Sl.

No.

Page
No

1.

INDEX
Introduction

2.

Objective of Study

3.

Abstract

4.

5.

Research
Methodology
Company Analysis

6.

Vision and Mission

11

7.

History

12

8.

Products Offered

15

9.

Details of Scam`

16

10.

Impact of Satyam
Scam on its Shares
Why did Raju
committed the fraud?
What was the
Auditors
Responsibility?
Steps taken by
Regulatory
Authorities
Steps taken by Law
Enforcing Authorities
Steps taken by PwC

21

Satyam after Satyam

Scam
Satyam Scam and
Corporate
Governance

33

11.
12.

13.

14.
15.
16.
17.

10

22
25

27

30
31

34

18.

19.
20.

How do Analyst view

Tech-Mahindra
Merger
How to avoid such
scams.
Learnings &
Refrences

37

40
42

INTRODUCTION
THE SATYAM SCAM
(RAJU NOT THE GENTLEMAN)
Indias Enron, the biggest corporate fraud of Indian History

SCAM:
A scam is a dishonest attempt to trap US into parting with our money. Unfortunately,
we have all experienced being cheated in one way or another, and we all know how it
feels.

A 'scammer' may make a personal approach, with an offer too good to be true.
Someone may email us, phone, text-message or post an offer that they press us to take
up.
Known scams cover a vast range of business transactions, including pyramid
selling/multi-level marketing; investment opportunities; prize/special offers; home
working schemes; miracle cures and bogus charities.
Although the actual message may differ, the intention is always the same; to obtain
money from the consumer, either by an outright swindle or by selling goods and
offering services which are not commensurate with the price charged.

Scams-fraudulent business schemes-are not a new phenomenon. With the evergrowing availability of mass communication methods, scams have the potential to
target many more consumers with increasingly serious results.

Satyam Scam
SATYAM means truth in Sanskrit. On January 7, 2009 in a letter addressed to the
existing Board of Directors of the Satyam Computer Services Ltd. and copied to the
Chairman of SEBI and Stock Exchanges, Raju admitted that the Companys Balance
Sheet as at September 30, 2008 carried inflated cash and bank balances, nonexistent
accrued interest, an understated liability and overstated debtors position. The
companys founder and chairman, B. Ramalinga Raju, confessed to a $1.47 billion
fraud on its balance sheet, which he and his brother, Satyams managing director, had
disguised from the companys board, senior managers and auditors for several years.
It was like riding a tiger, not knowing how to get off without being eaten, Mr Raju
wrote.
The scam at Satyam Computer Services, the fourth largest company in Indias much
showcased and fiscally pampered information technology (IT) industry, has had an
unusual trajectory. It began with a successful effort on the part of investors to thwart
an attempt by the minorityshareholding promoters to use the firms cash reserves to
buy out two companies owned by them Maytas Properties and Maytas Infra. That
aborted attempt at expansion precipitated a collapse in the price of the companys
stock and a shocking confession of financial manipulation and fraud from its
chairman, B. Ramalinga Raju.
The Satyam scam is also referred to as 'India's Enron' for its similarities to the scandal
at the US energy giant.
Objectives of the Study and Sources of Information
Objectives tell us why project has been taken under study. It helps us to know more
about the topic that is being undertaken and helps us to explore future prospects of that
organization.

The objective of the study is to discuss the meaning and purpose of corporate
governance and its evolution in India. The focus of the study is on the liability of
Independent Directors of a company and how it is followed or complied in Indian
corporate system. As all these issues have come into limelight after the SATYAM
fraud was revealed.
Recently, the accounting fraud of Satyam rocked the world; some even named it as
Indian Enron. Satyam
fraud is Indias biggest corporate scandal since the early 1990s and its first highprofile casualty since the
start of the global financial crisis. The main objectives of this study are to: (1)
the nature of
accounting irregularities satyam committed; (2) highlight the Satyam Computers
Limiteds accounting scandal
by portraying the sequence of events, the aftermath of events, the key parties involved,
and major follow-up
actions undertaken in India; and (3) what lesions can be learned from Satyam scam?
by undertaking original investigation and analysis. In addition, we
prepared the
Corporate Scandal Fact Sheet, which includes a list of short vignettes
on companies, and the names of
the main characters involved in the corporate fraud scandals.

