A Case Study of Satyam Computers Limited

ABSTRACT From Enron, WorldCom and Satyam, appears that corporate accounting fraud is
a major problem that is increasing both in its frequency and severity. Research evidence has
shown that growing number of frauds have undermined the integrity of financial reports,
contributed to substantial economic losses, and eroded investors’ confidence regarding the
usefulness and reliability of financial statements.

The increasing rate of white-collar crimes demands stiff penalties, exemplary punishments,
and effective enforcement of law with the right spirit. Here is an example. The Satyam
Computer’s “creative-accounting” scandal, which brought to limelight the importance of
“Ethics and corporate governance” (CG). The fraud committed by the founders of Satyam in
2009, is a testament to the fact that “the science of conduct is swayed in large by human
greed, ambition, and hunger for power, money, fame and glory”.

Unlike Enron, which sank due to “agency” problem, Satyam was brought to its knee due to
‘tunneling’ effect. The Satyam scandal highlights the importance of securities laws and CG in
‘emerging’ markets. Indeed, Satyam fraud “spurred the government of India to tighten the
CG norms to prevent recurrence of similar frauds in future”.

Thus, major financial reporting frauds need to be studied for “lessons-learned” and
“strategies-to-follow” to reduce the incidents of such frauds in the future.

What Is Fraud? Fraud is a worldwide phenomenon that affects all continents and all sectors
of the economy. Fraud encompasses a wide-range of illicit practices and illegal acts involving
intentional deception, or misrepresentation. According to the Association of Certified Fraud
Examiners (ACFE), fraud is “a deception or misrepresentation that an individual or entity
makes knowing that misrepresentation could result in some unauthorized benefit to the
individual or to the entity or some other party”

In other words, mistakes are not fraud. Indeed, in fraud, groups of unscrupulous individuals
manipulate, or influence the activities of a target business with the intention of making
money, or obtaining goods through illegal or unfair means. Fraud cheats the target
organization of its legitimate income and results in a loss of goods, money, and even
goodwill and reputation. Fraud often employs illegal and immoral, or unfair means. It is
essential that organizations build processes, procedures and controls that do not needlessly
put employees in a position to commit fraud and that effectively detect fraudulent activity if
it occurs.

Magnitude of Fraud Losses: A Glimpse Organizations of all types and sizes are subject to
fraud. On a number of occasions over the past few decades, major public companies have
experienced financial reporting fraud, resulting in turmoil in the capital markets, a loss of
shareholder value, and, in some cases, the bankruptcy of the company itself. Although, it is
generally accepted that the Sarbanes-Oxley Act has improved corporate governance and
decreased the incidence of fraud, recent studies and surveys indicate that investors and
management continue to have concerns about financial statement fraud.

Corporate Accounting Scandal at Satyam Computer Services Limited: A Case Study of India’s
Enron Ironically, Satyam means “truth” in the ancient Indian language “Sanskrit” . Satyam
won the “Golden Peacock Award” for the best governed company in 2007 and in 2009. 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; henceforth called “Raju”), who has
been arrested and has 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”. The case of Satyam’s accounting fraud has been dubbed as
“India’s Enron”. 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 market-place. Second, it is helpful to evaluate the driving-forces
behind Satyam’s decisions: Ramalinga Raju. Finally, attempt to learn some “lessons” from
Satyam fraud for the future.
 Emergence 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. It offered IT and business process outsourcing services
spanning various sectors. Satyam was as an example of “India’s growing success”. Satyam
won numerous awards for innovation, governance, and corporate accountability. “In 2007,
Ernst & Young awarded Mr. Raju with the ‘Entrepreneur of the Year’ award. On April 14,
2008, Satyam won awards from MZ Consult’s for being a ‘leader in India in CG and
accountability’. In September 2008, the World Council for Corporate Governance awarded
Satyam with the ‘Global Peacock Award’ for global excellence in corporate accountability” .
Unfortunately, less than five months after winning the Global Peacock Award, Satyam
became the centerpiece of a “massive” accounting fraud.

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 worldwide; the impact of the Internet on eBusiness; 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.

