The Satyam fiasco has reached its conclusion. Ramalinga Raju has resigned after admitting to cooking his books for years. It seems that Satyam overstated revenues and profits financial year after financial year, and as on 30th September 2008 showed (non-existent) cash and bank-balances of Rs. 50,400 million and did not report liabilities to the extent of Rs. 12,300 million. News channels put the extent of the fraud at Rs. 70,000 million.
While Ramalinga Raju has stated he’s ready to face the laws of the land (sporting, isn’t he?), this raises some very interesting questions. Most board members were unaware, or so they claim, of this fraud. So what exactly is the role of the board? Or do most boards still buy whatever management tells them? And what about the stat auditors, PriceWaterhouseCoopers? What have they been doing all these years? They have signed off on the accounts. What about all the institutional investors in Satyam? Fidelity, Aberdeen and the lot? What kind of due diligence was done here? Of course, PWC is going to get most of the flak here, as all the other parties are going to claim that their decisions were based on the accounts certified by PWC.
Most Indian companies excel at creative accounting. So the scary part is that there may be many more Satyams waiting to happen. The magnitude of this fraud lies in the fact that this is not some small mom-and-pop store. Satyam is an index stock, and is also listed abroad. It’s part of the top 4 Indian IT companies. How is this going to impact investment in India in these already difficult times? Look at the list of people Satyam fooled. The BSE, the NSE, PWC, Investment banks….these were not naïve retail investors relying on TV recommendations. These were specialists. And that is what makes this so petrifying. Not because corporate governance, transparency and honest reporting are problem areas in the Indian corporate sector. We know they are. But this is terrifying because the checks and balances have failed miserably. At worst, the regulators, auditors and other agencies might have been in on the scam. At best, they are a bunch of incompetent idiots.
2009 has got off to a rocking start, hasn’t it?
PS: Check out Liju’s interesting post on how Satyam kept lying about the Maytas deal.
UPDATE: Here’s what Citigroup’s research arm has to say about the possible fallout of the Satyam episode.
The Quirky Indian 
January 7, 2009 at 12:50 pm
Hope this is not the first of many to come. For a lot of us IT people, earning hefty packages has been very normal. Hope the IT bandwagon continues ahead.
January 7, 2009 at 1:15 pm
Very interesting post, Quirky Indian. I am really surprised at the role of auditors, who have immaculate system for going about the audit process. PwC would ve definately checked the bank balances from the bank confirmations. Its not really easy to fool on that one. The question remains – why was this fraud not detected by the auditor? Its blasphemous on their part to have given a clean audit report to Satyam. I am zapped at the magnitude of the fraud.
This is the 2nd time , when PwC is in news for a doubtful reporting on thier clients, the first being GTB fiasco. I hope PwC does not go the Anderson way. God save the financial markets and the trust therein!!
January 7, 2009 at 1:40 pm
Well, cooking books should be no surprise. Remember Enron and how the whole fiasco brought down Arthur Andersen? While I’m not surprised at Raju’s cooking the books, I’m surprised at the magnitude of the fraud. I’m surprised it went undetected for 10 years. And I’m more surprised that no one else was aware of the entire thing. Something of this magnitude cooked up by only one man in a company that is an index stock and has checks and balances.. something not right there. As for many more Satyam’s waiting to happen- Scary thought!
January 7, 2009 at 2:05 pm
Well, this was waiting to happen for a long time, regulations like Clause 49 which are supposed to promote Corporate Governance only stand as good as the trust that the company wishes to keep with.
The flak will be well-earned by PWC since there is an obvious auditing issue here.
As for due diligence done by the investors, all of it is done based on the audited reports published.
And the bankers for Satyam include all the leading banks, so we can question the attention paid by the bankers to the balance sheet too.
They had every right to try and question Satyam rather than just rely on the auditors’ report.
January 7, 2009 at 4:16 pm
Our very own Enron! I’m so proud.
And your bang on about the magnitude of the problem. Satyam falling is BAD news.