Objective
of study

To analyse the history

of Satyam.
To analyse why the
scam was not caught
earlier.
To know the reasons
of why Raju indulged
himself in fraud.

How to prevent such

scams.

SATYAM SCAM

SCOPE

Corporate Governance as a term comprises of many sections and

dimensions. The scope of the study is limited to the liability of Independent
Directors and its interpretation in India. The study would consider
SATYAM as a case study and would discuss the liability of Independent
Directors from the facts that emerged out of SATYAM case.

ABSTRACT
Ramalinga Raju and his brother Rama Raju, accused of committing a Rs40
billion fraud that threaten to shake the very foundation of Satyam
Computers, are in jail. The three-member director board constituted by the
Government has got down to brass tacks. The Government has further
offered financial support to bail out the beleaguered Satyam. The 50,000
odd employees of Satyam find themselves at sea, with some IT majors
deciding against hiring displaced Satyam staff. There are fears over the
adverse fallouts of the Satyam fraud on the international reputation of the
exports-driven Indian IT industry. The picture is getting curiouser and
curiouser by the day.

SATYAM SCAM

RESEARCH METHODOLOGY
Financial reporting practice can be developed by reference to a particular setting in
which it is embedded.
Therefore, qualitative research could be seen useful to explore and describe
fraudulent financial reporting
practice. Here, two issues are crucial. First, to understand why and how a specific
company is committed
to fraudulent financial reporting practice an appropriate interpretive research
approach is needed. Second,
case study conducted as part of this study, looked specifically at the largest
fraud case in India, involving
Satyam Computer Services (Satyam). Labelled as Indias Enron by the Indian
media, the issue involved
fraud and financial statement manipulation over a 10-year period,
predominantly by the chairman,
Ramalinga Raju (henceforth, Mr. Raju). It is Indias fourth largest software
services exporter having
operations in 66 countries. The Satyam accounting fraud has, for the first time,
comprehensively exposed the
failure of the regulatory oversight mechanism in India. No doubt, to design better
accounting systems, we
need to understand how accounting systems operate in their social, political and
6

SATYAM SCAM

economic contexts.

Method of data collection:Secondary sources:The data for study has been collected from various sources:
Internet Sources
Journals

Books.

Data has also been collected from Internet and particularly the companies
own website and its annual report.

SATYAM SCAM

COMPANY ANALYSIS COMPANY PROFILE:

Established on 24th June 1987 in Hyderabad (India) by B. Ramalinga
Raju and his brother-in-law, D. V. S. Raju, Satyam Computer Services
Limited was a rising-star in the Indian outsourced IT-services industry.
Satyam Computer Services Limited was incorporated in 1991 as a
public limited company. The company primarily operates in the US. The
company is headquartered in Secunderabad, India and employs about
51,000 people. Satyam was the fourth largest IT Company in India.
Satyam's network spans 57 countries, across 6 continents. Nearly 51,000
dedicated and highly skilled IT professionals, worked in development
centers in India, the USA, the UK, the UAE, Canada, Hungary, Singapore,
Malaysia, China, Japan and Australia and serve over 570 global companies,
including over 165 Fortune 500 corporations. Satyam Computer Services
Ltd. was a leading global consulting and IT services company, offering a
wide array of solutions customized for a range of key verticals and
horizontals. From strategy consulting right through to implementing IT
solutions for customers, Satyam straddles the entire IT space. It had
excellent domain competencies in verticals such as Automotive, Banking &
Financial Service, Insurance & Healthcare, Manufacturing, TelecomInfrastructure-Media-EntertainmentSemiconductors (TIMES). As a diverse
end-to-end IT solutions provider, Satyam offered a range of expertise
aimed at helping customers re-engineer and re-invent their businesses to
compete successfully in an ever-changing marketplace.
it also got its first Fortune 500 client, Deere and Co. In a short span of
time, it became a leading global consulting and IT services company
spanning 55 countries before nemesis caught up with it. It was one of the
8

