Corporate Accounting Scandal at Satyam Computer

Services Limited: A Case Study of India’s Enron

Ironically, Satyam means “truth” in the ancient Indian language “Sanskrit” [24]. Satyam
won the “Golden Peacock Award” for the best governed company in 2007 and in 2009.
From being India’s IT “crown jewel” and the country’s “fourth largest” company with high-
profile customers, the outsourcing firm Satyam Computers has become embroiled in the
nation’s biggest corporate scam in living memory [25]. Mr. Ramalinga Raju (Chairman
and Founder of Satyam; henceforth called “Raju”), who has been arrested and has
confessed to a $1.47 billion (or Rs. 7800 crore) fraud, admitted that he had made up
profits for years. According to reports, Raju and his brother, B. Rama Raju, who was the
Managing Director, “hid the deception from the company’s board, senior managers, and
auditors”. The case of Satyam’s accounting fraud has been dubbed as “India’s Enron”. In
order to evaluate and understand the severity of Satyam’s fraud, it is important to
understand factors that contributed to the “unethical” decisions made by the company’s
executives. First, it is necessary to detail the rise of Satyam as a competitor within the
global IT services market-place. Second, it is helpful to evaluate the driving-forces behind
Satyam’s decisions: Ramalinga Raju. Finally, attempt to learn some “lessons” from
Satyam fraud for the future.

4.1. Emergence of Satyam Computer Services Limited

Satyam Computer Services Limited was a “rising-star” in the Indian “outsourced” IT-
services industry. The company was formed in 1987 in Hyderabad (India) by Mr.
Ramalinga Raju. The firm began with 20 employees and grew rapidly as a “global”
business. It offered IT and business process outsourcing services spanning various
sectors. Satyam was as an example of “India’s growing success”. Satyam won numerous
awards for innovation, governance, and corporate accountability. “In 2007, Ernst & Young
awarded Mr. Raju with the ‘Entrepreneur of the Year’ award. On April 14, 2008, Satyam
won awards from MZ Consult’s for being a ‘leader in India in CG and accountability’. In
September 2008, the World Council for Corporate Governance awarded Satyam with the
‘Global Peacock Award’ for global excellence in corporate accountability” [26].
Unfortunately, less than five months after winning the Global Peacock Award, Satyam
became the centerpiece of a “massive” accounting fraud.
By 2003, Satyam’s IT services businesses included 13,120 technical associates servicing
over 300 customers worldwide. At that time, the world-wide IT services market was
estimated at nearly $400 billion, with an estimated annual compound growth rate of
6.4%. “The markets major drivers at that point in time were the increased importance of
IT services to businesses worldwide; the impact of the Internet on eBusiness; the
emergence of a high‐quality IT services industry in India and their methodologies; and,
the growing need of IT services providers who could provide a range of services”. To
effectively compete, both against domestic and global competitors, the company
embarked on a variety of multi‐pronged business growth strategies.
From 2003-2008, in nearly all financial metrics of interest to investors, the company grew
measurably. Satyam generated USD $467 million in total sales. By March 2008, the
company had grown to USD $2.1 billion. The company demonstrated “an annual
compound growth rate of 35% over that period”. Operating profits averaged 21%.
Earnings per share similarly grew, from $0.12 to $0.62, at a compound annual growth
rate of 40%. Over the same period (2003-2009), the company was trading at an average
trailing EBITDA multiple of 15.36. Finally, beginning in January 2003, at a share price of
138.08 INR, Satyam’s stock would peak at 526.25 INR—a 300% improvement in share
price after nearly five years. Satyam clearly generated significant corporate growth and
shareholder value. The company was a leading star—and a recognizable name—in a
global IT marketplace. The external environment in which Satyam operated was indeed
beneficial to the company’s growth. But, the numbers did not represent the full picture.
The case of Satyam accounting fraud has been dubbed as “India’s Enron”.

