s IT services businesses included 13,120 technical
associates servicing over 300 customers worldwide. At that time, the world-wide IT services
market was estimated at nearly $400 billion, with an estimated annual compound growth rate
of 6.4%. The markets major drivers at that point in time were the increased importance of IT
services to businesses world- wide; the impact of the Internet on e-business; the emergence of
a high‐quality IT services industry in India and their methodologies; and, the growing need of
IT services providers who could provide a range of services. To effectively compete, both
against domestic and global competitors, the company embarked on a variety of multi‐pronged
business growth strategies. From 2003-2008, in nearly all financial metrics of interest to
investors, the company grew measurably. Satyam generated USD $467 million in total sales.
By March 2008, the company had grown to USD $2.1 billion. The company demonstrated “an
annual compound growth rate of 35% over that period”. Operating profits averaged 21%.
Earnings per share similarly grew, from $0.12 to $0.62, at a compound annual growth rate of
40%. Over the same period (2003‐2009), the company was trading at an average trailing
EBITDA multiple of 15.36. Finally, beginning in January 2003, at a share price of 138.08 INR,
Satyam’s stock would peak at 526.25 INR—a 300% improvement in share price after nearly
five years. Satyam clearly generated significant corporate growth and shareholder value. The
company was a leading star—and a recognizable name—in a global IT marketplace. The
external environment in which Satyam operated was indeed beneficial to the company’s
growth. But the numbers did not represent the full picture.

MOTIVE
B. Ramalingam Raju saw a great potential in the real e-state market. At that time, the prices of
the properties were rising at a very high pace. Raju began purchasing properties in Hyderabad
and other different areas. There was even an information circulated in the market that Raju had
an internal information of the new routes to constructed for the metro rail tracks. He even
started purchasing properties in the name of his friends, family members and even employees.
When he required money to buy more properties, he stated manipulating the financial
statements of Satyam Computer System. Increasing the profits of the company lead to the
increase in the share prices. Raju including with his brother Ramaraju began selling off some
of their shares and kept the others as collateral to occupy more properties. The promoters of
the company kept on selling off their shares at very high prices. This money was then again
used to purchase properties.

BACKGROUND
In 2009, B. Ramalinga Raju admitted and confessed to a large-scale financial manipulation to
the tune of Rs 50.4 billion in Satyam’s books of account. Soon after, SEBI initiated
investigation, and there began 'the Satyam Saga’, the biggest corporate fraud in India until then.
From top management to auditors - all came under the scrutiny and were awarded punishments
for their respective roles in the Satyam scam.
The chairman, Ramalinga Raju, resigned as Chairman of Satyam Computer Services Limited
after revealing that he had systematically falsified accounts as the company expanded from a
handful of employees into a back-office giant with a work force of 53,000 and operations in 66
countries. Raju putting out a confessional statement admitting fraud that roughly 1.5 billion US
dollars (or the equivalent of 70 billion Indian rupees) of the firm’s past funds were “non-
existent”.
However, the most shocking part of the confession was that the money, which after the scam
was supposed to be fictitious, had been recorded in Satyam’s balance sheets and books of
account that had been audited by the internationally reputed firm of auditors, Price Waterhouse
Coopers
Mr. Raju said that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and
bank loans the company listed as assets for its second quarter, which ended in September, were
non•existent. Revenue for the quarter was 20 percent lower than the 27 billion rupees reported,
and the company’s operating margin was a fraction of what it declared.
Satyam served as the back office for some of the largest banks, manufacturers, health care and
media companies in the world, handling everything from computer systems to customer
service. Clients have included General Electric, General Motors, Nestle and the United States
government. In some cases, Satyam was even responsible for clients’ finances and accounting.
Mr. Raju, in his letter to the Bombay Stock Exchange, described a small discrepancy that grew
beyond his control. “What started as a marginal gap between actual operating profit and the
one reflected in the books of accounts continued to grow over the years. It has attained
unmanageable proportions as the size of company operations grew,” he wrote. “It was like
riding a tiger, not knowing how to get off without being eaten.” Mr. Raju said he had tried and
failed to bridge the gap.
Satyam was under close scrutiny, and the company was banned from World Bank contracts for
installing spy software on some World Bank computers. Satyam denied the accusation but the
World Bank confirmed without elaboration on the cause that Satyam had been banned.
The scandal raised questions over accounting standards in India as a whole, as observers asked
whether similar problems might have lied buried elsewhere. The risk premium for Indian
companies will rise in investors’ eyes. News of the scandal — quickly compared with the
collapse of Enron — sent jitters through the Indian stock market, and the benchmark Sensex
index fell more than 5 percent. Shares in Satyam fell more than 70 percent.