SATYAM SCAM

few Indian IT services companies listed on the New York Stock Exchange.
it was ranked as Indias fourth largest software exporter, after TCS, Infosys
and Wipro. The 1990s were an era of considerable growth for the
company. It also caused the formation of a number of subsidiary
companies such as Satyam Renaissance, Satyam Info way, Satyam Spark
Solutions and Satyam Enterprise Solutions; Satyam Info way (Sify)
incidentally became the first Indian internet company to be listed on the
NASDAQ. its American Depository Recipts (ADRs) are listed on the New
York Stock Exchange (NYSE). 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 Consults 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.
Satyam acquired a lot of businesses and expanded its operations to
many countries and signed
MoUs with many multinational companies in the new millennium.
Satyam added feather after
feather to its cap by becoming the first company in the world to start a
programme known as the
Customer-Oriented Global Organization training in May 2000, signing
contracts with numerous

SATYAM SCAM

international players such as Microsoft, Emirates, TRW, i2 Technologies

and Ford, claiming the
privilege of being the first ISO 9001:2001 company in the world certified
by BVQI, winning the
Frost & Sullivan Award for Competitive Strategy in ASP in 2001, and
earning the name as global company by opening offices in Singapore,
Dubai and Sydney. In 2005, it acquired a 100
per cent stake in Singapore-based Knowledge Dynamix and 75 per cent
stake in London-based
Citisoft Plc. Satyam was a company on the fast track to success and
has justifiably earned for
itself a name for consulting in the area of strategy right through to
implementing IT solutions for customers.
Its consulting and IT solutions had resulted in technology-intensive
transformations that have met the most stringent of international quality
standards. Satyam had developed a unique quality hallmark, called
eSCMSM (eSourcing Capability Model), for IT Enabled Services (ITES),
in collaboration with Carnegie Mellon University and Accenture.

A biographical sketch of Satyams promoter, Ramalinga Raju:

Born on September 16, 1954 in a family of farmers, Ramalinga Raju
completed his B. Com. from

10

SATYAM SCAM

Andhra Loyola College at Vijayawada and subsequently earned an MBA

from Ohio University,
USA. Raju also attended a short duration Owner / President course at
Harvard. After returning to
India in 1977, he moved away from the traditional agriculture business to
set up a spinning and
weaving mill named Sri Satyam (Satyam means truth!). Thereafter, he went
on to the real estate
business and started a construction company which he named Satyam
Constructions. In another
strategic move, Ramalinga Raju became in 1987, one of the pioneers
of the Information
Technology industry in India as the prime-mover, co-founder and
Chairman of Satyam Computer Services Ltd. With the launch of Sify,
Satyam became one of the early birds to enter into the Indian internet
service market. Over the years that he built his business empire, the
civil society looked at him with awe and admiration. Ramalinga Raju
had been the recipient of several awards and honours including the Ernst &
Young Entrepreneur of the Year for Services in 1999, Dataquest IT Man of
the Year in 2000, CNBCs Asian Business Leader - Corporate Citizen of
the Year award in 2002 and E&Y Entrepreneur of the Year Award in
2007.

11

SATYAM SCAM

VISION OF SATYAM COMPUTER SERVICES LIMITED:

The vision of Satyam Computer Services Limited was

'What Business Demands'!

Over the last few years before the scam, Satyam Computer Services
Limited took rapid strides in developing new businesses in line with its
proposition to offer complete technological services to both corporate and
retail clients.
The vision was to develop Satyam Computer Services Limited into an
organization that is empowered by bright and talented individuals, working
in teams and delivering world class technology.

MISSION OF SATYAM COMPUTER SERVICES LIMITED:

To produce world class engineers and scientists at the Under Graduate,

Post Graduate and Doctoral levels in various branches of Engineering,
12

SATYAM SCAM

Science and Technology with a view to meet quality manpower

requirements for the benefit of mankind and sustainable development of the
nation.

