Satyam Rip-off – The Story of India’s Largest Company Fraud!

A Case Research on ‘Satyam Rip-off’ Accounting Scandal: When the 2008 recession hit the world, India was not solely going by a monetary disaster but additionally an moral disaster. Think about a hypothetical situation within the inventory market the place the very fundamental financials offered to you by an organization are manipulated. This was what occurred with Satyam Pc Providers.

The Satyam rip-off (Satyam computer systems rip-off) was lastly uncovered early in 2009. Analysts dubbed the rip-off as India’s personal Enron. At present, we check out the scandal that hit the nation within the midst of a recession was carried out, its results, and the way it was handled.

The Flawless Public Facade

Satyam Pc Providers Ltd was based in 1987 in Hyderabad by brothers, Rama Raju and Ramalinga Raju (henceforth Raju). The title within the historical Indian language Sanskrit meant ‘Fact’. The agency started with 20 staff providing IT and BPO companies throughout varied sectors.

The preliminary success of the corporate quickly led to it getting listed and choosing an IPO within the BSE in 1991. Put up this the corporate quickly obtained its first Fortune 500 client- Deere and Co. This additional allowed the enterprise to develop quickly into changing into one of many prime gamers out there.

Satyam quickly turned the fourth largest IT software program exporter within the business after TCS, Wipro, and Infosys. 

On the peak of its success, Satyam employed greater than 50,000 staff and operated in 60+ nations. Satyam was now seen because the prime instance of an Indian Success story. Its financials too had been excellent. The agency was value $1billion in 2003. Satyam quickly went on to cross the $2billion mark in 2008.

Throughout this era the corporate had a CAGR of 40%, working income averaging 21% with a 300% improve in its inventory value. Satyam was now an instance to different firms as nicely. It was showered with accolades from MZ Seek the advice of for being a ‘chief in Indian Company Governance and Accountability, the ‘Golden Peacock Award’ for Company Accountability in 2008.

Mr Raju too was revered within the business for his enterprise acumen and was awarded the Ernest and Younger Entrepreneur of the Yr Award in 2008. 

Late in 2008, the board of Satyam determined to takeover Maytas an actual property firm owned by Mr Raju. This didn’t sit nicely with the shareholders which led to the choice being reversed in 12 hours, impacting the inventory value. On December twenty third the World Financial institution barred Satyam from doing enterprise with any of the banks’ direct contacts for a interval of 8 years.

This was one of the vital extreme penalties imposed by the World Financial institution towards an Indian outsourcing firm. The World Financial institution had alleged that Satyam had failed to keep up documentation to assist charges charged to its subcontractors and the corporate additionally offered improper advantages to the banks’ workers.

However had been these allegations true? At this level, Satyam was India’s crown jewel! Simply 2 days later Satyam replied demanded the World Financial institution to clarify itself and in addition apologize as its actions had broken Satyams investor confidence.

Satyam Rip-off Case Research: What was behind the Curtains?

Because the buyers had been nonetheless coping up with the failed acquisition of Maytas and the allegations by the World Financial institution on January seventh, 2009 the markets obtained the resignation by Mr Raju and together with it a confession that he had manipulated accounts of Rs. 7000 crores. Traders and shoppers throughout the World had been left shocked. This simply couldn’t be occurring!

To be able to perceive the rip-off, we must return to 1999. Mr Raju had begun inflating the quarterly income with a purpose to meet the analyst expectations. For eg the outcomes introduced on October 17, 2009, overstated quarterly revenues by 75% and income by 97%. Raju had performed this together with the corporate’s international head for inner audit.

Mr Raju used his private laptop to create a variety of financial institution statements with a purpose to inflate the steadiness sheet with money that merely didn’t exist. The corporate’s international head for inner audit created pretend buyer identities and faux invoices with a purpose to inflate the income.

This, in flip, would enable the corporate quick access to loans and the impression of its success led to a rise within the share value. Additionally, the money that the corporate had raised from the markets within the US by no means even made it to the steadiness sheets. However this was not enough for Raju, he went on to create information for pretend staff and would withdraw salaries on their behalf.

The elevated share value drove Raju to do away with as many shares as potential and keep simply sufficient to be part of the corporate. This allowed Raju to make income from their gross sales at excessive costs. He additionally withdrew $3 million each month as salaries on behalf of staff that didn’t exist.