4.2. Mr. Ramalinga Raju and the Satyam Scandal

On January 7, 2009, Mr. Raju disclosed in a letter (see Annexure) to Satyam Computers
Limited Board of Directors that “he had been manipulating the company’s accounting
numbers for years”. Mr. Raju claimed that he overstated assets on Satyam’s balance
sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that the company
claimed to own was non-existent. Satyam also underreported liabilities on its balance
sheet. Satyam overstated income nearly every quarter over the course of several years
in order to meet analyst expectations. For example, the results announced on October
17, 2009 overstated quarterly revenues by 75 percent and profits by 97 percent. Mr. Raju
and the company’s global head of internal audit used a number of different techniques to
perpetrate the fraud. “Using his personal computer, Mr. Raju created numerous bank
statements to advance the fraud. Mr. Raju falsified the bank accounts to inflate the
balance sheet with balances that did not exist. He inflated the income statement by
claiming interest income from the fake bank accounts. Mr. Raju also revealed that he
created 6000 fake salary accounts over the past few years and appropriated the money
after the company deposited it. The company’s global head of internal audit created fake
customer identities and generated fake invoices against their names to inflate revenue.
The global head of internal audit also forged board resolutions and illegally obtained loans
for the company” [27]. It also appeared that the cash that the company raised through
American Depository Receipts in the United States never made it to the balance sheets.
Greed for money, power, competition, success and prestige compelled Mr. Raju to “ride
the tiger”, which led to violation of all duties imposed on them as fiduciaries—the duty of
care, the duty of negligence, the duty of loyalty, the duty of disclosure towards the
stakeholders. “The Satyam scandal is a classic case of negligence of fiduciary duties, total
collapse of ethical standards, and a lack of corporate social responsibility. It is human
greed and desire that led to fraud. This type of behavior can be traced to: greed
overshadowing the responsibility to meet fiduciary duties; fierce competition and the
need to impress stakeholders especially investors, analysts, shareholders, and the stock
market; low ethical and moral standards by top management; and, greater emphasis on
short‐term performance” [28]. According to CBI, the Indian crime investigation agency,
the fraud activity dates back from April 1999, when the company embarked on a road to
double-digit annual growth. As of December 2008, Satyam had a total market
capitalization of $3.2 billion dollars.
Satyam planned to acquire a 51% stake in Maytas Infrastructure Limited, a leading
infrastructure development, construction and project management company, for $300
million. Here, the Rajus’s had a 37% stake. The total turnover was $350 million and a
net profit of $20 million. Raju’s also had a 35% share in Maytas Properties, another real-
estate investment firm. Satyam revenues exceeded $1 billion in 2006. In April, 2008
Satyam became the first Indian company to publish IFRS audited financials. On December
16, 2008, the Satyam board, including its five independent directors had approved the
founder’s proposal to buy the stake in Maytas Infrastructure and all of Maytas Properties,
which were owned by family members of Satyam’s Chairman, Ramalinga Raju, as fully
owned subsidiary for $1.6 billion. Without shareholder approval, the directors went ahead
with the management’s decision. The decision of acquisition was, however, reversed
twelve hours after investors sold Satyam’s stock and threatened action against the
management. This was followed by the law-suits filed in the US contesting Maytas deal.
The World Bank banned Satyam from conducting business for 8 years due to
inappropriate payments to staff and inability to provide information sought on invoices.
Four independent directors quit the Satyam board and SEBI ordered promoters to
disclose pledged shares to stock exchange.
