Satyam Computers Chairman, B. Ramalinga Raju (on Jan 7,2009), resigned, confessing that he had manipulated the accounts of approx Rs 14100 crores in several forms. The revelation of this scandal shook the worldwide corporate community.
In February 2009, CBI took over the case and throughout the year all charges arising from different phases were later merged into one charge sheet.
On 10 April 2015, B. Ramalinga Raju was convicted with 10 other members.
As mentioned in the previous article (read here), here we’ll be discussing what exactly led to the Satyam scam.
Anatomy of the Satyam Scam
Raju, a Havard Graduate, had a really impressive personality and a good character in his circle. Everybody had the utmost faith in him. The administrators of the Board never questioned him about his operations. They were of the view that he might be trusted with everything. Raju, even in his dreams, didn’t foresee that he could get exposed for cooking up his balance sheets worth thousands of crores. The story of Raju also exposes how important the link of politics is for the business.
Role of Government
Ramalinga Raju couldn’t become what he did without the help of govt. Andhra government awarded him with the huge metro rail project in Hyderabad. Determined to form his name as India’s modern Chief Minister, C. Naidu wanted to showcase Hyderabad as a shining symbol of an emerging India. In his endeavor, Naidu sought to use the software Industry to project Hyderabad. That’s precisely where Raju’s utility to Naidu came in. Naidu was so impressed by Raju that he portrayed him to the world because of the icon of the latest Hyderabad and chose the occasion of a visit to the then US President, Clinton to try to so. Raju was also smart enough to pawn the previous President APJ Abdul Kalam in his board for his Emergency Medical Research Institute (EMRI).
Greed got the higher of him. He used every single cent earned to get land. Before 1999, land purchases by Raju were funded by the dividends he earned from Satyam. But as Hyderabad began to develop further, he stepped up his land purchases. To finance the purchases, he started pledging and selling all of his shares which of his families. Since the laws of the land didn’t allow the denizens to accumulate quite 54-acres of land, Raju began purchasing land through his privately held companies. When the law caught him, he had managed to line up 325 companies, owned by his immediate relatives!! And to feature thereto, a major portion was bought as agricultural land, therefore the income was non-taxable!
But why did he need to reveal that he had committed fraud at Satyam?
Was it a guilty conscience?
Raju wouldn’t have landed during this position if it hadn’t been the recession that hit the Indian market in 2008. It threw him off guard and put halt to all his options. The market was filled with rumors of Satyam suffering from takeover threats. To get rid of such threats, he falsely increased the turnover so that it becomes a costly affair for the corporate making the bid for acquisition to acquire it. He transferred the funds from Satyam by cooking the books to get lands. So now there was an enormous hole within the record. But what if he merged his land and construction company with Satyam? He could then have possibly concealed the fraud. He gave up when he had to abort the merger of Satyam with Mytas Infra since the shareholders weren’t consenting.
How did he mastermind this maze at Satyam Computers?
Keen to project an everlasting bright picture of the firm to the investors, employees, and analysts, Raju manipulated the books such that it appeared a far bigger enterprise than it was. To realize this, they sewed up deals with fictitious clients and had large teams performing on these fictitious projects.
Note, here two things are done. One, fictitious Debtors i.e money receivable from clients is made and fictitious payroll (a.k.a ghost employees) showing payment of salary to them. He introduced 7000 fake invoices into the company’s computing system to record sales that simply didn’t exist. Obviously, over the years, these ghost debtors never paid their bills resulting in an enormous hole in Satyam’s record meaning only Sales increased, Cash didn’t. He further forged the bank statements to draw a mountain of money balance. This thing was possible that the auditors wouldn’t have known a minimum of for a couple of years because seldom do auditors do the Third Party Confirmation (Whereby the auditors confirm balances not by counting on the client produced documents, but by privately following up with banks for the balance, to extend the test reliability).
The Satyam Scam was all about corporate governance and fraudulent auditing practices alleged in collusion with auditors and chartered accountants. The company misrepresented its accounts to its board, stock exchanges, regulators, investors, and every other stakeholder.
These fraudulent practices misled the market and other stakeholders by lying about the company’s financial health. Even basic facts like revenues, operating profits, interest liabilities, and cash balances were grossly inflated to Project Company’s healthiness.
The promoters can be referred to as primary culprits, although it’s almost impossible to misrepresent such facts without the involvement of the auditors and a few exec board members. Independent directors, it seems, were kept within the dark about the particular books of accounts.
Reference: Case study of India’s Enron, KIMEP University & Hindustan Times.