Aayushi Sharma – Roll No.

487
Nitesh Daryanani – Roll No. 505
Introduction
 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 a 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.
 Apart from Hyderabad, it has development centers in
India at Bangalore, Chennai, Pune, Mumbai, Nagpur,
Delhi, Kolkata, Bhubaneswar, and Visakhapatnam.
Satyam Maytas Fiasco
 Satyam Computers had on December 16,
2008, announced that it will acquire two group firms -
Maytas properties and Maytas Infra
 The BOD of Satyam had approved the founder’s
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$ 1.6 bn comprising of US$ 1.3 bn for
the 100% stake in Maytas Properties and US$ 0.3 bn for
the 51% stake in Maytas Infra.
 This is the move that sparked a row over alleged
violation of corporate governance laws.
 This deal was not profitable for investors. So after this
announcement they started to raise their voices
against the deal.
Maytas Infra
 The company was run by the sons of Ramalinga Raju
 It was started in the late 1980’s by Ramalinga Raju
 The main reason for the debacle of Maytas Infra is due
to the debacle of Satyam
Maytas Properties Ltd
 One of the reasons for the debacle of Maytas
properties is the ongoing economic slowdown
 The company has huge land banks and the prices have
dropped down in the real estate significantly
Satyam’s justification for Maytas
buyout deal
 De-risk the core business
 The integrated organization would be stronger and
more diversified to deal with the uncertainty of the
market.
 Feeling that in the recent times it is difficult to make a
strategic deal with other IT companies.
Reaction of Investors after the
announcement of accusation of
Maytas
 Investment giant Templeton and brokerage house
CLSA opposed this decision.
Reasons for Investor’s reaction
• The deal was not profitable for investors
• Investors dumped Satyam’s stock and threatened action
against the management.
• Satyam Computer ADRs took a huge beating.
• The buyout was done, essentially to hide the irregularities
in the accounts of Satyam
• It is also said the close association with the political
leaders is one of the reasons.
Result of Investor’s Reaction
 A part of investors succeeded to thwart an attempt by
the minority-shareholding promoters to use the firm’s
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 company’s stock and a
shocking confession of financial manipulation and
fraud from its chairman, B. Ramalinga Raju
 Reasons for failure

• The promoters decided to inflate the

• revenue and profit figures of Satyam.
• In the event, the company had a
• huge hole in its balance sheet,
consisting of non-existent assets and cash reserves that had
been recorded and liabilities that were unrecorded.
Thus, in order to fill up this gap,
• Company announced Acquisition of 51% stake in
Maytas Infra and 100% stake in Maytas Properties
on 16th Dec 2008, but were unsuccessful.
Confession of Mr.
Raju Ramalingam
. Confession
•He tried to fill the gap b/w actual profits of the
company and the profits that were shown in
records, balance sheets etc. and also tried to cope
up the situation till last minute . But now the
situation were beyond his hands and therefore he
confessed the frauds(on Jan 7, 2009) made by
him by showing inflated profits in the balance
sheet

•According to the‘confessional’ statement of Mr.

Raju, the balance sheet shortfall was more than
Rs.7000 crore.

•The following statement he made in his confession letter –

“Every attempt to eliminate the (balance sheet) gap failed.”
WHAT WENT WRONG?
• 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.
 How it went wrong
Its financial statements for years were totally
false, cooked up and...

 Never had Rs 5064 crores (US$ 1.05 Billion)

shown as cash for several years.
 Its liability was understated by $ 1.23 Billions
 The Debtors were overstated by 400 millions
plus.
 The interest accrued and receivable by 376
Millions never existed
 CURRENT ASSESTS
ACTUAL DEBT WAS 2161
OVERSTATED 490 Cr
2651.6
5312.62
376 ACTUAL CASH
IN BANK WAS
321
INFLATED
5040cr

LIABILITIES NO ACCRUED
INTEREST
376 Cr

UNDERSTATED
REVENUE 2700 LIABILITY 1230
OPERATING 690 Cr which was
MARGIN
arranged by
ARTIFICIALLY ADDED 588 Mr.Raju
OPERATING PROFIT
ADDED 588
INCREASING THE CASH 5040+376+1230
RESERVE ONLY FOR Q2 + 490= 7136
ALONE TO 588
 ACTUAL OPERATING MARGIN 61
Cr REPORTED-649 Cr( CREATED
AN ARTIFICIAL REVENUE OF 588)

Operating Profit

800
Operatin Profit ( IN

648.61 649.27
CRORES)

600
545.49
468.72
400 401.61

200

0
Sep '07 Dec '07 Mar '08 Jun '08 Sep '08

Series1 401.61 468.72 545.49 648.61 649.27

Quarter

GROWTH IN THE OPERATING PROFIT

 REVENUE

2700 Operating Profit

3000
649
2112
588
2500
700

2000 600

500
1500
400
588
1000 300
61
200
500
100
0
Actual Reported Difference 0
Actual Op Reported Difference
Revenue Q 2