PROCEDURE
IT Company name Satyam Computers was started by Ramalinga Raju and his brother in law
in 1987. Raju was Harvard Graduate and an impressive personality. Satyam was Hyderabad
based company. In 1991-92 Satyam computers was listed on BSE (Bombay Stock Exchange)
and in 2001 it was listed on NYSE (New York Stock Exchange). Satyam Computers was one
of the fastest growing company of India and hence Satyam Computers as well as Ramalinga
Raju received many awards during its growth years.
During the same period the Real Estate was on Boom and hence Raju was attracted towards
real estate market. The property rates in Hyderabad was growing rapidly so he aggressively
started buying the land properties in Hyderabad and nearby areas. Due to aggressive buying of
properties he was in short of funds hence to generate more funds he started to manipulate the
financial statements of Satyam Computers. For example, If Satyam had the actual profit of Rs
60 crores then in financial statements Raju used to show the profit of Rs600 crores so as to
show that Satyam is growing very rapidly.
Due to this fake rapid growth and fake strong financials the price of share of Satyam was
growing rapidly. Raju and his brother were selling the shares of Satyam on this high price so
as to raise the money to buy properties. He then opened 365 new companies to buy the
properties and used to buy the properties under the name of his family members, relatives,
friends etc. Raju used to make his farm workers (whose monthly income was not more than
Rs5000) the Directors of his newly opened companies and used to buy the properties under
their name.
His plan was that the rates of the properties will grow in multiples after some time, and sold
off those properties and from the money earned, he will balance the gap that was created in
financial statements of Satyam.
Because of manipulating the financial statements of Satyam as well as showing the fake rapid
growth for years, the price of share of Satyam was growing very rapidly. Taking advantage of
this, the promoters of Satyam used to sell those shares on high price to earn profit. In 1999 the
promoters of Satyam hold 24% of shares, while in 2008 it was reduced to 2%. As the days were
passing the gap between the actual figures and fake figures was increasing resulting into a huge
amount.
Due to recession in 2008, the rates of properties decreased drastically and Raju’s plan of selling
properties at high rates failed. Raju was in great trouble and to escape from this he made a new
plan. According to this new plan, Satyam will buy the two companies that is Maytas properties
and Maytas Infra (both companies where of Raju’s family members). They will buy the
companies on paper but in real there will be no cash transactions so as to balance the fake
figures and actual figures in accounts of Satyam. Satyam’s board of directors approved the plan
on 16th Dec 2008 and without taking the permission of Share Holders, Raju sanctioned the
deal. But investors of Satyam were not happy and due to this price of stock of Satyam
decreased. But One investor from U.S filed Lawsuit on Satyam due to which the price of
Satyam was decreased by almost 55% on NYSE.
Due to increasing pressure of investors on Raju, he cancelled the plan of buying Maytas Infra
and Maytas properties. This was last chance for Raju to fill the gap between actual and fake
figures of Satyam and stop this scam from revealing, but seeing it failed, on 7th Jan 2009 he
confessed to SEBI that he was manipulating the financial statements of Satyam Computer
Services.

Timeline:

➢ January 7, 2009: Ramalinga Raju resigns, discloses a Rs 7000-crore accounting fraud

in balance sheets about cash which never existed in the company.
➢ January 8, 2009: Satyam's bank Citibank freezes its 30 accounts. Interim CEO Ram
Mynampati says company in severe cash crunch and may not be able to pay salaries.
Satyam's auditor PwC faces ire.
➢ January 9, 2009: Ramalinga Raju and his younger brother B Rama Raju arrested by
Police. Central Govt disbands Satyam board, to appoint its own 10 directors.
 ➢ Jan 9, 2009: Satyam removed from Sensex, Nifty; NSE excludes F&O contracts on
expiry of Jan contract.
➢ Jan 10, 2009: Satyam former CFO Srinivas Vadlamani arrested.
➢ Jan 11, 2009: Government appoints Deepak Parekh, Kiran Karnik and C
Achuthan to Satyam board.
➢ February 2009: CBI takes over investigation, goes on to file 3 charge sheets
➢ Mar 6, 2009: Gets SEBI nod for bidding process to select investor
➢ April 22, 2009: Tech Mahindra makes open offer to Satyam shareholders at
Rs58/share, offer to close Jun 9.
➢ June 22, 2009: Mahindra unveils new brand identity for Satyam, Mahindra Satyam.
➢ 2010: Raju retracts confession statement, says charges levelled by CBI are false
➢ November 2, 2011: Supreme Court grants bail to Raju since CBI failed to file charge
sheet on time.
➢ October 28, 2013: Enforcement Directorate filed a charge sheet against Raju and 212
others. The filed report states that "it transpires that the accused resorted to inter-
connected transactions, so as to ensure that crime proceeds were distanced from its
initial beneficiaries, and laundered the said proceeds under the cover of the corporate
veil, with an ulterior motive to project the properties so acquired as untainted ones
➢ December 8, 2014: Ramalinga Raju and 3 others given 6 months jail term by SFIO
➢ December 23, 2014: Judge adjourns verdict citing voluminous documents
➢ March 9, 2015: Special court adjourns verdict till April 9
➢ April 9, 2015: Ramalinga Raju and nine others found guilty, sentenced to seven years
imprisonment.