HISTORY OF SATYAM COMPUTER SERVICES LIMITED

Satyam Computer Services Limited was incorporated as a Private Limited
Co. in 24th June, 1987 for providing Software Development & Consultancy
Services to large corporations. The Company was promoted by B Rama
Raju and B Ramalinga Raju. The Company has set up two software
Technology Parks, one at Mayfair Centre, Secunderabad & other at
Qutuballapur of Ranga Reddy Dist. of Andhra Pradesh. The Company has
also developed a Software Development center in Bangalore. The
Company became a 100% EOU under the STP scheme of Dpt. of
Electronics Government of India & exports software to USA, Canada,
Sweden & Germany etc. On 26th August, 1987 it was converted into a
Public Limited Company.
In June 1991, Satyam Computer Services limited became the First Fortune
500 client. On 26th August 1991 it was converted into a Public Limited
Company.
In 1992, the company went in for a Public Issue of Equity shares and the
IPO was oversubscribed by 17 times. Satyam went in for a public issue of
equity shares with the main objective of setting up a software technology
park & a 100 percent export oriented unit for software development with a
dedicated 64 KBPS satellite link.
13

SATYAM SCAM

In December 1995, Satyam Infoway (Sify), subsidiary of Satyam Computer

Services Ltd., was incorporated.
1993
- During the year company has entered into a joint venture agreement with
Dun & Bradstrret Corp., U.S.A. for development of softwares.
1994
- On January 26th a joint venture company called Dun & Bradstreet
Satyam Software (P) Ltd. was incorporated.
1995
- During the year company issued 37,17,000 12% unsecured fully
convertible debentures part "A" of Rs.100 each on right basis for the
shareholders in proportion of 1 FCD for every 5 shares held. The company
also issued 37,17,000-12% FCD's-part `B' Rs.60 per debentures in August
which can be converted into equity shares of Rs.10 each at premium of
Rs.50 per share on August 1996.

In 1996, two offices were set up, one in USA & other in Japan. And the
Comp. has added new business partners in Australia, Canada, Japan &
Europe. During the year Comp. promoted 4 subsidiaries. Viz Satyam
Renaissance Consulting Ltd., Satyam Enterprise Solutions Pvt. Ltd.,
Satyam Infoway Pvt. Ltd & Satyam Infoway Pvt. Ltd.
14

SATYAM SCAM

In the year 1997, the co. added additional space in Secunderabad &
Bangalore and new software development centers were opened in
Hyderabad, Pune, Chennai & Bhubaneswar during the year, the Comp.
established a school at Indian Institute of Information Technology at
Hyderabad, joining a select band of global corporations like IBM,
Microsoft and oracle who are also participating in IIIT activities. Satyam
Infoway [Ps] limited [SILs], a subsidiary of Satyam Computers, signed an
agreement with Sterling Commerce, International Group of U.S. to provide
electronic data interchange [EDIs] & other value added electronic
commerce solutions throughout India. Two new offices were set up in the
US, and another in Japan and new business partners have been added in
Australia, Canada, Japan & Europe. In the same year, Satyam Computer
Services Ltd., was been selected by the Switzerland-based World
Economic Forum & World Link magazine as one of India most remarkable
& rapidly growing entrepreneurial companies.

In 1998, Satyam Infoway, a wholly-owned subsidiary of Satyam Computer

Services Ltd. received the Technical Engineering Centre [TECs] approval
from the Department of Telecommunications [DoTs] for commercialising
its operations. Satyam Infoway, a whollyowned subsidiary of Satyam
Computer Services Ltd. received the Technical Engineering Centre [TECs]
approval from the Department of Telecommunications [DoTs] for
commercialising its operations in the same year. In 1999, Satyam Infoway
Ltd became the second largest Internet services provider in India based on
the number of customers. Satyam Computer Services Ltd announced that it
15

SATYAM SCAM

had divested its 24 per cent ownership of Dun and Bradstreet Satyam
Software Pvt Ltd [DBSSs] in favour of Cognizant Software Solutions
Corporation, a subsidiary of Cognizant Corporation, US.
In 1999, Satyam Infoway became first Indian IT Company to be listed in
NASDAQ. Satyam Computer Services Ltd., one of fastest growing IT
companies in the country, took significant decisions including the merger
of three of its subsidiaries with the parent Comp. & a 1:1 bonus issue.
In 2000, the co. was been named a 2000 Web Business 50/50 award winner
for SatyamWorld - its corporate intranet, to become the only Comp. to
feature in this list. The co. also received the National HRD award - 2000
for outstanding contributions to HRD.
In 2001, the Comp. was been rated as one of 10 most well-regarded
companies in the country in prestigious 2000/2001 Review 2000 Survey
conducted by Hong Kong-based Far Eastern Economic Review. The co.
won the Frost and Sullivan market engineering award for Competitive
Strategy 2001 in the application service provider category. - The American
depositary shares [ADSs] of Satyam Computer Services on May 16 was
listed at $11.16 on the New York Stock Exchange [NYSEs] at a premium
of 14.9 per cent to the offer price. In the month of May of the same year,
Satyam was listed on New York Stock Exchange.
In 2003, Satyams 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
16

