Satyam Scandal – Falsifying of Revenues and Earnings

            Satyam Computer Services, India's fourth largest IT company specializes in business software and offers back-office outsourcing and consulting services. In the year to end-March 2008, Satyam Computers posted 2.1 billion dollars in revenue and an increase of $417 million in net income. But on January 7, 2008 Satyam’s founder and long time chairman Mr. Raju confessed in a letter to the Board that he had been cooking the books for years. He revealed that about $1.04 billion or 94% of the cash listed in assets at the end of the company’s second quarter in September simply did not exist! The scandal cost Satyam investors $2 billion on January7, 2008 alone & the shares declined 91% in just two days. In his letter, the chairman wrote that the cover-up finally got the best of him   “It was like riding a tiger, not knowing how to get off without being eaten.”  

            Satyam’s roster of clients included Citigroup, General Electric, General Motors, Nestle & United States Government. In 2008, it was serving more than a third of Fortune 500 Companies, 390 multinational corporations and had network in 67 countries with 53,000 employees. In addition to India, Satyam has been listed on the New York Stock Exchange since 2001, and on Euronext since January of 2008. The company has been audited by PricewaterhouseCoopers since its listing on the New York Stock exchange. Infact, in September of 2008 Satyam was awarded the Golden Peacok Global Award for Excellence in Corporate Governance. On the face of it, everything looked in accordance with Indian & US standards. Price Waterhouse insists that the audits were done in accordance with highest applicable standards and supported by relevant audit evidence.

             However, Dennis Beresford, a former chairman of the FASB said “It’s hard to miss $1 billion of cash.” How did the fraud go completely unnoticed & who is to blame? Is it the fraud brilliance of the CEO or failure of Price Waterhouse to see that the accounting books for Satyam were a complete sham for many years? Why were the auditors not able to track the manipulation of cash flows? Did the auditors assume there is cash? Did the auditors insist on certification by banks of the cash balance? Or did Mr. Raju present forged certificates? Could Mr. Raju have managed to find funds for just one day to deposit into the account for certificate purposes? Is it possible that the “Notes to Accounts” were not properly investigated? There fundamentally was a critical failure to enforce systems or audits in accordance with firm’s best practices. This also raises concerns that existing auditing standards imposed by Sarbanes Oxley may not be enough.

              The Satyam scandal came at a time when 145,000 member Institute of Chartered Accountants of India (ICAI) was considering to  introduce International Financial Reporting Standards (IFRS) system of accounting in India qualifying it as superior. As PWC uses IFRS, Satyam became one India’s first company to use IFRS format for keeping accounts. The traditional accountants in India strongly suggest that if traditional Indian accounting practices were used, the accounting fraud would come out. It is impossible to window dress the fraud over a period of years following traditional accounting practices. There would have been significant audit evidence. Clearly, the IFRS system has missed the entire fraud. There is pressure on the government to bring tighter regulations for financial institutions & market. For now PWC has claimed a manipulated set of books were provided for audit. This event brings up the emptiness of statutory audits. When a stated cash balance cannot be verified with accuracy, what is the point in having such high-priced auditors in place? The Securities and Exchange Board of India & the Central Bureau of Investigation are working on determining Price Waterhouse roll in Satyam fraud. The Institute of Chartered Accountants of India is also investigating and has the power to bar Price Waterhouse from working in the country indefinitely.        

               It is hard to believe that Mr. Raju’s confession on January 7, 2008 that the balance sheet of 30 September is tainted was an electric shock to the Board of Directors and Auditing Firm. He also stated that an understated liability of $253.38 million on account of funds was arranged by himself. He also confirmed that he had overstated debtor’s position in the books by 446.11 million. This magnitude of fudging of numbers doesn’t happen overnight. It starts very little and over a long period becomes a billion dollar fraud.