January 7, 2009 at 4:31 pm
Extremely interesting and extremely scary.. I just hope we donot have any more IT companies with such skeletons in their cupboards..
January 7, 2009 at 4:35 pm
Satyam’s gaffe in unbelievable.
This is a serious blot on SEBI more than any one else, it will further dampen the spirits of new investors….
January 7, 2009 at 4:49 pm
It indeed is.. I am shocked, more than this to the revelation that board members are shocked.. WTF?
January 7, 2009 at 5:53 pm
And the games begin in India ……
This is so unethical and very very scary –
January 7, 2009 at 6:43 pm
Wow, so finally, we Indians who pride ourselves on the best disclosure standards in the world (yeah, I mean see the disclosure in Ramalinga’s letter) have our own Enron.
But there can be no doubt bout the fact that PwC or atleast some of their partners are involved because this fraud, as disclosed, was in Cash and Bank Balances? How could you fool the auditors in this head?
Auditor with RSM International (Glad RSM didn’t audit Satyam 🙂
January 7, 2009 at 7:27 pm
Is it the tip of an iceberg? Somehow I feel yes.
My worry is what happens to the investors, employees & the image of corporate India?
Depresing is the word I can think for the start of the year 😦
January 7, 2009 at 8:07 pm
1. The world bank banned Satyam last year for giving benefits to the bank’s employees. What is to say that Satyam didn’t offer similar ‘benefits’ to the auditors and whoever else is claiming to be ‘fooled’.
2. Already there are foreign investors who are saying that they will need to go over all their other investments with a magnifying glass.
3. I would actually put it the other way around QI: “At BEST, the regulators, auditors and other interested parties might have been in on the scam. At WORST, they are a bunch of incompetent idiots.” – the first problem can be solved, the second takes us to doom.
January 7, 2009 at 9:22 pm
hey,
I am going to hope that it will be the last such incident this year, or people like me would be losing jobs…..
Would not be a “Happy new year” then 😛
January 7, 2009 at 9:28 pm
You are yourself quite a Cooker , Q I , Loved the new phrase, CREATIVE ACCOUNTING. Soon MBA courses will have at least a semester dedicated to it.
January 8, 2009 at 6:08 am
I have been listening to stories about Satyam for years now. But all i thought was that its some corporate rivals who are putting up the rumours in the market.
Now the Chairman comes out and tells that he was the one who had cooked the books. Am astounded. I simply have no words to say. Wish i could give him a kick on his back side for what he did.
Am not sure if i should believe the reports of the companies. The auditors, independent directors…every one is corrupt and culpable in this offence.
January 8, 2009 at 10:46 am
@Janit: I think it will, people will just be more careful. Hopefully.
@Ex-PWC-Employee: Welcome. Thanks for the comment. I had forgotten about the GTB issue. And both in Hyderabad!
@GypsyGirl: Welcome and thanks for the comment. It is a scary thought, isn’t it?
@ChennaiRamblings: The concern is, how many more of our “infallible” and/or “iconic” companies have similar tales waiting to be told? Wasn’t Raju deified till a few months ago?
@Hades: I’m glad you found the silver lining! 🙂
@Smitha: Thanks for the comment…many of us share the same concern.
@Dhiren: Well, companies rend to present a more flattering picture. The problem is when the overseeing/regulating agencies don’t do their jobs well.
@Oxy: Exactly. What were the independent directors doing?
@Ritu: I feel sorry for the retail investors. What can they do?
@Rakesh: I think Ashok Wadhwa is too smart to allow a mistake like that!
@Smita: Perhaps a trip to the mall might help! 🙂
@Vaibhav: Thanks for the comment. I see what you mean with putting it the other way around, but for me, personal and professional integrity come first. A lack of integrity can do more damage than a lack of competence. Just look at our politicians. 🙂
@Ajit: I think this is a wake-up call…hopefully the last one. Fingers crossed and all that. 🙂
@Manpreet: Thanks! 🙂
@Liju: Let’s see what we learn from this, and if any improvement can be brought about.