Mr. Ramalinga Raju and the Satyam Scandal On January 7, 2009, Mr. Raju disclosed in a
letter to Satyam Computers Limited Board of Directors that “he had been manipulating the
company’s accounting numbers for years”. Mr. Raju claimed that he overstated assets on
Satyam’s balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that the
company claimed to own was non-existent. Satyam also underreported liabilities on its
balance sheet. Satyam overstated 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 percent and profits by 97 percent. Mr. Raju
and the company’s global head of internal audit used a number of different techniques to
perpetrate the fraud. “Using his personal computer, Mr. Raju created numerous bank
statements to advance the fraud. Mr. Raju falsified the bank accounts to inflate the balance
sheet with balances that did not exist. He inflated the income statement by claiming interest
income from the fake bank accounts. Mr. Raju also revealed that he created 6000 fake
salary accounts over the past few years and appropriated the money after the company
deposited it. The company’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. Greed for money, power,
competition, success and prestige compelled Mr. Raju to “ride the tiger”, which led to
violation of all duties imposed on them as fiduciaries—the duty of care, the duty of
negligence, the duty of loyalty, the duty of disclosure towards the stakeholders. “The
Satyam scandal is a classic case of negligence of fiduciary duties, total collapse of ethical
standards, and a lack of corporate social responsibility. It is human greed and desire that led
to fraud. This type of behavior can be traced to: greed overshadowing the responsibility to
meet fiduciary duties; fierce competition and the need to impress stakeholders especially
investors, analysts, shareholders, and the stock market; low ethical and moral standards by
top management; and, greater emphasis on short‐term performance” .

According to CBI, the Indian crime investigation agency, the fraud activity dates back from
April 1999, when the company embarked on a road to double-digit annual growth. As of
December 2008, Satyam had a total market capitalization of $3.2 billion dollars. Satyam
planned to acquire a 51% stake in Maytas Infrastructure Limited, a leading infrastructure
development, construction and project management company, for $300 million. Here, the
Rajus’s had a 37% stake. The total turnover was $350 million and a net profit of $20 million.
Raju’s also had a 35% share in Maytas Properties, another real-estate investment firm.
Satyam revenues exceeded $1 billion in 2006. In April, 2008 Satyam became the first Indian
company to publish IFRS audited financials. On December 16, 2008, the Satyam board,
including its five independent directors had approved the founder’s proposal to buy the
stake in Maytas Infrastructure and all of Maytas Properties, which were owned by family
members of Satyam’s Chairman, Ramalinga Raju, as fully owned subsidiary for $1.6 billion.
Without shareholder approval, the directors went ahead with the management’s decision.
The decision of acquisition was, however, reversed twelve hours after investors sold
Satyam’s stock and threatened action against the management. This was followed by the
law-suits filed in the US contesting Maytas deal. The World Bank banned Satyam from
conducting business for 8 years due to inappropriate payments to staff and inability to
provide information sought on invoices. Four independent directors quit the Satyam board
and SEBI ordered promoters to disclose pledged shares to stock exchange. Investment bank
DSP Merrill Lynch, which was appointed by Satyam to look for a partner or buyer for the
company, ultimately blew the whistle and terminated its engagement with the company
soon after it found financial irregularities .

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

Some of the main victims were: employees, clients, shareholders, bankers and Indian
government. 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. Tech Mahindra purchased 51% of Satyam on April 16, 2009, successfully saving the
firm from a complete collapse. With the right changes, India can minimize the rate and size
of accounting fraud in the Indian capital markets, Corporate Governance Issues at
Satyam.On a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which
he committed amounted to nearly $276 million. In the process, Satyam grossly violated all
rules of corporate governance .

The Satyam scam had been the example for following “poor” CG practices. It had failed to
show good relation with the shareholders and employees. CG issue at Satyam arose because
of non-fulfillment of obligation of the company towards the various stakeholders. Of specific
interest are the following: distinguishing the roles of board and management; separation of
the roles of the CEO and chairman; appointment to the board; directors and executive
compensation; protection of shareholders rights and their executives.. Lessons Learned
from Satyam Scam The 2009 Satyam scandal in India highlighted the nefarious potential of
an improperly governed corporate leader. As the fallout continues, and the effects were felt
throughout the global economy, the prevailing hope is that some good can come from the
scandal in terms of lessons learned .
1. Analysing this case as an Entrepreneur and explain the importance of Corporate
Governance. What are your specific learnings?
2. Take any other company of your choice that has got caught for corporate fraud and
provide some more solid measures for strengthening our Business and environment
(political and social) systems to ensure such types of frauds are not repeated in
future by organisations