Investment bank DSP Merrill Lynch, which was appointed by Satyam to look for a partner
or buyer for the company, ultimately blew the whistle and terminated its engagement
with the company soon after it found financial irregularities [29]. On 7 January 2009,
Saytam’s Chairman, Ramalinga Raju, resigned after notifying board members and the
Securities and Exchange Board of India (SEBI) that Satyam’s accounts had been falsified.
Raju confessed that Satyam’s balance sheet of September 30, 2008, contained the
following irregularies: “He faked figures to the extent of Rs. 5040 crore of non-existent
cash and bank balances as against Rs. 5361 crore in the books, accrued interest of Rs.
376 crore (non-existent), understated liability of Rs. 1230 crore on account of funds
raised by Raju, and an overstated debtor’s position of Rs. 490 crore. He accepted that
Satyam had reported revenue of Rs. 2700 crore and an operating margin of Rs. 649
crore, while the actual revenue was Rs. 2112 crore and the margin was Rs. 61 crore”. In
other words, Raju: 1) inflated figures for cash and bank balances of US $1.04 billion vs.
US $1.1 billion reflected in the books; 2) an accrued interest of US $77.46 million which
was nonexistent; 3) an understated liability of US $253.38 million on account of funds
was arranged by himself; and 4) an overstated debtors' position of US $100.94 million
vs. US $546.11 million in the books.
Raju claimed in the same letter that “neither he nor the managing director had benefited
financially from the inflated revenues, and none of the board members had any
knowledge of the situation in which the company was placed”. The fraud took place to
divert company funds into real-estate investment, keep high earnings per share, raise
executive compensation, and make huge profits by selling stake at inflated price. The
gap in the balance sheet had arisen purely on account of inflated profits over a period
that lasted several years starting in April 1999. “What accounted as a marginal gap
between actual operating profit and the one reflected in the books of accounts continued
to grow over the years. This gap reached unmanageable proportions as company
operations grew significantly”, Ragu explained in his letter to the board and shareholders.
He went on to explain, “Every attempt to eliminate the gap failed, and the aborted Maytas
acquisition deal was the last attempt to fill the fictitious assets with real ones. But the
investors thought it was a brazen attempt to siphon cash out of Satyam, in which the
Raju family held a small stake, into firms the family held tightly”. Table 1 depicts some
parts of the Satyam’s fabricated ‘Balance Sheet and Income Statement’ and shows the
“difference” between “actual” and “reported” finances.
Fortunately, the Satyam deal with Matyas was “salvageable”. It could have been saved
only if “the deal had been allowed to go through, as Satyam would have been able to use
Maytas’ assets to shore up its own books”. Raju, who showed “artificial” cash on his
books, had planned to use this “non-existent” cash to acquire the two Maytas companies.
As part of their “tunneling” strategy, the Satyam promoters had substantially reduced
their holdings in company from 25.6% in March 2001 to 8.74% in March 2008.
Furthermore, as the promoters held a very small percentage of equity (mere 2.18%) on
December 2008, as shown in Table 2, the concern was that poor performance would
result in a takeover bid, thereby exposing the gap. It was like “riding a tiger, not knowing
how to get off without being eaten”. The aborted Maytas acquisition deal was the final,
desperate effort to cover up the accounting fraud by bringing some real assets into the
business. When that failed, Raju confessed the fraud. Given the stake the Rajus held in
Matyas, pursuing the deal would not have been terribly difficult from the perspective of
the Raju family. Unlike Enron, which sank due to agency problem, Satyam was brought
to its knee due to tunneling. The company with a huge cash pile, with promoters still
controlling it with a small per cent of shares (less than 3%), and trying to ab-
Table 1. Fabricated balance sheet and income statement of Satyam: as of September
30, 2008.

