The Satyam Fiasco - Summary & Analysis

The Satyam Fiasco: A Satyam Saga of Lies
Case Summary and Analysis:
India experienced both a financial and an ethical crisis during the global financial crisis of
2008. Consider a fictitious scenario in the stock market where the most fundamental financial
information a firm provides to you is distorted. In the case of Satyam Computer Services, this
took place. Early in 2009, the Satyam scandal (Satyam computers scam) was eventually
disclosed. The fraud was referred to many analysts as India's Enron. Today, we examine the
causes, consequences, and response to the scandal that rocked the country in the midst of a
recession.
Rama Raju and Ramalinga Raju, brothers, started Satyam Computer Services Ltd. in
Hyderabad in 1987. The firm began with 20 employees offering IT and BPO services across
various sectors.
The company's initial success quickly led to it being listed and choosing an IPO in the BSE in
1991. Following this, Deere and Company became the company's first Fortune 500 client.
This also made it possible for the company to expand quickly and rise to the top of its
industry.
After TCS, Wipro, and Infosys, Satyam quickly rose to become the fourth-largest IT software
exporter in the sector.
At its height, Satyam employed over 50,000 people and had operations in more than 60
nations. Now, Satyam was regarded as the best illustration of an Indian success tale. Its
financials were flawless as well. In 2003, the company was worth $1 billion. Soon after, in
2008, Satyam exceeded the $2 billion mark.
Late in 2008, the board of Satyam made the decision to acquire Mr. Raju's real estate firm
Maytas. The decision was reversed within 12 hours as a result of the shareholders'
displeasure, which also had an effect on the stock price. As the investors were still coping up
with the failed acquisition of Maytas, Mr. Raju's resignation and his admission that he had
falsified accounts totaling Rs. 7000 crores were accepted by the marketplace. Clients and
investors everywhere in the world expressed disbelief.
We would have to go back to 1999 to comprehend the con. Mr. Raju has started exaggerating
the quarterly profits to exceed the forecasts of the analysts. For instance, the October 17,
2009 figures overestimated quarterly profits by 97% and revenues by 75%. Together with the
company's worldwide internal audit chief, Raju had carried out this action.
Mr. Raju used his computer to construct a number of bank statements, adding money that
didn't exist to the balance sheet. The company's worldwide director of internal audit produced
fictitious invoices and client identities to inflate sales.
In turn, this would give the business simple access to loans, and the perception of its success
caused the share price to rise. Additionally, the money that the business had raised from US
markets was never even recorded on the financial sheets. However, Raju thought this was
insufficient, so he continued to make records for fictitious workers and would withdraw
salaries on their behalf.
Raju was motivated by the rising share price to sell as many shares as he could while still
keeping just enough to own stock in the company. Raju was able to profit from their high-
priced sales as a result. Additionally, he withdrew $3 million per month in salaries on behalf
of workers that never existed. Apart from his existing business, Raju was interested in real
estate industry also. So, he decided to buy Maytas Properties and Maytas Infrastructure,
owned by his family. This would also fill up the huge gap between the fake and manipulated
financials of Satyam. However, every attempt in this direction failed. The Maytas deal never
got materialized due to opposition from the institutional investors. By now, whistleblowing
attempts had started to arise and Raju put himself at the mercy of the law. Raju later
mentioned “It was like riding a tiger, not knowing how to get off without being eaten.”
How Raju was able to get away with the Scandal?
The auditor, PriceWaterhouseCoopers(PwC), failed miserably, and this is why. PwC was the
company's external auditor, and it was their responsibility to check the financial records for
accuracy. It is amazing that while auditing Satyam for almost nine years, they failed to
discover 7561 phoney bills.
The auditors could have noticed a number of warning signs. First, a quick check with the
banks would have shown that the cash amounts were exaggerated and the invoices were not
legitimate. Second, any business with as much cash on hand as Satyam would at the very
least place it in an account that pays interest. However, this time, it was different. Despite
these clear indicators, PwC looked to be ignoring them. When it was discovered that PwC
received double the amount charged for their services, suspicions toward them later grew.
Raju was detained and charged with criminal conspiracy, breach of trust, and forgery two
days after the confession was made. On that day, the shares dropped to Rs. 11.50 from 2008
highs of Rs. 544. When the CBI searched the home of the youngest Raju brother, they
discovered 112 sales deeds for various land purchases. Additionally, the CBI discovered
13,000 fabricated personnel records made by Satyam and asserted that the scandal cost over
Rs. 7000 crores.

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The Satyam Fiasco: A Satyam Saga of Lies

Case Summary and Analysis:

How Raju was able to get away with the Scandal?

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