INFLATING THE PROFIT AND REVENUE

Satyam scam: So who is to blame?
 Who is guilty in this
sordid state of events?
 Mr. Raju is by far the
father of this fraud.
 But there were others who
are also culpable.
Satyam's auditors
 Apart from a possible loss of reputation, the stakes are
high for PwC, which audited over 140 companies in
India in the previous fiscal year.
 Price Waterhouse's clients include big names, such as
Maruti Suzuki, United Breweries, United Spirits, GMR
Infra, Glenmark Pharma, Piramal Healthcare, among
others.
 So what were the auditing company, Pricewater
houseCoopers, doing?
 Merrill Lynch had been retained by Satyam ten days
before Mr Raju's confession, to explore merger
opportunities for the outsourcing giant, which was
already struggling with corporate governance issues.
 Just hours before Mr Raju admitted to the fraud, Merrill
Lynch severed its ties with the company. "In the course of
our engagement, we came to understand that there were
material accounting irregularities, which prompted our
aforesaid decision," a spokesman for Merrill said.
 Allegations on PWC
 The two auditors of Satyam Computer Services, appointed by
PWC to audit the accounts of the company, were not partners
of the audit firm at that time, people close to the investigation
told.
 The questioning of Ramesh Rajan, chairman and CEO of
PricewaterhouseCoopers, India (PwC) by CBI last week, has
revealed that the Satyam balance sheets were in fact audited by
Lovelock & Lewes and not Price Waterhouse (PW). It is also
learnt that the auditing fees, though deposited in the name of
Price Waterhouse, Bangalore, was later transferred into the
account of Lovelock & Lewes.
 Srinivas Talluri and S Gopalakrishnan, the two partners who
have been signing the Satyam balance sheets for the past
several years, were actually members of Lovelock & Lewes, a
member firm of PwC.
 On being questioned by CBI about this "outsourcing" of
work , Rajan, who is also a partner with
PriceWaterhouse, Bangalore said that the firm has no
manpower and, hence, as part of an internal
arrangement gives out their work to Lovelock and
Lewes.
 Consequence
 The Institute of Chartered Accountants of India (ICAI) rules
make it clear that the balance sheet of a company should only
be signed by the partners of the statutory audit firm. There is
no provision for the function to be passed onto the partners of
an affiliate even if the said firm belongs to the same family.
 This is case of professional misconduct.
 This is not acceptable, considering that the two firms are
completely different entities.
 The audited accounts may become null and void if partners
who are not members of the audit firm sign on the balance
sheet of a company.
 The disclosure has the potential to cause further
complications for PwC whose role in the Satyam episode is
being probed by ICAI.
Short fall of the Auditors
 Auditors do bank reconciliation to check whether the
money has indeed come or not.
 They check bank statements and certificates.
 So was this a total lapse in supervision or were the
bank statements forged? No one knows yet.
 The company officials said they relied on data from the
reputed auditors.
 PwC has written a letter to the BOD of Satyam that its
audit may be rendered "inaccurate and unreliable" due
to the disclosures made by Satyam's (ex)Chairman.
 Liabiliy of PWC
 Even as shareholders and investors plan to take Satyam
Computer Services' auditors, Price Waterhouse, to court for
failing to check the alleged falsification in the company's
accounts, it is likely that the audit firm could get away lightly
as accountancy firms limit the extent of their liability in their
contracts with clients.
 Typically, auditors restrict the quantum of their liability to
the extent of the fees that they receive from the company, say
lawyers.
 However, the Institute of Chartered Accountants of India
can, if convinced about Price Waterhouse's audit failure,
blacklist the audit firm.
 On Thursday, a day after the Satyam fraud—described
as India's Enron—was exposed, ICAI said it is planning
to issue a showcause notice to Price Waterhouse by
next week. The institute also said that it would
examine all communication between Satyam and Price
Waterhouse.
 Reacting to reports of allegedly overlooking the
Satyam accounts, Price Waterhouse on Thursday said:
"The audits were conducted by Price Waterhouse in
accordance with applicable auditing standards and
were supported by appropriate audit evidence.”
The promoters Since the promoters, in this
case, held only about 8
percent shares, their idea to
push through the Maytas
acquisition deal was
defeated by an angry lot of
shareholders.
Other company bigwigs
 Satyam's CFO Srinivas
Vadlamani has already been
arrested.
 But the question arises that
could only two or three
people have managed to cook
the books of such a large
company for years?
SEBI
 The Sebi had in December
given a clean chit to Satyam
in the probe on violation of
corporate governance law.
The bankers
 If the auditors were conned,
it means that either the
bank statement and
certificates were forged
 Satyam's banks -- ICICI
Bank, HDFC Bank, Bank of
Baroda, etc
The government
 The government too is
equally guilty in not having
managed to save the
shareholders, the
employees and some clients
of the company from losing
heavily.
 Conclusion
 Satyam is a victim of three factors. The factors are not the
causes of the global and colossal fraud. But they provide an
enabling environment for abuse and delusion.
 First, it is a publicly-owned company that can raise capital
inexpensively if its existing shareholders assigned it a high
value.
 Second, it is a publicly-owned company in which Mr Raju
could own a very small fraction of the ownership stock. He
could overstate profits with the objective of influencing
other shareholders. The overstatement never hurt him
because his own share of the real profits has remained very
small.
 Third, Satyam could preserve its fictitious profits without
having to pay big taxes because its profits were protected
significantly from the normal tax laws.
 The events at Satyam Computer Services are an
outcome of a total break-down in controls and more
importantly, personal values. They are, in the least, a
sad reflection of incompetence by a supposedly
eminent board of directors and possibly, even wilful
oversight. The Satyam saga demonstrates how easy it is
for a high profile public limited company to commit
fraud and effectively deprive public shareholders of
millions of dollars of their invested fortune.
Tech Mahindra is paying Rs1757 crore for a 31% stake in
the company, or Rs 58 per share.
Satyam Computer Services has now zoomed 15% to Rs
54.20 ahead of the announcement of the highest bidder
for the company on April 13, 2009.
In India this moment was full of praise for the manner
and speed with which the reconstituted board of Satyam
Computer Services found a strategic investor .
This would send a strong signal globally that the country
can respond well and fast to financial crisis.