Table 2. Promoter’s shareholding pattern in Satyam from 2001 to 2008.

sorb a real-estate company in which they have a majority stake is a deadly combination
pointing prima facie to tunneling [30]. The reason why Ramalinga Raju claims that he did
it was because every year he was fudging revenue figures and since expenditure figures
could not be fudged so easily, the gap between “actual” profit and “book” profit got
widened every year. In order to close this gap, he had to buy Maytas Infrastructure and
Maytas Properties. In this way, “fictitious” profits could be absorbed through a “self-
dealing” process. The auditors, bankers, and SEBI, the market watchdog, were all blamed
for their role in the accounting fraud.

4.3. The Auditors Role and Factors Contributing to Fraud

Global auditing firm, PricewaterhouseCoopers (PwC), audited Satyam’s books from June
2000 until the discovery of the fraud in 2009. Several commentators criticized PwC
harshly for failing to detect the fraud. Indeed, PwC signed Satyam’s financial statements
and was responsible for the numbers under the Indian law. One particularly troubling
item concerned the $1.04 billion that Satyam claimed to have on its balance sheet in
“non-interestbearing” deposits. According to accounting professionals, “any reasonable
company would have either invested the money into an interest-bearing account, or
returned the excess cash to the shareholders. The large amount of cash thus should have
been a ‘red-flag’ for the auditors that further verification and testing was necessary.
Furthermore, it appears that the auditors did not independently verify with the banks in
which Satyam claimed to have deposits”.
Additionally, the Satyam fraud went on for a number of years and involved both the
manipulation of balance sheets and income statements. Whenever Satyam needed more
income to meet analyst estimates, it simply created “fictitious” sources and it did so
numerous times, without the auditors ever discovering the fraud. Suspiciously, Satyam
also paid PwC twice what other firms would charge for the audit, which raises questions
about whether PwC was complicit in the fraud. Furthermore, PwC audited the company
for nearly 9 years and did not uncover the fraud, whereas Merrill Lynch discovered the
fraud as part of its due diligence in merely 10 days. Missing these “red-flags” implied
either that the auditors were grossly inept or in collusion with the company in committing
the fraud. PWC initially asserted that it performed all of the company’s audits in
accordance with applicable auditing standards.
Numerous factored contributed to the Satyam fraud. The independent board members of
Satyam, the institutional investor community, the SEBI, retail investors, and the external
auditor—none of them, including professional investors with detailed information and
models available to them, detected the malfeasance. The following is a list of factors that
contributed to the fraud: greed, ambitious corporate growth, deceptive reporting
practices—lack of transparency, excessive interest in maintaining stock prices, executive
incentives, stock market expectations, nature of accounting rules, ESOPs issued to those
who prepared fake bills, high risk deals that went sour, audit failures (internal and
external), aggressiveness of investment and commercial banks, rating agencies and
investors, weak independent directors and audit committee, and whistle-blower policy
not being effective.

4.4. Aftermath of Satyam Scandal

Immediately following the news of the fraud, Merrill Lynch terminated its engagement
with Satyam, Credit Suisse suspended its coverage of Satyam, and
PricewaterhouseCoopers (PwC) came under intense scrutiny and its license to operate
was revoked. Coveted awards won by Satyam and its executive management were
stripped from the company. Satyam’s shares fell to 11.50 rupees on January 10, 2009,
their lowest level since March 1998, compared to a high of 544 rupees in 2008. In the
New York Stock Exchange, Satyam shares peaked in 2008 at US $ 29.10; by March 2009
they were trading around US $1.80. Thus, investors lost $2.82 billion in Satyam.
Unfortunately, Satyam significantly inflated its earnings and assets for years and rolling
down Indian stock markets and throwing the industry into turmoil [31]. Criminal charges
were brought against Mr. Raju, including: criminal conspiracy, breach of trust, and
forgery. After the Satyam fiasco and the role played by PwC, investors became wary of
those companies who are clients of PwC, which resulted in fall in share prices of around
100 companies varying between 5% - 15%. The news of the scandal (quickly compared
with the collapse of Enron) sent jitters through the Indian stock market, and the
benchmark Sensex index fell more than 5%. Shares in Satyam fell more than 70%. The
chart titled as “Fall from grace”, shown in Exhibit 1 depicts the Satyam’s stock decline
between December 2008 and January 2009.
Immediately after Raju’s revelation about the accounting fraud, “new” board members
were appointed and they started working towards a solution that would prevent the total
collapse of the firm. Indian officials acted quickly to try to save Satyam from the same
fate that met Enron and WorldCom, when they experienced large accounting scandals.
The Indian government “immediately started an investigation, while at the same time
limiting its direct participation, with Satyam because it did not want to appear like it was
responsible for the

Exhibit 1. Stock Charting of Satyam from December 2008 to January 2009.