FINANCIALS
Ramalinga Raju and Fraudulent Financial Reporting Practices at Satyam
Unfortunately, less than five months after winning the Global Peacock Award, Satyam
became the centre-piece of a ‘massive’ accounting fraud. 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 5-years, from 2003 to 2008. Shockingly,
on January 7, 2009, Mr. Raju disclosed in a letter, “He had been manipulating the
company’s accounting numbers for years. He overstated assets on Satyam’s balance
sheet by $1.47 billion, and nearly $1.04 billion in bank loans and cash that the company
claimed to own was non-existent. Satyam also under-reported liabilities on its balance
sheet and overstated its income nearly every quarter over the course of several years in
order to meet analyst expectations.” For example, the results announced on October 17,
2009 overstated quarterly revenues by 75% and profits by 97%. Mr. Raju and
company’s global head of internal audit used a number of different techniques to
perpetrate the fraud. As Ramachandran pointed out, “Using his personal computer, Mr.
Raju created numerous bank statements to advance the fraud. He falsified the bank
accounts to inflate the balance sheet with balances that did not exist. He also inflated
the income statement by claiming interest income from the fake bank accounts. Mr.
Raju also revealed that He created 6,000 fake salary accounts over the past few years
and appropriated the money after the company deposited it.” As Bhasin pointed out,
 “The Satyam’s global head of internal audit created fake customer identities and
generated fake invoices against their names to inflate revenue. The global head of
internal audit also forged board resolutions and illegally obtained loans for the
company.” It also appeared that the cash that the company raised through American
Depository Receipts in the United States never made it to the balance sheets.

Satyam’s Fraudulent Reporting Methodology

The unfolding of Satyam sage has been a watershed event in the Indian corporate history.
According to the founder’s own public confession, Satyam had frequently used fraudulent
financial reporting practices by inflating its reported revenues by 25%, its operating margins
by over 10 times, and its cash and bank balance by over 1 billion dollars. The magnitude of
this scam/fraud makes it by far the biggest accounting scandal in India’s history. Now, it is
good to see that the Satyam case is different at least in one respect—we now have all the details
about the modus operandi of the fraud. Shockingly, how did Raju mastermind this maze of
fraudulent accounting practices at Satyam? Keen to project a perpetually rosy picture of the
company to the investors, employees and analysts, Raju manipulated and fudged the account
books so that it appeared a far bigger enterprise and more profitable, than it actually was. Here,
Bhasin remarked, “The Satyam reporting scam is clearly a case of abuse of accounting, in
which the accounts were ‘cooked-up’ by creating fake invoices for the services not rendered,
recognizing revenue on these fake receipts, falsifying the bank balances and interest on fixed
deposits to show these fake invoices are converted into cash receipts and are earning interest,
and so on.” These types of fraudulent reporting accounting practices are both illegal and
unethical. In its recent indictment of the former promoters and top managers of Satyam, the
SEBI and other investigative agencies in India had finally provided minute and fascinating
details about how India’s largest corporate scam was committed.

1. Web of Companies: “A web of 356 investment companies was used to allegedly

divert funds from Satyam. Under Ramalinga Raju, Satyam floated 327 companies and
published inflated financials,” said Bhasin. These front companies purchased 6,000
acres of land, taken loans of Rs. 1,230 crores from these companies, which were not
even accounted in books. The CID investigation also revealed that Satyam had executed
projects in the name of 7 non-existent companies. All these companies had several
transactions in the form of inter-corporate investments, advances and loans within and
among them. One such ‘sister’ company, with a paid-up capital of Rs. 5 lakh, had made
an investment of Rs. 90.25 crores, and received unsecured loans of Rs. 600 crores.

2. Cooked-Up Books of Accounts: Raju maintained thorough details of the Satyam’s

cooked-up accounts and minutes of meetings since 2002. He stored records of accounts
for the latest year (2008-09) in a computer server called “My Home Hub.” Details of
accounts from 2002 till Jan. 7, 2009 (the day Mr. Raju came out with his dramatic 5-
page confession) were stored in two separate Internet Protocol (IP) addresses. Keeping
in view the media reports, Bhasin is of firm opinion that “Satyam’s top management
simply cooked-up the company’s books by overstating its revenues, profit margins,
profits, ghost employees, etc. for every single quarter over a period of 5-years, from
2003 to 2008. In his letter, Raju admitted to inflating the cash and bank balances of the
company by Rs. 5,040 crores. The company’s total assets as on Sept. 30, 2008, stood
at Rs. 8,795 crores. Of this, cash and bank balances stood at Rs. 5,313 crores (which
was nearly 60% of the total assets). This was overstated by Rs. 5,040 crores. The
company basically had cash and bank balances of less than Rs. 300 crores.” The balance

Actual (Rs.) Reported (Rs.) Difference (Rs.)