However the place did all this cash go? Though Raju had arrange a terrific IT firm, he was additionally concerned with the actual property enterprise. The true property enterprise within the early 2000s was booming in Hyderabad. It was additionally rumoured that Raju knew the plan(route) for a metro that was to be inbuilt Hyderabad.

The inspiration of the metro plans was laid within the yr 2003. Raju quickly diverted all the cash into actual property with hopes to make a superb revenue as soon as the metro was purposeful. He additionally arrange an actual property firm referred to as Maytas.

However sadly, identical to each different sector the actual property sector too was hit badly through the recession of 2008. By then nearly a decade of manipulation of the monetary statements had led to the massively overstated property and underreported liabilities. Almost $1.04billion in financial institution loans and money that the books confirmed was nonexistent. The hole was just too huge to fill!

By now whistleblowing makes an attempt had been additionally beginning to come up. Firm director Krishna Palepu obtained nameless emails from the alias Joseph Abraham. The mail uncovered the fraud. Palepu forwarded it to a different director and to S. Gopalkrishnan a companion at PwC – their auditor.

Gopalkrishnan assured Palepu that there have been no truths within the mail and a presentation can be held earlier than the audit committee with a purpose to guarantee him on twenty ninth December. The date was later revised to tenth January 2009. 

Regardless of this Raju had a final resort. The plan included a takeover of Maytas by Satyam which might bridge the hole that had accrued through the years. The brand new financials would justify that the money had been used to buy Maytas. However this plan was foiled after shareholder opposition.

This pressured Raju to place himself on the mercy of the regulation. Raju later talked about It was like driving a tiger, not realizing learn how to get off with out being eaten.

Satyam Rip-off Case Research: How Raju was capable of get away with the Scandal?

The subsequent huge query whereas finding out this huge scandal is how was Ramalinga Raju capable of get away with the Satyam Rip-off (Satyam computer systems rip-off) in an organization of over 50,000 staff?

The reply to this lies within the depressing failure of PriceWaterhouseCoopers(PwC) their auditor. PwC was the exterior auditors to the corporate and it was their responsibility to look at the monetary information and be certain that they’re correct. It’s stunning how they didn’t discover 7561 pretend payments after auditing Satyam for nearly 9 years.

There have been a number of pink flags that the auditors might have caught upon. Firstly a easy examine with the banks would have revealed that the payments weren’t legitimate and the money balances had been overstated. Secondly, any firm with that huge of money reserves as Satyam would no less than make investments them in an curiosity yielding account.

However that was not the case right here. Regardless of these apparent indicators, PwC appeared to be wanting the opposite means. Suspicion in direction of PwC was later elevated when it was discovered that they had been paid twice the charges for his or her companies. 

PwC was not capable of detect the fraud for nearly 9 years however Merrill Lynch found the fraud as a part of their due diligence in merely 10 days.

The Aftermath of Satyam Rip-off Publicity

Two days after the confession was made Raju was arrested and charged with felony conspiracy, breach of belief, and forgery. The shares fell to Rs.11.50 on that day in comparison with heights of Rs.544 in 2008. The CBI raided the home of the youngest Raju sibling the place 112 gross sales deeds to completely different land purchases had been discovered. The CBI additionally discovered 13,000 pretend worker information created in Satyam and claimed that the rip-off amounted to over Rs. 7000 crores.

PwC initially claimed that their failure to catch the fraud was as a result of reliance positioned by them on data offered by the administration. PwC was discovered responsible and its license was briefly revoked for two years. Traders too turned range of different firms audited by PwC. This resulted within the share costs of those firms falling by 5-15%. The information of the rip-off led to the Sensex falling by 7.3%

The Indian inventory markets had been now in turmoil. The Indian authorities realizing the influence this might have on the inventory markets and future FDIs instantly spurted to motion. They started investigating and shortly appointed a brand new board to Satyam. The board’s purpose was to promote the corporate inside the subsequent 100 days.

With this purpose, the board appointed Goldman Sachs and Avendus Capital to assist quick observe the sale. SEBI appointed retired SC justice Barucha to supervise the transaction with a purpose to instil belief. A number of firms bid on April 13, 2009. The successful bid was positioned by Tech Mahindra who went on to purchase Satyam for 1/third of its worth earlier than the fraud was revealed.

On 4th November 2011, bail was granted to Raju and two others accused. In 2015 Raju, his 2 brothers, and seven others had been sentenced to 7 years in jail.

Additionally learn: 3 Previous Largest Scams That Shook Indian Inventory Market!