January 8, 2009 at 12:23 pm
all these things make you wonder about every company all of a sudden, doesnt it?
i mean imagine being one of the most respected companies to this! its absolutely crazy.
and the board members saying they had no clue sounds only a shade more truthful than Goyal man saying he didnt know so many Jet employees were sacked! geez!
January 8, 2009 at 12:59 pm
I’m just selfishly relieved that I never bought those Satyam shares I was meaning to, last year. And worried about my friend who works there.
But isn’t this frightening? What and whom does one trust? And who suffers? Always, always, the common man.
January 8, 2009 at 8:26 pm
Ahhh, Brilliant we are no more a third world country, We have Enron, too. I am not much worried about the Satyam as it will fade away soon. The Idea is to now see what happens to PWC, its fucked. The Auditors getting Audited.
Now this is something to dwell upon, who checks the security guard and are Indian as virgin-pure as they seem.
Reliance and Tata’s need some serious double auditing. Ha ha ha, Raju came out of a closet.
January 8, 2009 at 11:30 pm
Wowie, India’s first major ultra huge corporate scandal. I guess we join the bigshots now. Shameful as though it might be, it just makes you realise that we do have companies that can affect investments and economies beyond our borders.
January 9, 2009 at 10:26 am
Q.I – the Qs you raised on due diligence are totally bang on.
The ripple effect of this is so huge. Apart from the employees and shareholders, it’s the competitors & clients that will suffer in a big way.
In an already shaky world economy, the Indian IT industry so didn’t need this.
January 9, 2009 at 11:49 am
Trying hard to believe that there are no others … and in Satyam they all have to be hand in glove.
Satyam has been most Asatyam 😦
January 10, 2009 at 10:03 am
QI:
Although I have little interst in IT/business I’m shell-shocked like millions here in AP.
Shock because Raju (finally he’s been arrested) is an icon, a cult figure here. For more than two decades, he’s been the inspiration for middle-class famiies’ IT dreams in AP. He may have had the best business management education, but what he needed was lessons on ethics.
With murky land deals being hinted at (the Raju family’s fondness for land is well-known) I’m sure political links to this scam will surface. Perhaps at least now the sheen of Hyderabad as an IT giant stands exposed …
January 10, 2009 at 12:25 pm
Ahh QI – you misunderstand me. Personal integrity should always be foremost. I meant that if it turns out to be a personal integrity issue then it is fine because that can be fixed through stronger laws and proper prosecution in this case.
But if this happened because of incompetence, then we are in trouble because there is nothing that can prevent this from happening again.
January 10, 2009 at 4:18 pm
I received Satyam rhymes in an email forward, one went thus:
Raju Raju sat on the wall
Raju Raju had a great fall
Balance sheet died
Shareholders cried
Raju Raju made a fraud
January 10, 2009 at 6:27 pm
No, no, not Ambit. I’m with RSM International. It’s the 7th largest accounting firm in the world. Our member in India is Suresh Surana & Associates.
Btw, read my post on what happens when Satyam goes to Bollywood !
January 11, 2009 at 10:31 am
Hi Friend
I am equally worried about the faith getting lost:
a) Mumbai episode – told India is no safer than Pakistan for tourism etc;
b) Satyam episode – told India can not be trusted even for financial (that too in IT sector) safty.
We need to group and resolve these crisis..for India’s sake.
January 11, 2009 at 5:10 pm
I don’t know how they got away with it, save to infer that there was (probably) collusion between the audit manager and perhaps the “bank” concerned. I have been involved in the audit of large multinational quoted companies so I do have some experience , besides, our clients did wine and dine us, no expense spared, but on no account could the audit programme be deviated from.
January 14, 2009 at 11:42 am
Welcome to the multiple and creative accounting world!
But you still have a long road to join the developed countries’ club.