Cash and bank balances 321 5361 5040
Accrued interest on bank FDs nil 376.5 376
Understated liability 1230 nil 1230
Overstated debtors 2161 2651 490
Total nil nil 7136
Reevenues (Q2 FY 2009) 2112 2700 588
Operating profits 61 649 588
sheet of Satyam (as on 30 Sept., 2008) carried an inflated (non-existent) cash and bank
balances of Rs. 5,040 crores, non-existent interest of Rs. 376 crores, and understated
liability of Rs. 1,230 crores. In fact, the balance sheet carried an accrued interest of Rs.
376 crores, which was also non-existent. The table below depicts some parts of the
Satyam’s fabricated ‘Balance Sheet and Income Statement’ and shows the ‘difference’
between ‘actual’ and ‘reported’ finances. Keeping in view the modus-operandi
successfully used by Satyam, Bhasin remarked: “To show excess cash, several banks
have to be ‘fooled’. To show huge fake revenues, everyone, from sales teams to MIS
managers to accountants, had to be kept in the ‘dark’. To hide it all from investors and
analysts, auditors had to be ‘fooled’. Some surely were. It is frightening that such large-
scale fraudulent financial reporting scam, which is precisely the kind of thing our
various ‘watchdogs’ are meant to prevent, can be perpetrated so casually by just a few
people at the top!”

3. Falsification of Bank’s Fixed Deposits Accounts: As Bhasin commented, “From

the records of Satyam, as well as, the books held with the auditors, it was noted that
two sets of letters of confirmation of balances of FDRs were available with the auditors.
These two sets included confirmations actually sent by banks directly to the auditors
(the genuine ones) in the prescribed format, and confirmations through forged letters
purportedly sent from various bank branches, but forged.” Thus, as on 30 Sept. 2008,
while the actual FDs balances with various banks was just under Rs. 10 crores, fake FD
receipts shown to the auditors totalled over Rs. 3,300 crores. Providing an explanation,
Bhasin described the motto and rationale for the process as, “Fake FDs had to be
generated since fake business had to be shown to the stock markets, which meant the
creation of fake customers and fake invoices from these businesses. Fake businesses
generated fake revenues which, in turn, created the illusion of fake profit margins, and,
finally, fake cash in the bank. Satyam apparently was very poor on its business
fundamentals—with margins being low in many quarters, including negative margins
in some quarters.” Indeed, falsification with regards to fixed deposit have been done
since 2001-02 till 2007-08 and also for the quarter ended June 2008 and Sept. 2008.
4. Fake Invoices: Bhasin stated, “Documents showed how the Satyam’s standard
billing systems were subverted to generate ‘false’ invoices to show ‘inflated’ sales,
before its former boss, Raju, admitted to his role in the corporate scandal. The Satyam
scandal involved this system structure being bypassed by the abuse of an emergency
‘Excel Porting System’, which allows invoices to be generated directly in IMS…by
porting the data into the IMS.” This system was subverted by the creation of a user ID
called ‘Super User’ with “the power to hide/unhide the invoices generated in IMS.” The
investigators had used cyber forensics to uncover how in-house computer systems were
exploited to generate fake invoices. Regular Satyam bills were created by a computer
application called ‘Operational Real Time Management (OPTIMA)’, which created and
maintained information on all company projects. The ‘Satyam Project Repository
(SRP)’ system then generated project IDs; there is also an ‘Ontime’ application for
entering the hours worked by Satyam employees; and a ‘Project Bill Management
System (PBMS)’ for billing. An ‘Invoice Management System (IMS)’ generated the
final invoices. There were about 74,625 invoices generated in the IMS between April
2003 and Dec. 2008. The CBI found that sales were inflated every quarter and the
average inflation in sales was about 18%.

5. Showing Fake Employees: To quote Bhasin, “One of the biggest sources of

defalcation at Satyam was the inflation of the number of employees. Founder chairman
of Satyam, Raju claimed that the company had 53,000 employees on its payroll. But
according to investigators, the real number was around 43,000. The fictitious/ghost
number of employees could be fabricated because payment to the remaining 13,000
employees was faked year-after-year: an operation that evidently involved the creation
of bogus companies with a large number of employees.” The money, in the form of
salaries paid to ghost employees, came to around $4 million a month, which was
diverted through front companies and through accounts belonging to one of Mr. Raju’s
brothers and his mother to buy thousands of acres of land. Making up ghost employees
might sound complicated, but investigators said it was not that difficult. “Employees
are just code numbers in Satyam system; it can create any amount of them by creating
bogus employee IDs with false address, time-sheets, opening fake salary accounts with
banks, and collecting payments through an accomplice.”

