A report on

Satyam scandal through creative accounting

In the partial fulfillment of the course ECON GC281 Fundamentals of Finance & Accounts BITS-Pilani Goa Campus

Submitted By Ramil Sobti Nikita Bharadia Vaibhav Gupta Tanushriya Singh 2006B4A8661G 2008A3PS154G 2008A7PS006G 2008a8ps263G

Acknowledgement
We would like to thank Mrs. Pinky Pawaskar for her guidance and opportunity to write this report and widen our thoughts on the topic of creative accounting techniques.

Table of content

Acknowledgement 1. Introduction 2. Chronology of events

3. Satyam unfolding the scam.

4. Stock movements pre and post scandal 5. Scandal aftermath 6. Conclusion 7. References

Introduction
Corporate scandals are a global phenomenon. India is not immune. India has a young, vast and fast growing corporate scenario leading to huge FDI inflows helping to achieve a higher GDP in the times of global recession. Indian firms need to establish trust and maintain an image on the global level to keep the success stories running. The Satyam scandal is an indication for the lack rules and regulations of corporate governance in India. Satyam Computer Services Ltd. is a consulting and information technology Services Company based in Hyderabad, India. It was found in 1987 by B.Ramalinga Raju. The company offers information technology (IT) services spanning various sectors, and is listed on the New York Stock Exchange and Euronext. It is considered as an icon among the IT companies and at one point had over billion dollar revenue. Satyam's network covers 67 countries across six continents. The company employs 40,000 IT professionals across development centers in India, the United States, the United Kingdom, the UAE, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt and Australia. It serves over 654 global companies, 185 of which are Fortune 500 corporations. Satyam has strategic technology and marketing alliances with over 50 companies. Apart from Hyderabad, it has development centers in India at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar and Visakhapatnam. Indias government, its corporate sector and even the people working for Satyam were stunned after the founder-chairman of one of the countrys largest information technology (IT) services companies admitted to years of falsified profits and an audacious financial fraud worth 1.5 billion dollars. The scam at Satyam Computer Services, the fourth largest company in Indias much showcased and fiscally pampered information technology (IT) industry, has had an unusual trajectory. It began with a successful effort on the part of investors to thwart an attempt by the minority-shareholding promoters to use the firms cash reserves to buy out two companies owned by them Maytas Properties and Maytas Infra. That aborted attempt at expansion precipitated a collapse in the price of the companys stock and a shocking confession of financial manipulation and fraud from its chairman. Ramalinga Raju.

The promoters decided to inflate the revenue and profit figures of Satyam. In the event, the company has a huge hole in its balance sheet, consisting of non-existent assets and cash reserves that have been recorded and liabilities that are unrecorded. According to the confessional statement of Mr. Raju, the balance sheet shortfall is more than Rs.7000 crore. The desire to drive up stock values was the key reason and the benefits derived by promoters from high stock values are obvious, allowing them to buy into real wealth outside the company and giving them the invasion money to acquire large stakes in other firms. Though the precise numbers quoted vary, according to observers the stake of the promoters fell sharply after 2001 when they held 25.60 per cent of equity in the company. This fell to 22.26 per cent by the end of March, 2002, 20.74 per cent in 2003, 17.35 per cent in 2004, 15.67 per cent in 2005, 14.02 per cent in 2006, 8.79 in 2007, 8.65 at the end of September 2008, and 5.13 per cent in January 2009 (Business Line, January 3, 2009). The most recent decline is attributed to the decision of lenders from whom the family had borrowed to sell the shares that were pledged with them. But the earlier declines must have been the result either of sale of shares by promoters or of sale of new shares to investors. This quick drop in promoters stake should have raised concern but lack of knowledge and poor corporate governance led to the delayed exposure. Ironically Satyam had an award-winning reputation for corporate governance, impeccable board with high-profile independent directors, and its appointment of big-four member PwC as its auditor and still the fraud occurred.