fraud, or attempting to cover up the fraud”. The government appointed a “new” board of
directors for Satyam to try to save the company. The Board’s goal was “to sell the
company within 100 days”. To devise a plan of sale, the board met with bankers,
accountants, lawyers, and government officials immediately. It worked diligently to bring
stability and confidence back to the company to ensure the sale of the company within
the 100-day time frame. To accomplish the sale, the board hired Goldman Sachs and
Avendus Capital and charged them with selling the company in the shortest time possible.
By mid-March, several major players in the IT field had gained enough confidence in
Satyam’s operations to participate in an auction process for Satyam. The Securities and
Exchange Board of India (SEBI) appointed a retired Supreme Court Justice, Justice
Bharucha, to oversee the process and instill confidence in the transaction. Several
companies bid on Satyam on April 13, 2009. The winning bidder, Tech Mahindra, bought
Satyam for $1.13 per share—less than a third of its stock market value before Mr. Raju
revealed the fraud—and salvaged its operations [32]. Both Tech Mahindra and the SEBI
are now fully aware of the full extent of the fraud and India will not pursue further
investigations. The stock has again stabilized from its fall on November 26, 2009 and, as
part of Tech Mahindra, Saytam is once again on its way toward a bright future.

4.5. Investigation: Criminal and Civil Charges

The investigation that followed the revelation of the fraud has led to charges against
several different groups of people involved with Satyam. Indian authorities arrested Mr.
Raju, Mr. Raju’s brother, B. Ramu Raju, its former managing director, Srinivas Vdlamani,
the company’s head of internal audit, and its CFO on criminal charges of fraud. Indian
authorities also arrested and charged several of the company’s auditors (PwC) with fraud.
The Institute of Chartered Accountants of India [33] ruled that “the CFO and the auditor
were guilty of professional misconduct”. The CBI is also in the course of investigating the
CEO’s overseas assets. There were also several civil charges filed in the US against
Satyam by the holders of its ADRs. The investigation also implicated several Indian
politicians. Both civil and criminal litigation cases continue in India and civil litigation
continues in the United States. Some of the main victims were: employees, clients,
shareholders, bankers and Indian government.
In the aftermath of Satyam, India’s markets recovered and Satyam now lives on. India’s
stock market is currently trading near record highs, as it appears that a global economic
recovery is taking place. Civil litigation and criminal charges continue against Satyam.
Tech Mahindra purchased 51% of Satyam on April 16, 2009, successfully saving the firm
from a complete collapse. With the right changes, India can minimize the rate and size
of accounting fraud in the Indian capital markets.

4.6. Corporate Governance Issues at Satyam

On a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which he
committed amounted to nearly $276 million. In the process, Satyam grossly violated all
rules of corporate governance [34]. The Satyam scam had been the example for following
“poor” CG practices. It had failed to show good relation with the shareholders and
employees. CG issue at Satyam arose because of non-fulfillment of obligation of the
company towards the various stakeholders. Of specific interest are the following:
distinguishing the roles of board and management; separation of the roles of the CEO
and chairman; appointment to the board; directors and executive compensation;
protection of shareholders rights and their executives.

4.7. Lessons Learned from Satyam Scam

The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly
governed corporate leader. As the fallout continues, and the effects were felt throughout
the global economy, the prevailing hope is that some good can come from the scandal in
terms of lessons learned [35]. Here are some lessons learned from the Satyam Scandal:
• Investigate All Inaccuracies: The fraud scheme at Satyam started very small, eventually
growing into $276 million white-elephant in the room. Indeed, a lot of fraud schemes
initially start out small, with the perpetrator thinking that small changes here and there
would not make a big difference, and is less likely to be detected. This sends a message
to a lot of companies: if your accounts are not balancing, or if something seems
inaccurate (even just a tiny bit), it is worth investigating. Dividing responsibilities across
a team of people makes it easier to detect irregularities or misappropriated funds.
• Ruined Reputations: Fraud does not just look bad on a company; it looks bad on the
whole industry and a country. “India’s biggest corporate scandal in memory threatens
future foreign investment flows into Asia’s third largest economy and casts a cloud over
growth in its once-booming outsourcing sector. The news sent Indian equity markets into
a tail-spin, with Bombay’s main benchmark index tumbling 7.3% and the Indian rupee
fell”. Now, because of the Satyam scandal, Indian rivals will come under greater scrutiny
by the regulators, investors and customers.
• Corporate Governance Needs to Be Stronger: The Satyam case is just another example
supporting the need for stronger CG. All public-companies must be careful when selecting
executives and top-level managers. These are the people who set the tone for the
company: if there is corruption at the top, it is bound to trickle-down. Also, separate the
role of CEO and Chairman of the Board. Splitting up the roles, thus, helps avoid situations
like the one at Satyam.
The Satyam Computer Services’ scandal brought to light the importance of ethics and its
relevance to corporate culture. The fraud committed by the founders of Satyam is a
testament to the fact that “the science of conduct” is swayed in large by human greed,
ambition, and hunger for power, money, fame and glory.