6. Lax Board of Directors: The Satyam Board was composed of “chairman friendly”
directors, who failed to question the management’s strategy and use of leverage in
recasting the company. Moreover, they were also extremely slow to act when it was
already clear that the company was in financial distress. Here, Bhasin observed, “The
directors acted as mere rubber-stamps and the promoters were always present to
influence the decision. The glue that held the board members together was Mr. Raju
(Chairman). Each of the board members were there on his personal invitation and that
made them ineffective. The Board ignored, or failed to act on, critical information
related to financial wrong-doings before the company ultimately collapsed.” It was only
when Raju in the Dec. 2008 announced a $1.6 billion bid for two Maytas companies
(Maytas Infra and Maytas Properties) and while the share market reacted very strongly
against the bid and prices plunged by 55% on concerns about Satyam’s CG, that some
of the IDs came into action by announcing their withdrawal from the Board, by than it
was too late. Satyam board’s decision to invest 1.6 billion dollars to acquire a 100%
stake in Maytas Properties and 51% stake in Maytas Infrastructure (the two real estate
firms promoted by Raju’s sons) was in gross violation of the Companies Act 1956,
under which no company is allowed, without shareholder’s approval to acquire directly
or indirectly any other corporate entity that is valued at over 60% of its paid-up capital.
“Yet, Satyam’s directors went along with the decision, raising only technical and
procedural questions about SEBI’s guidelines and the valuation of the Maytas
companies. They did not even refer to the conflict of interest in buying companies in a
completely unrelated business, floated by the chairman’s relatives,” remarked Bhasin.
Indeed, one of the independent directors even praised the merits of real-estate
investment on Satyam’s part.

7. Unconvincing Role of Independent Directors: With regard to the role of the

‘independent’ directors (IDs) at Satyam, we should understand: how ‘independent’ they
actually were? It was seen that all the non-executive directors (NEDs) at Satyam have
been allotted significant stock options at an unbelievable low strike price of Rs. 2 per
share. Apart from this, all the NEDs have also earned handsome commissions during
2007-08, as reflected by Satyam’s audited results. Naturally, a basic question arises
here: “how can directors who had enjoyed such a huge largesse from the Company’s
promoters, had been beneficiaries of stock options given at an unbelievable strike price
of Rs. 2 per share (against the ruling price of Rs. 500 per share in 2007- 08), and who
had received such high commissions could be expected to be ‘independent’? According
to Bhasin, “The idea of giving stock options to the IDs, was an intelligent ploy by Raju
to successfully implement his plot at Satyam, with little resistance from the so-called
independent directors, to whom, he was supposed to report to. It sounds ridiculous to
listen to some of the IDs at the Press interviews (post-scandal) that they were not aware
of what was going on at Satyam.” “Satyam scam is one more proof that the mere
compliance of SEBI’s rule of the minimum number of independent directors does not
guarantee ethical practices. Corporate history of the past decade has more than clearly
shown that independent directors have not served their purpose,” stated Bhasin.

8. Tunnelling Strategy Used by Satyam: As part of their “tunnelling” strategy, the

Satyam promoters had substantially reduced their holdings in company from 25.6% (in
Mar. 2001) to 8.74% (in Mar. 2008). Furthermore, as the promoters held a very small
percentage of equity (mere 2.18%) on Dec. 2008, as shown in Table 3, the concern was
that poor performance would result in a takeover bid, thereby exposing the gap. Here,
Bhasin reports, “The aborted Maytas acquisition deal was the final, desperate effort to
cover up the accounting fraud by bringing in some real assets into the business. When
that failed, Raju confessed the fraud. Given the stake the Raju’s held in Matyas,
pursuing the deal would not have been terribly difficult from the perspective of the Raju
family.”
As pointed out by Shirur, “Unlike Enron, which sank due to agency problem, Satyam
was brought to its knee due to tunnelling. The company with a huge cash pile, with
promoters still controlling it with a small per cent of shares (less than 3%), and trying
to absorb a real-estate company in which they have a majority stake is a deadly
Particularls Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Dec-08
Promoter's holding (in % -age) 25.6 22.26 20.74 17.35 15.67 14.02 8.79 8.74 2.18
combination pointing prima facie to tunnelling.” The reason why Raju claims that he
did it was because every year he was fudging revenue figures, and since expenditure
figures could not be fudged so easily, the gap between ‘actual’ profit and ‘book’ profit
got widened every year. In order to close this gap, he had planned to buy Maytas
Infrastructure and Maytas Properties. In this way, ‘fictitious’ profits could be absorbed
through a ‘self-dealing’ process. Bhasin concludes, “The auditors, bankers, and SEBI,
the market watchdog, were all blamed for their role in the accounting fraud.”