Closing Ideas

There was no rip-off that affected the CA and audit corporations just like the Satyam Rip-off. The growing nature of those scams has made dependence on such professionals way more essential highlighting the significance of ethics and CG of their roles. White-collared crimes like these don’t solely make the corporate look unhealthy but additionally the business and the nation. We hope you loved our Satyam Rip-off case research article, do tell us what you suppose within the feedback space beneath.

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Steadily Requested Questions (FAQs)

What was the Satyam Computer systems rip-off?

The Satyam Rip-off was a large-scale accounting fraud of over Rs. 7,800 crores which ultimately turned out to be roughly Rs. 12,320 crores fiasco. Satyam computer systems administration misled the market and the stakeholders by manipulating the corporate’s monetary well being. Materials details had been misstated and went undetected for 7 to eight years, even by PwC, its exterior auditors. Satyam’s funds had been a black field that was accessible solely by Ramalinga Raju and his confidants. Its income and property had been overstated. When this bubble burst, lots of people had been affected and many cash was worn out. The CBI discovered 112 gross sales deeds for buying lands and 1000’s of faux worker information.

Who’s guilty within the Satyam rip-off?

There are lots of people guilty within the Satyam rip-off (Satyam computer systems rip-off), beginning with its founder Mr. Ramalinga Raju, his brothers B Suryanarayana Raju, B Rama Raju, Satyam’s then CFO Srinivas Vadlamani, its inner auditors, its exterior auditors S Gopalakrishnan and Srinivas Talluri from PriceWaterhouseCoopers (PwC). There have been eight different folks concerned within the rip-off aside from the highest administration.

How had been Satyam books cooked?

Satyam’s books had been cooked by overstating its revenues, revenue margins, and income for over a interval of 5 years from 2003 to 2008. There have been off-balance-sheet transactions concerned. The books of accounts portrayed it to be a far greater firm than it truly was. They sewed up initiatives with fictitious shoppers and had pretend and non-existent groups engaged on these initiatives. Over 7000 pretend invoices had been added to the corporate’s laptop programs to report gross sales that didn’t exist. The issue was that all the pink flags went undetected by the exterior auditors from PwC.

What occurred to PwC after the Satyam scandal?

Initially, the SEBI had positioned a 2-year audit ban order on PwC. Later, the Securities Appellate Tribunal or the SAT overturned SEBI’s order in PwC in India and partly allowed the disgorgement of the 13 crore price with curiosity from them for the breach of responsibility. It put aside the ban on the bottom that solely the ICAI can take any motion towards its members (the auditors), whereas the SEBI (SEBI) can solely take remedial or preventive motion. Auditors are merely watch canine, not bloodhounds, which means that they elevate issues after they come throughout one thing suspicious, nevertheless, they don’t actively go seeking suspicious exercise. On this case, PwC can’t be accused of fraud on the idea of negligence in auditing.

Who acquired Satyam? Why did Mahindra purchase Satyam?

Tech Mahindra acquired Satyam as a strategic alternative to maneuver to the subsequent stage of development. This acquisition helped the group to diversify throughout clients, verticals and geographies. Earlier Tech Mahindra was a distinct segment participant within the telecom vertical and Satyam was the fourth largest Indian IT companies firm when it comes to income. It was listed on Indian in addition to the US’s inventory change. Because of the rip-off, it was accessible at nearly one third of its worth, and Tech Mahindra and its mum or dad, the Mahindra group noticed a possibility and purchased Satyam by changing into the best bidders.

How did Satyam get caught?

Satyam had enormous money reserves. Its board really helpful that this money must be invested with a purpose to earn curiosity, unaware of the artistic accounting practices within the firm. The difficulty began when the founders determined to merge with an organization referred to as Mytas that was held and managed by Ramalinga Raju’s household. This was the final straw left to place the pretend funds in place. The board and the shareholders didn’t need this. Ramalinga Raju confessed that he had manipulated accounts and the quantity concerned was Rs. 7,000 crores. Additional, the World Financial institution barred Satyam from doing enterprise with it for eight years on account of information theft and paying bribes to its workers. That is how Satyam obtained caught.

Aron, Bachelors in Commerce from Mangalore College, entered the world of Fairness analysis to discover his pursuits in monetary markets. Exterior of labor, you possibly can catch him binging on a present, supporting RCB, and dreaming of visiting Kasol quickly. He additionally believes that consuming child’s ice-cream is one of the simplest ways to show them taxes.