SATYAM SCAM

emergence of a highquality 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.World Bank gives outsourcing contract
to Satyam Services. Satyam solution bags CSI National IT Award for best
packaged application. Satyam Computer Services honoured with
prestigious IBM Lotus award
In 2005, Satyam ranked 3rd in Corporate Governance Survey by Global
Institutional Investors
In 2006, Satyam receives AS9100 / EN9100 certification for its aerospace
domain. On October 26, 2006 has announced that it has achieved global
certification in the ISO 9001 [quality managements], ISO 20000
[information technology service management for Infrastructure
Management Services & Network and Systems], & ISO 27001
[Information Security Managements] standards. With the successful audit
of development center at Budapest, Hungary, all three certifications were
conferred at an organization-wide level. In the same year, Revenues of
Satyam crosses $1 billion. and Raju becomes chairman of Nasscom In
2007, Ernst & Young named Raju as the Entrepreneur of the Year.

17

SATYAM SCAM

PRODUCTS OFFERED
Satyam Computer Services Limited offered quality services and solutions
to the IT sector.
Satyam was considered to be a global leader in this field catering to the
Telecom-Infrastructure;
Media-Entertainment-Semiconductors; Banking & Financial Service;
Automotive; Manufacturing; Insurance & Healthcare industries.
Satyam Computer Services (Satyam) was a global information technology
(IT) solutions company. The company offered a comprehensive range of
services including application development, maintenance services,
consulting and enterprise business solutions, extended engineering
solutions and infrastructure management services. The company also
offered business process outsourcing services through Nipuna, a majority
owned subsidiary of the company.
Satyam Computer Services was a leading global business and information
technology services company that leverages deep industry and functional
expertise, leading technology practices, and an advanced, global delivery
model to help clients transform their highest-value business processes and
improve their business performance. The company's professionals excelled
in enterprise solutions, supply chain management, client relationship
management, business intelligence, business process quality, engineering
and product lifecycle management, and infrastructure services, among
other key capabilities. The various services offered by the satyam included:

Application Software
18

SATYAM SCAM

Business process outsourcing

Business value enhancement

Consulting and Enterprise Solution

Infrastructure Management Service

Integrated Engineering Solution

Product and Application Testing

DETAILS OF SCAM/FRAUD:
Fraud is a worldwide phenomenon that affects all continents and
all sectors of the economy. Fraud
encompasses a wide-range of illicit practices and illegal acts
involving intentional deception or
misrepresentation. According to the Association of Certified Fraud
Examiners (ACFE, 2010), fraud is a
deception or misrepresentation that an individual or entity makes
knowing that misrepresentation could
result in some unauthorized benefit to the individual or to the entity or
some other party. In other words,
mistakes are not fraud. Indeed, in fraud, groups of unscrupulous
individuals manipulate, or influence the
activities of a target business with the intention of making money,
or obtaining goods through illegal or
unfair means. Fraud cheats the target organization of its legitimate
income and results in a loss of goods,
money, and even goodwill and reputation. Fraud often employs illegal
and immoral, or unfair means.