Chronological order of the fallout

December 16: Satyam gets board of approval for acquisition of Maytas infrastructure and Maytas properties for $1.6 billion December 17: Defers Maytas acquisition on stiff investor resistance. December 18: Schedules board meet for the proposal of buyback of shares on 29. December 18: British mobile solution provider Upaid file a law suit against Satyam in district court in the US over Maytas deal. December 24: World Bank bans Satyam for 8 years on charges of data theft. December 25: Mangalam Srinivasam, non-executive and independent director resigns from board. December 27: Postpones board meeting to January 10, 2009 to consider buyback of shares. December 27: Promoters disclosed that their entire holding in Satyam pledged with institutional lenders December 28: Two independent Director Krishna G Palepu, Vinod K Dham resigned from the board. December 29: M Rammohan Rao, another independent director resigned. January 1: Satyam Upaid case hearing over Maytas deal in Texas court on January 7. January 2: Promoters holding in Satyam drops to 5.31 % from 8.27 % after the sale of pledged shared by lenders. January 5: Satyam brings up old report by research firm Forrester complimenting companys innovative strategy. January 6: IL&FS Trust company sales 2.45 crore shares of Saytam pledged to institutional investors by promoters. January 6: Rajus family holdings in Satyam falls to 3.16% after sale of pledged shares by lenders. January 7: Satyam chairman Ramalinga Raju sends letter to board tendering his resignation and admitting to fraud in accounting books. January 7: Satyam managing directors B Rama Raju also resign. January 7: DSP Merrill lynch terminated its advisory engagement with company.

Satyam-Unfolding the scam

Ramalinga Raju's journey with Satyam came to an end with the announcement on 16th Dec'08 that it will acquire two group firms - Maytas properties and Maytas Infra. The BOD of Satyam had approved the founders proposal to buy 51 per cent stake in Maytas Infrastructure and 100 % in Maytas Properties. The total outflow for both the acquisitions was expected to be US$ 1.6bn comprising of US$ 1.3bn for the 100% stake in Maytas Properties and US$ 0.3bn for the 51% stake in Maytas Infra. This is the move that sparked a row over alleged violation of corporate governance laws. The deal was clearly not in the interest of Satyam and thus share holders opposed the decision which was spear headed by Investment giant Templeton and brokerage house CLSA. The founder still tried to go ahead with the deal citing de-risking, diversification and inability to find a suitable IT company for an acquisition. Maytas infra another of the founder's company was reeling under debt due to falling land prices a consequence of economic slowdown. Investors succeeded to thwart an attempt by the minority-shareholding promoters to use the firms cash reserves to buy out the two companies which was basically cover up and the aborted attempt at expansion precipitated a collapse in the price of the companys stock and a shocking confession of financial manipulation and fraud from its chairman, B. Ramalinga Raju. Bottom line of the Confession: The Balance Sheet carries as of September 30, 2008

1. Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books) 2. An accrued interest of Rs. 376 crore which is non-existent 3. An understated liability of Rs. 1,230 crore on account of funds arranged by me 4.An over stated debtors position of Rs. 490 crore (as against Rs. 2651 [cr.] reflected in the books) operating margin of Rs. 649 crore (24% Of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% of revenues). This has resulted in artificial, cash and bank balances going up by Rs. 588 crore in Q2 alone.

.For the September quarter (02) we reported a revenue of Rs.2,700 crore and an

The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). 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 significantly (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations thereby significantly increasing the costs.

Balance sheet gaps: Simple manipulation of revenues and earnings To show superior performance Raising fictitious bills for services that were never rendered to increase the cash & bank balance correspondingly. Operating profits were artificially boosted from the actual Rs 61 crore to Rs 649 crore. Its financial statements were manipulated for years-Never had Rs.5064 crores(US$ 1.05bn) shown has cash for several years. Liabilities understated by US$1.23bn Debtors were overstated by US$400 million Interest accrued and receivable by US$376 million never existed

Current Assets

ACTUAL CASH IN BANK WAS 321 INFLATED 5040cr

ACTUAL DEBT WAS 2161 OVERSTATED 490 Cr

NO ACCRUED INTEREST 376 Cr

Current Liabilities

UNDERSTATED LIABILITY 1230 Cr which was arranged by the founder

REVENUE OPERATING MARGIN

2700 690

ARTIFICIALLY ADDED 588 OPERATING PROFIT ADDED 588 INCREASING THE CASH RESERVE ONLY FOR Q2 ALONE TO 588

Total Non Existent Assets->5040+376+1230+ 490= 7136 Cr

Manipulated trend in Operating Profit

Ope rating Profit
800 Operatin Profit ( IN CRORES) 600 400 200 0 Series 1 Sep '07 401.61 Dec '07 468.72 Mar '08 545.49 Quarter Jun '08 648.61 Sep '08 649.27 401.61 468.72 648.61 545.49

