KEJAS SHAH ROLL NO-49 MFM 2016-2019

A Case study of Satyam Computers Scam: -

Satyam Computers Services Ltd. was one of the pioneers in the field of
Information Technology and it was ranked fourth in the India in the business of
computers and information technology services. Satyam has won the Golden
Peacock Award for the best Governance in the year 2007 and again in 2009. It
is a matter of great irony that the company which has “Satyam” word in its
name means “Truth” as per ancient Indian Language has presented all the lies
in its financial Statements and other records and there by failed to follow the
proper Corporate Governance.

There are three basic purposes of discussing the case study of Satyam
Computers services Ltd. in this research paper of corporate governance. First,
it is very much important to know how this company has got the rise in the
field of Information & Technology sector and Secondly to discuss how and why
this financial scandal was conducted and thirdly what are the major
constituents of Corporate Governance which were either not followed by the
Satyam Computers or wrongly presented to the regulatory agencies.
Regulators and Indian economy may learn lots and lots of lessons from the
failure of Satyam Computers in the field of Corporate Governance. So, here
firstly we are presenting how Satyam computer Services Ltd got the Rise.

Emergence of Satyam Computer Services Limited

Satyam Computers Services Limited was the one of most successful company
in Indian 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 won numerous awards for
innovation, governance, and corporate accountability. “In 2007, Ernst & Young
awarded Mr. Raju with the „Entrepreneur of the Year‟ award. In 2008, Satyam
won awards from MZ Consult‟s for being a „leader in India in Corporate
Governance and accountability‟. In September 2008, the World Council for
Corporate Governance awarded Satyam with the „Global Peacock Award‟ for
global excellence in corporate accountability”. By 2003, Satyam‟s IT services
businesses included 13,120 technical associates servicing over 300 customers
worldwide. At that time, the total service market of IT Sector was estimated to
be $400 billion and it was estimated that it will continue to grow with a
compound gowth rate of 6.4%. To effectively compete, both against domestic
and global competitors, the company embarked on a variety of multi‐pronged
business growth strategies.

From 2003-2008, company has unmarked a remarkable growth in the entire

major all financial metrics of in these period Satyam total sales was computed
to be $467 million. The total Market Capitalization of the company was
estimated to be $2.1 billion By March 2008. The Companies annual compound
growth rate was estimated to be 35% from 2003-08. The Operating Profits
were averaged 21% over that period. Even EPS showed the annual growth rate
of 40%. Finally, beginning in January 2003, at a share price of `138.08,
Satyam‟s stock would peak at `526.25—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: -

The time for Saytam Computers and the life of Mr. Ramlingam Raju going very
smoothly without any interruption by regulators like SEBI, Ministry of Company
affairs etc. The Scam was exposed from the point where, Satyam planned to
acquire Maytas Infrastructure Limited, One of best infrastructure development
and Construction Company for $300 million. Satyam Director Mr. Ramlinga
Raju has already 37% stake in that company. Raju‟s also had a 35% share in
Maytas Properties, another real-estate investment firm. Satyam Computers
Services Limited was the first Indian company to publish its financial
statements by following International Financial Reporting Standards. Satyam
board of Directors had approved the deal of buying the entire stake in Maytas
Infrastructure Ltd and Maytas Properties Ltd. Without any consent of the
shareholders, the board went ahead for their decision. However the dream of
Satyam Board remains the dream only when investors sold the Satyam‟s stock
and warned the management for action against them. In US the stakeholders
filed law-suits for aborting the Maytas deal. Mr. Raju want that deal to bridge
the gap between real figures and faked figures when every attempt to do this
is failed, then Raju‟s by writing a letter to board members and SEBI had to
confess that Accounts of Saytam Computers Services Limited has Irregularities.
The facts presented by MR. Raju in his letter to SEBI have shocked everyone
including Stakeholders and all Government regulators. Some of the
irregularities are reproduced here.
Table 1. Fabricated balance sheet and Actu Repor Differe

income statement of Satyam: as of al ted nce `

September 30, 2008. Items Rs. in crore ` `

Cash and Bank 321 5361 5040

Balances

Accrued Interest on Bank Fixed Deposits Nil 376.5 376

Understated Liability 1230 None 1230

Overstated Debtors 2161 2651 490

Total Nil Nil 7136

Revenues (Q2 FY 2009) 2112 2700 588

Operating Profits 61 649 588

1. The major difference is created between Actual cash and Bank Balance
and Faked Balance i.e. `5040 Crores by creating numerous bank
statements by using his personal computer.

2. He also had shown interest of ` 376 Crores on those fake deposits.

3. He understated the Liability side of the balance sheet by `1230 crores.

4. He has overstated the Debtors by `490 Crores.

5. He overstated its revenue of by `588 crores for the Quarter II in

Financial year 2009-10 for meeting the analyst expectation Satyam by
creating fake customers and fake invoices in their names.
 6. By doing so the operating profits for the quarter were also overstated by
588 crores.

7. He claimed that he overstated the company Balance sheet by $1.47

billion nearly $1.04 Billion in Bank Loans and the cash the company
claimed to own was non-existent.
Besides above stated irregularities the following additional irregularities were
also found.
1. Mr. Raju also revealed that he created 6000 fake salary Accounts over
the past year and appropriated the money out of it after the company
deposited in that accounts.

2. It is also shown that the company raised money by issuing ADR never
made to the company Accounts.

The benefits availed by the Promoters of Satyam Computer Services Ltd.