9. Insider Trading Activities: Investigations into Satyam scam by the CID of the State
Police and Central agencies have established that “the promoters indulged in nastiest
kind of insider trading of the company’s shares to raise money for building a large land
bank.” According to the SFIO Report findings, “promoters of Satyam and their family
members during April 2000 to January 7, 2009 sold almost 3.9 crores number of shares
thereby collecting in Rs. 3029.67 crores. During this course, the founder ex-chairman
Ramalinga Raju sold 98 lakh shares collecting in Rs. 773.42 crores, whereas, his brother
Rama Raju, sold 1.1 crores shares pocketing Rs. 894.32 crores.” Finding these top
managers guilty of unfair manipulation of stock prices and insider trading, SEBI has
asked them to deposit their ‘unlawful gains’ of Rs. 1850 crores, with 12% 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.

10. Gaps in Satyam’s Earnings and Cash Flows: After careful analysis, we can see
there is no real difference in the trends in Satyam’s net income and its cash flow from
operations during 2004 and 2005. Both net income and cash flow lines were almost
overlapping each other. That is not because the earnings were genuine; it is because the
cash flows were manipulated too. To do that, Raju’s team had to forge several big
amount accounts receivables, and simultaneously falsify about their cash collections.
Thus, the fake cash flows had led to the bogus bank balances. However, wide gaps can
be noticed in net income and cash flow from operation during 2006, 2007 and 2008,
respectively. “During 2006 to 2008, cash flows were far less than net income due to
accounting manipulations. Indeed, Satyam fraud was a stunningly and very cleverly
articulated comprehensive fraud, likely to be far more extensive than what happened at
Enron,” said Bhasin.

Year 2004-05 2005-06 2006-07 2007-08

Total income 35468 50122 64100 83944
Audit fees 6.537 11.5 36.7 37.3
% 0.0184 0.0229 0.0573 0.0444
11. Fake Audit and Dubious Role Played by Auditor’s: Many experts cast partial
blame for the accounting scandal on Satyam’s auditor ‘Price Waterhouse (PwC)’ India,
because the fraud went undetected for so many years. In fact, global auditing firm used
Lovelock and Lewis (as their agent), who audited the Satyam’s books of accounts from
June 2000 until the discovery of the fraud in 2009. Several commentators criticized
PwC harshly for failing to detect the fraud (Winkler, 2010). However, Raju’s admission
of having fudged the accounts for several years put the role of these statutory auditors
 on the dock. The SFIO Report stated, “Statutory auditors instead of using an
‘independent’ testing mechanism used Satyam’s investigative tools and thereby
compromised on reporting standards.” PwC did not check even 1% of the invoices;
neither did they pay enough attention to verification of sundry debtors, which
(according to Raju’s confession) was overstated by 23% (SFIO report says it was
overstated by almost 50%). The Statutory auditors also failed in discharging their duty
when it came to independently verifying cash and bank balances, both current account
and fixed deposits. Hence, it was required that the PwC auditors independently check
with the banks on the existence of Fixed Deposit’s, but this was not done for as large
as a sum of Rs. 5,040 crores. “The statutory auditors on whom the general public relied
on for accurate information not only failed in their job but themselves played a part in
perpetrating fraud by preparing a clean audit report for fudged, manipulated and cooked
books,” concluded Bhasin. It is shocking to know that “PwC outsourced the audit
function to a local audit firm, Lovelock and Lewis, without the approval of Satyam.”
Unfortunately, the PwC audited the company for nearly 9 years and did not uncover the
fraud, whereas Merrill Lynch discovered the fraud as part of its due diligence in merely
10 days. Missing these “red-flags” implied either that the auditors were grossly inept
or in collusion with the company in committing the fraud. The CBI, which investigated
the case, also charged the two auditors with complicity in the commission of the fraud
by consciously overlooking the accounting irregularities. On April 22, 2014 “The
Institute of Chartered Accountants of India (ICAI)” has imposed a life-time ban on four
auditors involved in the Satyam CA fraud. A penalty of Rs. 5 lakh each was also levied
on them. Strangely, Satyam’s auditor, PwC, got away with a rap on its knuckles.