19

SATYAM SCAM

Satyam Scam also referred to as Indias Enron, is the biggest corporate

fraud of Indian History. The Satyam accounting fraud unveiled in Jan 2009
by confession and resignation from Chairman Ramalinga Raju brought to
light the rationale behind the chain of controversies Satyam has been
surrounded with.
Raju started inflating accounts to benefit himself and his relatives by as
early as mid-2000. He has been indulging himself in the activities to benefit
himself without even considering the impact which it could have on
Satyams stakeholders, debtors, creditworthiness, etc. and more particularly
on him. In all total, the scam included four sides which has been stated
below.
Satyam and SES Merger - 2000
In mid-2000, Satyam Computers merged Satyam Enterprise Solutions in a
way that hugely benefited Srinivas Raju, brother-in-law of B Ramalinga
Raju, who was running SES. The merger ratio, fixed by KPMG, was 1:1.
But, before the merger, Satyam Computers renounced 800,000 shares of
SES in favour of Srini Raju at a price of Rs 10 when the shares were
trading at Rs 1500 in the stock market. The 1:1 merger ensured that Srini
Raju got 800,000 shares of Satyam Computers (paid for at Rs 10).
Maytas Deal Dec 08
In Dec 2008, Satyam Computer Services Limited announced its plan to
acquire controlling interest in two companies linked to the promoter family
- Maytas Infrastructure and Maytas
Property for $1.6 billion. Both the companys were owned by Satyams
Chairman S Ramalinga Rajus sons. Maytas is Satyam spelt in reverse.
The move aimed at transferring over Rs 6,000 crore of cash from Satyams
20

SATYAM SCAM

shareholders to the pockets of the Rajus who controlled both Satyam and
Maytas. Promoter had a stake of only 8.74% in Satyam while a stake of
36.64% in Maytas Infra, so it was a clear gain for Rajus.
The argument provided by them was the acquisition was meant to de risk
the business while the investors were busy figuring what would an IT
company do buying a construction firm.
Mutual funds and institutional investors were outraged. Satyams ADR
crashed over 50% and after an ineffectual attempt to defend the decision,
Chairman Ramalinga Raju gave in and cancelled the deal. The share price
still fell 30%. It came down from a level of Rs. 235 on 1st December to Rs.
135 on 26th Dec.
Satyam Barred from World Bank Dec 08
The World Bank barred Satyam in Dec 08, from doing any off-shore work
with it for 8 years after spy software was discovered on workstations inside
the bank's Washington headquarters, through which highly sensitive data
were stolen.
World Bank had signed a 5-year, $10-million contract with Satyam in 2003
to develop and implement an IT strategy at the World Bank, which was
expanded over the years to a $100million deal.
In 2005, the banks internal investigation unit began looking at the activities
of the banks chief information officer, the Sri Lankan Mohamed Vazir
Muhsin, considering a review if his retirement plan. He was ousted from
the bank for intervening in awarding of the contract to Satyam and was also
a preferential stock holder of the company.
21

SATYAM SCAM

For unclear reasons Satyam was still in control of banks operations till it
was temporarily suspended in February 08 and then completely ineligible,
effective from the month of September for providing improper benefits to
bank staff, failed to maintain documentation for fees charged and for an
alleged data theft.
The debarment of Satyam became public only in the month of December
because of World Banks non-disclosure policy but later decided to make
public the names of firm barred from doing any project with the world bank
in the interest of fairness and transparency.
Satyams share price after opening up at Rs. 163 fell to Rs. 140.4 on 23rd
Dec after the news i.e.
13.55% down.
Satyam Accounting Scandal Jan 09
On 7 January 2009, company 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 as on 30th September, 2008 contained:
inflated figures for cash and bank balances of 5,040 crore (US$1.09
billion) as against 5,361 crore (US$1.16 billion) reflected in the books.
an accrued interest of 376 crore (US$81.59 million) which was nonexistent.
an understated liability of 1,230 crore (US$266.91 million) on account
of funds was arranged by himself.
an overstated debtors' position of 490 crore (US$106.33 million) (as
against 2,651 crore (US$575.27 million) in the books).
22

SATYAM SCAM

An overstated revenue of Rs 2700 crore (Rs 27 billion) for the

September quarter and an operating margin of Rs 649 crore (24 per cent of
revenue) as against the actual revenue of Rs 2112 crore (Rs 21.12 billion)
and an actual operating margin of Rs 61 crore (3 per cent of revenue).