Table 2. Promoter’s shareholding pattern in Satyam Promoter’s holding in %

from 2001 to 2008.As on

March 2001 25.6

2002 22.26

2003 20.74

2004 17.35

2005 15.67

2006 14.02

2007 8.79

2008 8.74

Dec. 2008 2.18

The Table 2 Clearly indicate the intention of Promoters of selling the staked at
high price by inflating the profits and revenue figures. In March, 2001 the
promoters has 25.6% stake in Satyam Computers Services Ltd. but by
decreasing every year it comes to 2.18% in Dec. 2008. (oj)
The Auditors Role and Factors Contributing to Fraud: -

One of the best auditing firms around the world, Price water house Coopers,
audited Satyam books of Accounts for nearly ten years but not able to detect
any financial scam. Several Accounting and auditing experts criticized PWC for
not been able to detect the fraud. PWC is equally responsible for the fraud
since it has signed all the financial statements. One particularly concerning
item that Saytam claimed to have on its Balance sheet was “Non-Interest
bearing deposits”. The view of Accounting professional was that “any
reasonable company would have either invest the money or returned the
excess cash to Depositors. The cash lying without any income with the
company is a clear indication for the Auditors to Investigate Properly. The
Auditors did not independently verify with banks in which the company
claimed to have deposited. Whenever Satyam needed more income to meet
analyst expectations, it creates “fictitious” sources and it did so numerous
times and the auditor PWC never been able to detect these things. PWC
audited the accounts of Satyam form June, 2000 to until the discovery of
financial scam i.e. almost nine years but Merrill Lynch discovered the fraud
within 10 days. Missing these signs implied that either the auditors were
grossly inept or collusion with the Mr. Ramlinga Raju and company for
committing the fraud.

Besides Auditors many other factors contributed to that financial scam like
Independent Directors, the institutional Investor Community, SEBI, Retail
Investors and professional Investors who have all the sources like models,
detailed information about the company. Greed for money, power, Success
and prestige compelled Mr. Raju to do all these manipulations. The Satyam‟s
case is case of negligence of all fiduciaries like duty of loyality, duty of
disclosure towards sharholders etc. Mr Ramlinga Raju has never followed any
ethical code of conduct and corporate social responsibility. Mr Raju has done
all this for maintaining high earning per share (EPS), raise executive
compensation and to sell the stake at inflated price.
Failure of Corporate Governance in case Satyam Computers Services Ltd.:

The case study of Satyam Computers is a sheer case of failure of Corporate

Governance in India. It is really very unfortunate that within five months after
winning the Global Peacock Award, Satyam became the centrepiece of a
“massive” accounting fraud. Satyam Computers

Services Ltd has failed on almost every front of Corporate Governance and
deceived every Government regulator like SEBI, Registrar of Companies and
Department of Corporate Affairs. The total case of failure of reporting and
misrepresentation of Facts may be divided under three major heads. First
there is a failure of Corporate Governance, Secondly there is a Failure of SEBI
and lastly there is failure of Auditors (M/s Price Waterhouse Coopers). We are
presenting these failures one by one: -

1. Failure of Corporate Governance in Satyam Computers Services Ltd: -

A. 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 here in this case, this concept was a
total failure.

B. Failure of the role of Audit Committee: - Audit Committee of the Satyam

Computers played hardly any role in curbing the financial
misrepresentation of facts. So, another important pillar of Corporate
Governance has shattered in this case.

C. Failure of the role of CEO/CFO: - It is presented in the concept of Corporate

Governance that the CEO/CFO of the company will certify about the
truthfulness and fairness of Financial Statements of the Company but in this
 case the CEO/CFO of the Company Mr.Ramlinga Raju/ Srinivas Vadlamani
has certified the wrong financial position of the Company.

D. Failure of presenting the ture report on compliance of Corporate

Governance in the Financial Statements of the Company: - In case of
Satyam Computers, the Annual Report of this company included the report
on the Compliance of Corporate Governance but hardly any fact of that
report was true in real sense

2. Failure of SEBI in timely detection of this Finance Scam: -

The Security Exchange Board of India is the most powerful regulating

agency of the Government of India which has the full powers in intervening in
any of the Financial Affairs of the Companies regarding the presentation of
Financial Figures and insiders trading. The prices of the share of Satyam
Computers were increased many folds 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 deliberately made money in crores by
misrepresenting the financial figures and there by increased the market value
of the shares and sold their shares at those higher values and the end result
was that there was the erosion of the funds of the common people who have
invested in the shares of Satyam Computers relying upon the financial figures
of the that Company.

3. Failure of Auditors in the Due Deligence in their duties: -

M/s Price water house Coopers is one of the best auditing firms around
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 income on that.
The PWC is total fail in due diligence of their duties for example PWC never
verifies the forged statements with the bank and debtors etc. The failure of
PWC can be judged from the fact that Investment banker Merillynch found the
financial scam merely in 10 days. In nutshell we can arrived at a conclusion
that if PWC work with due diligence the Satyam scam may not occurred.

Lessons and Recommendations: -

The Govt. and regulator SEBI has learned lesson from that financial scam by
Mr. Ramlinga Raju and others. The Govt. had given the power to SEBI to arrest
in these types of cases. Ministry of Company affairs made a body of retired
Judges of Supreme Court and High court named Serious Fraud Investigation
Organisation (SFIO). Institute of Chartered Accountants also barred PWC to do
audit in India. ICAI will also act as a watchdog on these Auditing firms.

Besides this SEBI has done lot of hard work in the proper implementation of
Corporate Governance in India, yet there is a lot of work which is to be done in
this direction. Besides Strengthening the SEBI more, the Government of Indian
also has to take some concrete steps in strengthening the Legal framework in
India especially with regards to Indian Companies Act 1956. Though many
important provisions of listing requirements have now being included in the
Indian Companies (Amendments) Act, 2013 still there is a requirement of few
additional provisions in Companies Act with respect to the actions against
wrong Financial Reporting and Insider Trading.