ROLE OF AUDITORS
M/s PriceWaterhouseCoopres is one of the best auditing firms all across the globe. This firm
is equally responsible for the financial scam since there are many factors which may work as
indicators for demanding further investigation like cash lying with the company without any
proof of income on that. The PWC is a total fail in due diligence of their duties. They never
verified the forged statement with the bank and debtors etc. The failure of PWC can be judged
from the fact that investment banker Merrill Lynch found the financial scam of Satyam
Computers Services ltd. merely in 10 days.
PriceWaterhouseCoopers affiliates served as an independent auditor of Satyam Computer
Services when the report of scandal in the account books of Satyam Computer Services came
into the market. The Indian arm of PwC was fined $6 million by the SEC (US Securities and
Exchange Commission) for not following the code of conduct and auditing standards in the
performance of its duties related to the auditing of the accounts of Satyam Computer Services.
In 2018, SEBI (Securities and Exchange Board of India) banned Price Waterhouse from
auditing any listed company in India for 2 years, saying that the firm was complicit with the
main perpetrators of the Satyam fraud and did not comply with auditing standards. SEBI also
ordered fine of over Rs 13 crore for wrongful gains from the firm and 2 partners. PwC
announced their intention to get a stay order.
AFTERMATH OF THE SATYAM SCANDAL
The news of the fraudulent financial reporting practices followed by Satyam sent jitters through
the Indian stock market, and Sensex index fell more than 5% and also Satyam shares fell by
more than 70%. Following the shocking disclosures by Mr. Raju, the traders counter saw frantic
selling on the bourses and nearly 143 million shares had changed hands and finally, the shares
closed down 77.69% at Rs. 39.95 at the Bombay Stock Exchange (BSE), wiping out Rs.139.15
per share in a single day. After Wednesday’s fall, the firm’s market value has sunk to little
more than $500 million from around $7 billion as recently as last June. The stock that hit its
all-time high of Rs. 542 in 2008 crashed to an unimaginable Rs. 6.30 on the day Raju confessed
on Jan. 9, 2009. Satyam’s shares fell to 11.50 rupees on Jan. 10, 2009, their lowest level since
March 1998, compared to a high of Rs. 544 in 2008. In the New York Stock Exchange, Satyam
shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80. Thus,
investors lost $2.82 billion in Satyam. Just a year later, the scam-hit Satyam was snapped up
by Tech Mahindra for a mere Rs. 58 per share—a market cap of mere Rs. 5,600 crores. In the
aftermath of Satyam, India’s markets recovered and Satyam now lives on. India’s stock market
is currently trading near record highs, as it appears that a global economic recovery is taking
place. Civil litigation and criminal charges continue against Satyam. As Shubhashish
concluded, “On 13 April 2009, via a formal public auction process, a 46% stake in Satyam was
purchased by Mahindra & Mahindra owned company Tech Mahindra, as part of its
diversification strategy. Effective July 2009, Satyam rebranded its services under the new
Mahindra management as Mahindra Satyam. After a delay due to tax issues, Tech Mahindra
announced its merger with Mahindra Satyam on 21 March 2012, after the board of two
companies gave the approval. The companies are merged legally on 25 June 2013.” As Winkler
states (2010), “With the right changes, India can minimize the rate and size of accounting fraud
in the Indian capital markets.”

INVESTIGATION INTO THE SATYAM CASE: CRIMINAL

AND CIVIL CHARGES
The Indian government immediately started an investigation, while at the same time limiting
its direct participation. The government appointed a ‘new’ board of directors for Satyam to try
to save the company: goal was to sell the company within 100 days. On 7 Jan. 2009, the SEBI
commenced investigations under the various SEBI regulations. The Ministry of Corporate
Affairs (MCA) of the Central Government separately initiated a fraud investigation through its
Serious Fraud Investigation Office (SFIO). In addition, the MCA filed a petition before the
Company Law Board (CLB) to prevent the existing directors from acting on the Board and to
appoint new directors. On 9 Jan. 2009, the CLB suspended the current directors of Satyam and
allowed the Government to appoint up to 10 new “nominee” directors. Subsequently, the new,
six member Board had appointed a chief executive officer and external advisors, including the
accounting firms KPMG and Deloitte to restate the accounts of Satyam. “The Satyam
fraudulent financial reporting scam/fraud has highlighted the multiplicity of regulators, courts
and regulations involved in a serious offence by a listed company in India. The lengthy and
complicated investigations that were followed up after the revelation of the fraud has led to
charges against several different groups of people involved with Satyam,” says Bhasin. Indian
authorities arrested Mr. Raju, Mr. B. Ramu Raju (Raju’s brother), its former managing director,
Mr. Srinivas Vdlamani, the company’s head of internal audit, and its CFO on criminal charges
of fraud. Indian authorities also arrested and charged several of the company’s auditors (PwC)
with fraud. The Institute of Chartered Accountants of India (ICAI 2009) ruled that “the CFO
and the auditor were guilty of professional misconduct.” All the accused involved in the Satyam
fraud case were charged with cheating, criminal conspiracy, forgery, breach of trust, inflating
invoices and profits, faking accounts and violating number of income tax laws. The CBI had
filed three charge-sheets in the case, which were later clubbed into one massive charge-sheet
running over 55,000 pages. Over 3000 documents and 250 witnesses were parsed over the past
6 years. A special CBI court on April 9, 2015 finally, sentenced Mr. B. Ramalinga Raju, his
two brothers and seven others to seven years in prison in the Satyam fraud case. The court also
imposed a fine of Rs. 5 crores on Ramalinga Raju, the Satyam founder and former chairman,
and his brother B. Rama Raju, and Rs. 20-25 lakh each on the remaining accused (Kaul, 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.

