SATYAM SCANDAL
Details of the case –
A shock to the IT industry of the whole country !
Byrraju Ramalinga Raju, chairman of Satyam, a company which provides the
IT services. It was started in Hyderabad in 1987 with 20 members
He resigned on 7th January 2009 after confessing that he had manipulated the
figures in the financial statements.
The company was bought by Tech Mahindra in a bid at Rs. 58 per share
Why was this fraudulent financial reporting was done ?
A bird-eye view on the question ‘why’ – To attract the stakeholder and
particularly to solicit the foreign investment
A greed to stand in the market encouraged the company to fake the figures and
show that the company is performing soundly and it is financially stable
This will keep the stakeholders happy and satisfied and will pour new funds
into the company.
How was this fraud was done ?
To keep up the pace and to gain the market share and to give a good picture
about the company to the outside world, Raju started to show the inflated
revenues for which it raised fake invoices in the name of customers. The gap
between the original revenue and what is shown in the books of accounts has
kept on increasing.
The company has tried in several ways to cover this up through the steps which
are explained below. But all its trials went in vain. The company made a last
attempt through which it tried to buy the major stake in Maytas Infrastructure
Limited and Maytas Properties, another firm that deals in real estate
investment, so that the financials of these two companies will come into the
consolidated financial statements. This brings some real assets into the balance
sheet of the company. Methods deployed for this fraudulent reporting –
Faking Revenue and inflated debtors: The company raised around 7000 fake
invoices for sales which placed lot of receivables on the balance sheet. Through
fake credit sales it created fake receivables and through fake non-credit sales, it
created fake cash and bank balance. The team of Raju used to create
manipulated bank statements that showed inflated figures of revenue from the
clients. These manipulated figures were used to be given to the analysts and
other stakeholders. This increased the revenue of the company and increased
the market capitalisation.
Inflated Cash and Bank Balance and Understatement of Liability – The
company has faked and inflated the cash and bank balances by 5040 crores
.The reason is quite clear as it is illogical to have high cash and bank balance
on the asset side and having liability on the other side. To overcome this, it
understated the liability.
Besides this, a prudent business which has excess cash will invest somewhere
to get returns or will pay the dividend. But
(i) The company has got no enough balance to pay the dividends, so it did not
go for dividends.
AND
(ii) If it shows that it invested in interest giving investments means that it must
fraud its cash and bank balances to show the interest from such investment in
addition to which it has already been doing through fake cash sales.
Therefore, to avoid the above two cases, it took the route of saying that the
company has made investment in ‘Non-Interest bearing deposits’
Who were involved ?
Raju is the key player in this fraud along with his development team.
Though many people on the board resigned including independent
directors, top executives are also to be stated who said that they had
recognised the unhealthy environment late which poses a doubt on them
PWC – The inability of such a competent audit firm to identify the fraud
over all these years also throws a doubt. A small verification of balances
and getting corroborative evidences from the third parties like banks
must have revealed the fraud early. But it failed to do so though it is his
duty. However its license to operate was revoked and certificates of
practice were cancelled.
Impact
Drastic dip in the share price of the company.
civil and criminal charges on the company
Several legal provisions were introduced and old ones were made stringent
