The Satyam Scandal:
The entire story in 1000 words
Public companies are required to submit a detailed financial report of their finances. But how will you know that this data is absolutely correct? When the global financial crisis of 2008 hit, India was experiencing not only an economic but also faced an ethical crisis. Considering a hypothetical situation in the financial markets in which a company's basic accounting financials are altered. That's what Satyam Computer Services did that led to its end and winding up. A scam that made it to the MBA course syllabus is worth a read!
About Satyam Computers
Mahindra Satyam (previously Satyam Computer Services Limited) was Indian software development, operation and maintenance, packaged software integration, and engineering design services company based in Hyderabad, India. Satyam Computer Services was started in 1987 by Ramalinga Raju and his brother Rama Raju. It had grown to over $2 billion in revenue by 2008, employing over 52,000 IT experts worldwide. In the ancient Indian language Sanskrit, the word “Satyam” signified 'Truth.' The company started with 20 people and provided IT and BPO services to various industries.
The company's first success led to it being listed and chosen for an IPO on the BSE in 1991. Following this, Deere and Company became the company's first Fortune 500 client. This allowed the company to expand quickly and become one of the market's leading competitors. It was one of India's top five IT firms, focusing on the enterprise market. It had a long number of clients, including 185 Fortune 500 firms.
What did it look like to the public?
Satyam had over 50,000 employees and was active in over 60 countries during the height of its prosperity. Satyam had become the poster child for an Indian success tale. Its financials were also flawless. In 2003, the company was valued at $1 billion. Satyam rapidly surpassed the $2 billion milestone in 2008.
During this time, the company grew at a CAGR of 40%, with operating profits averaging 21% and a stock price rise of 300 percent. Satyam had now become a role model for other businesses. MZ Consult was awarded the 'Golden Peacock Award' for Corporate Accountability in 2008 for being a "pioneer in Indian Corporate Governance and Accountability."
Mr. Raju was also well-known in the sector for his commercial skills, and in 2008 he received the Ernest and Young Entrepreneur of the Year Award. Satyam's board of directors agreed late in 2008 to acquire Maytas, a real estate firm held by Mr. Raju. This did not settle well with shareholders, and the decision was reversed within 12 hours, causing a drop in the stock price. Satyam was forbidden from doing anything with any of the World Bank's direct connections for an eight-year term on December 23rd.
The World Bank issued one of the harshest penalties on an Indian outsourcing company that it had charged on Satyam. The World Bank accused Satyam of failing to maintain accurate documentation and accounts to justify the fees charged to its subcontractors and of providing illegal benefits to bank employees.
Was it true? Were these allegations actually real? Satyam was India's crown jewel at the time! Satyam responded two days later, demanding the World Bank to explain itself for the statement and henceforth apologize for its actions, which had harmed Satyam's investor confidence.
What was it inside?
The Satyam was in everyone’s eyes for its brilliant clientele, performance, and growth. However, the failed attempt to acquire Maytas and these world bank allegations changed the entire scenario.
The market received the resignation of Mr. Raju on the morning of January 7th, 2009. When the world was dwindling in the economic crash led by the fallen standards of ethics, India faced its own ethical concern. Along with the resignation was a confession by Mr. Raju for the manipulation of accounts worth Rs. 7000 crores. Investors and clients from all across the world were stunned. This could not possibly be happening!
We'd have to travel back to 1999 to figure out what was going on. To fulfill Dalal Street's expectations, Mr. Raju began to exaggerate and inflate quarterly profits to meet Dalal Street's expectations. For example, quarterly revenues were exaggerated by 75%, and profits were overstated by 97% in the October 17, 2009 reports. Raju and the company's global head of internal audit collaborated on this.
Mr. Raju used his computer to generate a series of bank records to inflate the balance sheet with money that did not exist. The company's global internal audit supervisor developed bogus customer identities and fake invoices to exaggerate revenue.
As a result, the company would have easier access to loans, and the perception of its success would lead to a rise in the stock price. Additionally, the funds generated in the US markets never made it to the company's financial sheets. But that wasn't enough for Raju; he created fake employee records and withdrew their salaries on these fake identities' behalf.
Who should be blamed?
The Satyam Scam was an extensive audit and accounting fraud that was supposed to cost over Rs. 7,800 crores but ended up costing around Rs. 12,320 crores. Satyam Computers executives misled the markets and stakeholders by distorting the company's financial condition. Even PwC, the company's external auditors, missed crucial facts that went unnoticed for 7 to 8 years. Satyam's funds were a black box that only Ramalinga Raju and his close associates had access to. The company's profits and assets were exaggerated. When the bubble burst, it harmed a large number of people and wiped out a large sum of money. The CBI discovered 112 land purchase deeds and thousands of forged employment records. The Satyam scam has several people to blame, including the company's founder Mr. Ramalinga Raju, his brothers B Suryanarayana Raju and B Rama Raju, Satyam's then-CFO Srinivas Vadlamani, Satyam's internal auditors, and PriceWaterhouseCoopers' external auditors S Gopalakrishnan and Srinivas Talluri (PwC). Apart from the top management, eight additional people were implicated in the fraud.