CONSEQUENCES
The falsification of accounts decreased the values of Satyam’s stock from Rs 170 to Rs 6.50
due to which its investors suffered the loss of around 14,000 crores. LIC, who was the
institutional investor in Satyam Computer Services ltd. suffered the huge loss of Rs. 950 crores.
Money laundering charges were imposed on 166 companies of Raju and 47 other members and
their properties were also sealed. He used to send the money in European countries and then
re-route them back in India. Recently, PWC was banned by SEBI (Securities and Exchange
Board of India) for 2 years and was also fined with a sum of Rs. 13 crores. Even the US stock
market regulator, SEC (Securities and Exchange Commission) fined a sum of $ 6 million. SEBI
filed the case of Insider trading on Raju and ordered him to return the profit of Rs,1850 crore
that he earned from insider trading with 12% interest and banned him for 14 years to deal in
securities market. On 9 January 2009, B.R. Raju and his brother were arrested and Satyam’s
stock were removed from Sensex and Nifty. On 9 April 2015, Raju and 9 others were convicted
of collaborating to inflate the company’s revenue, falsifying accounts and income tax returns
and fabricating invoices and was sentenced to seven years imprisonment by Hyderabad court.
B.R. Raju and his brother were also fined a sum of Rs. 5.5 crore each. After this scam
government appointed new Board of Directors for Satyam Computer Services ltd. and it was
taken over by Mahindra and converted into Mahindra Satyam. Finally, in June 2013, Mahindra
Satyam merged with Tech Mahindra.
CORPORATE GOVERNANCE ISSUES WITH SATYAM
COMPUTER SERVICES LIMITED
On a quarterly basis, Satyam earnings grew. Mr.Raju admitted that the fraud which he
committed amounted to nearly $ 276 million. In this process Satyam grossly violated all rules
of corporate governance. The Satyam scam had been the example for following poor corporate
governance practices. It had failed to show good relations with the shareholders and employees.
The issues related to corporate governance arose because of non-fulfillment of obligation of
the company towards various stakeholders and failure of various parties which includes:
1. Failure of concept of Independent Auditors: At the time of application of concept
of corporate governance, SEBI has highlighted the role of independent directors in the
presentation of financial figures before government that independent directors will
present the true and fair view of financial figures and take the active part in audit
process of companies better than traditional directors, but in case of Satyam scandal it
was a total failure.
2. Failure of the role of CEO/CFO: The duties of the CEO/CFO of the company is to
certify about the truthfulness and fairness of financial statements of the company but in
case of Satyam scam Mr.Ramalinga Raju(CEO) and Mr.Srinivas Vadlamani(CFO) has
certified the wrong financial position of the company.
3. Failure of SEBI in timely detection of Satyam scam: Securities and Exchange Board
of India is one of the most powerful regulating agencies of Government of India which
has the full powers in intervening in any of the financial affairs of the company
including the presentation of financial figures and insider trading. The prices of the
share of Satyam computers were increased many times but SEBI was in total failure in
detecting or even smelling any foul smell. The result of all that insider trading was that
the promoters of the company have made money in crores by misrepresenting the
financial figures and increasing the market value of the shares.
4. Failure of Auditors in the due-diligence in their duties: M/s PriceWaterhouse
Coopres is one of the best auditing firms all across the globe. This firm is equally
responsible for the financial scam since there are many factors which may work as
indicators for demanding further investigation like cash lying with the company without
any proof of income on that. The PWC is a total fail in due diligence of their duties.
They never verified the forged statement with the bank and debtors etc. The failure of
PWC can be judged from the fact that investment banker Merillynch found the financial
scam of Satyam Computers Services ltd. merely in 10 days.
Lessons learned from Satyam Scam

The 2009 Satyam scandal was one of the biggest scams that took place in India. After this
scam numerous lessons were learned from the loopholes of various parties:
a) Investigate, all inaccuracies: Satyam scandal started with a small amount but eventually
it grew to a big amount of about $ 276 million. Thus, there should be investigation of small
misappropriation of funds to avoid frauds.
b) Ruined reputations: Frauds not only look bad on the company, it looks bad on the whole
industry or country, which ruins the reputation of the country leading to less amount of future
foreign investment.
c) Corporate governance needs to be stronger: The Satyam case is just another example
supporting the need for stronger corporate governance. The members of the board and top
officials should be selected properly and the role of chairperson and CEO (Chief Executive
Officer) should be separated to avoid the cases which took place at Satyam.
Thus, Satyam scam bought into light the value of ethics and helped to develop corporate culture.
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