ACTUAL OPERATING MARGIN 61 Cr REPORTED649 Cr( CREATED AN 649.27 ARTIFICIAL REVENUE OF 588)

Auditors do bank reconciliation to check whether the money has indeed come or not. They check bank statements and certificates. PriceWaterHouseCoopers one of the big 3 in the accounting world, had also some of its official employees working with founder resulting in this sordid state for Satyam. The company officials said they relied on data from the reputed auditors. Satyam's bankers - ICICI Bank, HDFC Bank, Bank of Baroda, etc are also to be blamed to certain extent.

Stock movements pre and post scandal

This graph refers to the movement of stock of satyam computers service LTD in Newyork stock exchange . After falling steeply, it has started showing some signs of revival though far waay from its previous standards.

This graph compares the movement of Satyam services LTD and IT bench mark index. It reveals that both the graphs took a nosedive during recession. However the revived Mahendra Satyam havent shown return like IT bench mark after the scandal.

Post Scandal Revival Of Satyam

After the Satyam scandal of 2008-09, Tech Mahindra bid for Satyam Computer Services, and emerged as a top bidder with an offer of Rs 59 a share for a 31 per cent stake in the company, beating a strong rival Larsen & Toubro. After evaluating the bids, the governmentappointed board of Satyam Computer announced on 13 April 2009: "its Board of Directors has selected Venturbay Consultants Private Limited, a subsidiary controlled by Tech Mahindra Limited as the highest bidder to acquire a controlling stake in the Company, subject to the approval of the Hon'ble Company Law Board." Through a subsidiary, it has emerged victorious in Satyam sell-off; a company probably two times its size in number of people. Tech Mahindra paid 17.6 billion Indian rupees (US$354 million) for a 31 percent stake in Satyam, through a preferential issue of equity. It also acquired another 20 percent equity through a public offer to other Satyam shareholders. The move by Tech Mahindra to acquire a majority stake in Satyam may put off clients from outside the telecommunications industry, according to analysts. Following the results of Satyam Bid in favor of Tech Mahindra on June 21, 2009 Satyam Computer Services Limited (NYSE: SAY), unveiled its new brand identity, Mahindra Satyam. This strategic move paves the way for the emergence of a robust brand, which draws from the core values of the Mahindra Group and the inherent strength of the Satyam brand. CP Gurnani as CEO and S. Durgashankar as CFO have been appointed. Satyams revenue, which was around $1.8 billion, is believed to have dropped to $1.2 billion after the scam due to significant client attrition. With Tech Mahindras revenue at around $1 billion, the combined revenue would be around $2.2 billion. The Company Law Board (CLB) has now set June 30, 2010 as the deadline for Mahindra Satyam to file its re-stated accounts. The company has been allowed to reflect any errors, omissions, irregularities, mis-statements or any other irregularities identified for periods prior to 2008-09.

Conclusion:

Satyam was a pillar of India's growing economy and fourth-largest IT services firm until it became embroiled in one of the largest global examples of corporate fraud. It caused potential damage to India's appeal for foreign investors and the IT services industry in particular. Satyam provides an excellent warning that high-profile awards and accolades a company may garner are not always a definite indicator of true good governance standards. Satyam episode has brought into sharp relief the role and efficacy of independent directors, auditors and the fact that India should tighten its corporate laws. With increasing number of shareholders and capital competency in India Inc, such frauds have to be contained for the growth of Indian economy on the whole.

Reference

www.wikipedia.com www.satyamscam.in www.authorstrem.com/satyam.ppt www.yahoo.com/finance/financial data.com www.harbus.org/.../The-Satyam.Scandal.Explained-3633696.shtm www.corporatecomplianceinsights.com/.../satyam-scandal-india-governance-complianceconcer.com