5. Conclusions
Recent corporate frauds and the outcry for transparency and honesty in reporting have
given rise to two outcomes. First, forensic accounting skills have become very crucial in
untangling the complicated accounting maneuvers that have obfuscated financial
statements. Second, public demand for change and subsequent regulatory action has
transformed CG scenario across the globe. In fact, both these trends have the common
goal of addressing the investors’ concerns about the transparent financial reporting
system. The failure of the corporate communication structure, therefore, has made the
financial community realize that “there is a great need for skilled professionals that can
identify, expose, and prevent structural weaknesses in three key areas: poor corporate
governance, flawed internal controls, and fraudulent financial statements [36]. In
addition, the CG framework needs to be first of all strengthened and then implemented
in “letter as well as in right spirit”. The increasing rate of white-collar crimes, without
doubt, demands stiff penalties and punishments.
Perhaps, no financial fraud had a greater impact on accounting and auditing profession
than Enron, WorldCom, and recently, India’s Enron: “Satyam”. All these frauds have led
to the passage of the Sarbanes-Oxley Act in July 2002, and a new federal agency and
financial standard-setting body, the Public Companies Accounting Oversight Board
(PCAOB). It also was the impetus for the American Institute of Certified Public
Accountants’ (AICPA) adoption of SAS No. 99, “Consideration of Fraud in a Financial
Statement Audit” [37]. But it may be that the greatest impact of Enron and WorldCom
was in the significant increased focus and awareness related to fraud. It establishes
external auditors’ responsibility to plan and perform audits to provide a reasonable
assurance that the audited financial statements are free of material frauds.
As part of this research study, one of the key objectives was “to examine and analyze in-
depth the Satyam Computers Limited’s accounting scandal by portraying the sequence
of events, the aftermath of events, the key parties involved, major reforms undertaken
in India, and learn some lessons from it”. Unlike Enron, which sank due to “agency”
problem, Satyam was brought to its knee due to “tunneling”. The Satyam scandal
highlights the importance of securities laws and CG in emerging markets. There is a broad
consensus that emerging market countries must strive to create a regulatory
environment in their securities markets that fosters effective CG. India has managed its
transition into a global economy well, and although it suffers from CG issues, it is not
alone as both developed countries and emerging countries experience accounting and CG
scandals. The Satyam scandal brought to light, once again, the importance of ethics and
its relevance to corporate culture. The fraud committed by the founders of Satyam is a
testament to the fact that “the science of conduct is swayed in large by human greed,
ambition, and hunger for power, money, fame and glory”. All kind of scandals/frauds
have proven that there is a need for good conduct based on strong ethics. The Indian
government, in Satyam case, took very quick actions to protect the interest of the
investors, safeguard the credibility of India, and the nation’s image across the world.
Moreover, Satyam fraud has forced the government to re-write CG rules and tightened
the norms for auditors and accountants. The Indian affiliate of PwC “routinely failed to
follow the most basic audit procedures. The SEC and the PCAOB fined the affiliate, PwC
India, $7.5 million which was described as the largest American penalty ever against a
foreign accounting firm” [38]. According to President, ICAI (January 25, 2011), “The
Satyam scam was not an accounting or auditing failure, but one of CG. This apex body
had found the two PWC auditors prima-facie guilty of professional misconduct”. The CBI,
which investigated the Satyam fraud case, also charged the two auditors with “complicity
in the commission of the fraud by consciously overlooking the accounting irregularities”.