In what promises to be India’s biggest corporate scandal till date, Mr. Ramalinga Raju, founder and chairman of Satyam Computers, one of India’s four premier IT companies, admitted of a fraud through a letter addressed to the board of the company. The controversial and seemingly absurd acquisition proposal of Mytas, an infrastructure company of Satyam promoters by Satyam computers a few weeks back suddenly started making sense once the letter by Mr. Raju to the board of the Satyam was out.
Here’s how the story unfolded...
Full Text of Mr. Raju’s letter to Satyam Board
Mr. Narayanmurthy reacts... It is important to remember that one Satyam does not make the entire Indian software industry. I believe it is an isolated case
ICAI, ICSI say they are working on the facts of the case... Will soon take action
Satyam to be thrown out of NIFTY, SENSEX?
The Fraud
There is Rs. 5040 Crores worth inflated cash and bank balance
Non-existent accrued interest of Rs. 376 Crores
Understated liability of Rs. 1230 Crores
Overstated debtor position of Rs. 490 Crores
For last quarter,
Overstated Revenues by Rs. 588 Crores and overstated operating profit by Rs. 588 Crores
Added together, it is a discrepancy of Rs. 7724 Crores on the face of it for a company having annual revenues of Rs. 10000 odd Crores, a gigantic fraud by Indian standards.
The After-effects
- Satyam Scrip on NSE, BSE crashed 77% to Rs. 40.25 on the news and the great story for a seemingly successful Indian IT company ended. Fingers were pointed, concerns were raised, complaints were filed and dreams were shattered. What happened at Satyam and why it happened will be contemplated by regulators and chewed by business media for days to come but I think it is time for some quick action on part of the regulators, corporate India and the government
- The event has left Satyam with virtually no board as most of the independent directors have resigned and promoters will be kicked out. The Acquirer or the government must appoint able directors quickly to ensure business sustainability
- There are about 53000 able employees of Satyam which need to be taken care of. They are at no fault for the current crisis at Satyam and still make Satyam a valuable enterprise
- Many customers of Satyam still expect to be serviced and in case of an unfortunate event of bankruptcy, the contracts should be sold to other Indian companies (By the government of course) so as to make sure that Indian IT story is not dented
- The auditors and their inability to verify even the cash balances of Satyam is a fact that concerns me. There should be higher accountability or responsibility on part of the auditors and those found guilty should be severely punished
- Other Indian IT companies should do all that they can to prevent their image from denting. This includes assuring customers and investors about sound corporate governance (If it exists that is) and introducing transparency and stringency in the disclosures
Finally, my first recession gives me my first big scam in India. The crisis times like these separate good companies from ordinary ones and expose ill-managed organizations. The crisis could dampen India’s image as a good investment destination. It could affect badly, the businesses of Indian IT, BPO, KPO firms. We should remember that the position India is in, as an emerging and promising market, we cannot afford such mistakes and this event should and hopefully will have enough impact to trigger India’s Sarbanes-Oxley so that such mismanagement can be prevented in the future
PS: The word 'Satyam' means 'The truth' in Sanskrit whereas 'Asatyam' means a lie.
One wonders just how big this'll get.
ReplyDeleteClearly the auditors PricewaterhouseCoopers have much to answer for. As does the board, which appears to have demonstrated an unusual degree of complicity in having passed the Mytas resolution en masse. In case the board is found guilty too, who shall appoint the (final) new CEO and his immediate management team?
Analogies with the Enron scandal are rife, and justifiably so - that one took down both the company and its auditors.
Welcome, then, to your first scam. I guess B-school's the best place to be when these things surface. Hope you'll post a few insights from your classmates as a follow-up to this post.
Also, an act such as Sarbanes-Oxley (or, for that matter, installing a regulator) won't fix things automatically. While SOx certainly prevented any further Enron-like scams, it failed to check the rampant risk-taking by financial service firms.
ReplyDeleteThe "regulators" in that space, the credit rating firms, were complicit too. Indeed, there was, in seems, a revolving door between Wall Street and even the SEC. I strongly recommend this article (The End of the Financial World as We Know It) by Michael Lewis (author of Liar's Poker) at the New York Times.
How do we make sure our regulators are independent?
The question that most are asking now is whether this can be as big as Enron fiasco and bring PWC down as another Arthur Anderson.
ReplyDeleteFew things need to be considered in this context. PWC in India has a separate entity for Audit and a separate one for Tax,Consultancy etc.So theoretically if things go worse, technically Tax and Consultancy are safe. But so was the case with Arthur Anderson. When the sentiments are weak and the integrity of the Brand is questioned i don't think that the legal distinction matters. Plus it Tax department is already in soup due to adverse Vodafone ruling.
Will it have global repercussions for PWC? No one knows as of now. But another fact needs to considered here. Some of the investors of the (in)famous Madoff's Ponzzi scheme have sued PWC for its alleged involvement. One the standalone basis all these events might not be that detrimental for PWC but mix it all up at the same time and looks like the bad recipe for PWC.
Also when Arthur Anderson went down the global economy was not in the mess as the one we are facing currently and hence the employees(most of them innocent)were been taken in by the rival firm which may not happen in this time around.
All in all looks like its soon going to change from "Big 4" to "Big 3".
Incidences like these keep happening on the scene always...USA in its recent past has been at the recieving end of such acts far often..
ReplyDeleteAlso by increasing regulation time and again..U will almost wipe out all the risk taking element in finance and ultimately Finance will become a boring game..Finance is interesting because of the risks it involves...Its just that few are taking undue advantage of it!!!