Fabricated Income Statement

Rs.
Cr
ore
Dif
fer
enc
e

A
c
t
u
a
l
3
2
1

R
ep
or
te
d
53
61

50
40

Accrued
Interest
on Bank
FD's
Understat
ed
Liability

N
i
l

37
6.
5

37
6.5

1
2
3
0

N
on
e

12
30

Overstate
d Debtors

2
1
6
1

26
51

49
0

Total

71
36

Cash and
Bank
Balance

23

SATYAM SCAM

Revenues
(Q2FY09)

2
1
1
2

27
00

58
8

Opearting
Profits

6
1

64
9

58
8

On this Confession price of Satyam over the stock exchange after opening
up at Rs. 179 saw a low of Rs 30.7.
Raju has been inflating the accounts since 2001 and claimed in the same
letter that neither he nor the managing director had benefited financially
from the inflated revenues. He also claimed that none of the board
members had any knowledge of the situation in which the company was
placed.
He stated that what started as a marginal gap between actual operating
profit and the one reflected in the books of accounts continued to grow over
the years. It has attained unmanageable proportions as the size of company
operations grew significantly (annualized revenue run rate of 11,276 crore
(US$2.5 billion) in the September quarter of 2008 and official reserves of
8,392 crore (US$1.86 billion)). As the promoters held a small percentage of
equity, the concern was that poor performance would result in a takeover,
thereby exposing the gap. The aborted Maytas acquisition deal was the last
attempt to fill the fictitious assets with real ones. It was like riding a tiger,
not knowing how to get off without being eaten.
As the promoters held a small percentage of equity (2.18%), the concern
was that poor performance would result in a takeover, thereby exposing the
24

SATYAM SCAM

gap. 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.
The promoters of Satyam had been significantly decreasing their stake in
the company every quarter brought down from 25.6% in March 01 to a
level of only 2.18% in Dec 09 before the fraud was finally unveiled.
..
Raju also stated in his letter that neither he, nor the Managing Director took
even one rupee/dollar from the company and have not benefitted in
financial terms on account of the inflated results, none of the board
members, past or present, had any knowledge of the situation in which the
company is placed. Even business leaders and senior executives in the
company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab
Panda/Virender Agarwal, A.S. Murthy, Hari T, SV Krishnan, Vijay Prasad,
Manish Mehta, Murali V, Sriram Papani, Kiran Kavale, Joe Lagioia,
Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the
real situation as against the books of accounts, none of his or Managing
Directors immediate or extended family members has any idea about these
issues.
After disclosing about the above facts, Raju also recommended the
following steps:

A Task Force has been formed in the last few days to address the

situation arising out of the failed Maytas acquisition attempt. This consists
of some of the most accomplished leaders of Satyam: Subu D, T.R. Anand,
Keshab Panda and Virender Agarwal , representing business functions, and
25

SATYAM SCAM

A.S, Murthy, Hari T and Murali V representing support functions. I suggest

that Ram Mynampati be made the Chairman of this Task Force to
immediately address some of the operational matters on hand. Ram can
also act as an Interim CEO reporting to the board.

Merrill Lynch can be entrusted with the task of quickly exploring

some Merger opportunities.

How did the scam matter to the Nation?
1.

Jobs of over 53,000 technocrats was at risk.

2. Countrys booming economy feared slight risk as countrys GDP fell

by 0.4%.
3. Indias IT Sector suffered downturn as its image was tarnished
globally.
4. The share prices of Satyam saw a sharp fall after Rajus Confession.
The sharp prices fell down from 190 to

30 (approx) in a day. The scam affected the image of Indian

Companies among foreign investors portfolio.
FACTORS CONTRIBUTING TO FRAUD

Numerous factored contributed to the Satyam fraud. The independent boa

rd members of Satyam (including the dean of the Indian School of Busines
s, a Harvard Business School professor, and an erstwhile star at Intel), the i
nstitutional investor community, the SEBI, retail investors, and the externa
l auditor none of them, including professional investors with detailed info
rmation and models available to them, detected the malfeasance.xxxvii Th
e following is a list of factors that contributed to the fraud:
Greed
26

SATYAM SCAM

Ambitious corporate growth

Deceptive reporting practiceslack 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 & External
Aggressiveness of investment banks, commercial banks,
Rating agencies & investors
Weak Independent directors and Audit committee
Whistle blower policy not being effective