Your next mission is too launch the ponzi scheme and then, yes, you will be acclaimed as one of “us”
🙂
http://fvarga.wordpress.com/
January 14, 2009 at 12:10 pm
QI
If you look at the share performances of various IT companies since this fiasco, you will see that the market is already discriminating between those perceived to be just giving lip-service to corporate governance and those actually doing something positive. If nothing else, one good thing is that it demonstrates the discriminating abilities of the market.
There are two ways people invest in India – in the stock market, and in corporations. The former is looking much better than the latter but I must say it is only in comparison and the advantage is only mild. India Ltd must recover from this mess else all growth projections could well be mud.
January 16, 2009 at 10:37 am
@Abha: You’d be surprised at how much many “respected” and “respectable” entities have to hide…
@Banno: That was lucky. And yes, it’s always the ordinary citizen that suffers…but isn’t that why we exist at all?
@Chirag: I just hope this incident leads to a strengthening of the system…let’s learn from mistakes.
@Dxtr: Welcome and thanks for commenting. Infamy, I suppose, is as sought-after as fame!
@Pooja: Welcome and thanks for the comment. I hope we take this opportunity to study what went wrong, and to ensure that the chances of any future systemic failure are minimised.
@IHM: Most entities have something to hide…..but 50,000 million is appalling. The sheer scale of the fraud – and the relevant accounting head – scared me. This was not like showing marginally more revenue or deferring costs to bump up margins a couple of percentage points….which they did, of course, but to show non-existent cash and bank-balances to that extent? That’s not very easy to pull off without active connivance. Or stupidity.
@SS: Re the political connections and the land scams: Sreedharan of the Delhi Metro fame had come out against the questionable manner is which contracts were awarded to Maytas. The AP government threatened to sue but didn’t. For obvious reasons. The conspiracy theorists have already started speculating that the government took him into custody so as to prevent the regulators from getting to him….
@V: Well, that’s a never-ending debate that has no conclusion.
@Rakesh: Sorry, my mistake. Don’t know why I associated AW with RSM.
@Manish Raj: Welcome and thanks for the comment. I suppose things will sort themselves out. At least, one hopes they do.
@Halim Chishtie: Welcome and thanks for commenting. I think it would be very difficult to disagree with that conclusion.
@fvarga: Just you wait….we’re catching up. 😉
@Shefaly: Yes, but one needs to take demonstrations of ‘abilities’ of the market with a pinch of salt. Scams can happen in any market. The question is, is the market deep enough, and are the systems robust enough to absorb the shocks and come out stronger? The same market participants that screwed up on Satyam have suddenly acquired discriminating abilities. Which points to an integrity issue – and an integrity issue in firms of impeccable pedigree. Which is the worst fallout – any financial statement from India may well be put under the scanner multiple times now, before any decision is taken. This will add to transaction costs, lead to longer “gestation” periods and make people err on the side of caution. Not a happy situation. The silver lining is the fact that we could, based on this experience, actually strengthen our systems and processes and emerge stronger in a while. Let’s see how long that takes.
January 17, 2009 at 10:41 am
You’re right. Satyam going down isn’t what keeps me up at night, but the possibility that this may just be the beginning of more such disasters.
A veritable tip of the iceberg.
March 24, 2009 at 12:03 pm
After Satyam, it will be IRCON International Limited.
Recently IRCON International made some promises to a “party” in Malaysia for the South Double Track Project – Seremban Gemas, in south Malaysia.
Rumour has it..a sum of money had been promised by this “party” in exchange for the Signalling & Systems Contract. Rumour has it..some influential people from Malaysia had flown down personally to meet in New Delhi.
This can be an embarrasment for India and Ircon if this issue is blown up. My source in Malaysia says, the Malaysian Authorities, namely the new Malaysia Anti Corruption Commission came to know of meeting and dinner which was hosted by “this party” who is using money to clinch this contract. Investigations had started.
So looks like….IRCON will find itself in hot soup soon……….It seems his name is in circle in the rail industry in Malaysia after his recent visit to Kuala Lumpur….