Impact on Brand India

The outrage over Rajus admission of systematic accounting fraud has
broadened to wider concern about the potential damage to Indias appeal
for foreign investors and the IT services industry in particular. Immediately
following Rajus confession, Satyams shareholders took a direct hit as the
27

SATYAM SCAM

companys share price crashed 77% to Rs. 30 (approximately 60 cents), a

far cry from its 52-week high of Rs. 544 ($11.35) last May.
If there were one or two more such accounting scandals in the next six
months, it would make international investors more wary, says Wharton
management professor Michael Useem. One example would put people on
guard; several examples would be enough to tell big investment money
managers that they have to be especially careful working in that
environment.
Jitendra Singh, a Wharton management professor who is currently dean of
the Nanyang Business School in Singapore, believes Satyam is an outlier
and that there is no reason to think that problems of this kind may be
much more extensive than one company or a handful of companies.
However, he adds, foreign investors will look a little more askance at
accounting data from India. And that may not be a bad thing.
Useem also warns against overreacting. Dont assume other firms are
guilty, he says. But he considers the situation to be an alerting call for
investors to check where their money is, and for auditors and independent
directors in all major firms to take a look at the books.
Corporate India has tried to contain the damage so far. Rajeev
Chandrasekhar, president of the Federation of Indian Chambers of
Commerce and Industry, called upon regulators to move quickly to
demonstrate that this is an exceptional case among corporations, and that
investors need not worry about Indian corporate governance and
accounting standards. Suresh Surana, founder of RSM Astute Consulting
Group, said in a statement that the Satyam development is a major eye
opener and will bring into renewed and critical focus the role of
independent directors, auditors, company management, [the] CFO and
other key persons involved.

IMPACT OF SATYAM SCAM ON ITS SHARES

28

SATYAM SCAM

Satyams share price started to fell after the news of the scam came in.
Satyam's shares made a low of 11.50 rupees on 9 January 2009, their
lowest level since March 1998, compared to a high of 544 rupees in 2008.
Satyam stock was removed from its S&P CNX Nifty 50-share index from
Jan 12, 2009. Satyam was also excluded from the CNX 100 index, CNX
500 index and the CNX IT index. Reliance Capital Ltd replaced Satyam in
the main index. Satyam lost more than 10000 Crore rupee in a single day
trading. $8 Crore changed hands at BSE and 33 Crore changed hands at
NSE.

The following Fund Houses sold shares heavily in the open market after the
announcement of the scam :

Swiss Finance Corp Mauritius Ltd: Sold 7786759 shares at Rs.74.61

Aberdeen International India Opportunities Mauritius Ltd:Sold

9830811 shares of the company at Rs.43.41.

Aberdeen Asset Managers Ltd Aberdeen Global Asia Pacific fund:

Sold 4179064 shares at Rs.43.41.

The NYSE also halted trading ADRs of Satyam after the scam.
. Stock Charting of Satyam from December 2008 to January 2009.

29

SATYAM SCAM

Roles of independent directors:

The Indian law does not have any specific provision regarding the duties of
an independent director. Although clause 49 of the Listing Agreement
makes provisions regarding independent Directors, one does not find any
specific provision regarding the duties and obligations of an independent
Director. The role of independent director is that of a conscience keeper.
Generally an independent director is expected to perform the fiduciary
duties and the duty to exercise care and skill. They represent divergent
viewpoints on issues brought before them. They exercise independent
judgment on the issues of strategy, performance and standards of conduct.
They should have the courage to ask the uncomfortable questions. They
should be able to resist the influences, luring and pressures faced by them.
They should be independent in their judgment on the issues of strategy,
performance and resources, including key appointments and standards of
conduct. They also ensure that proper and effective monitoring system
exists in the company. He must act honestly with a degree of diligence and
skill. Broadly the responsibilities of an independent director should include
the a) Duty to exercise powers in accordance with the companys
constitution
b)

Duty to promote the success of the company

c)

Duty to exercise independent judgment

30

SATYAM SCAM

d)

Duty to exercise reasonable care, skill and diligence

e)

Duty to avoid conflicts of interest

f)

Duty not to accept benefits from third parties

g) Duty to declare interest in proposed transactions or arrangements with

the company.
h)

Duty to protect the interests of minority share holders

But it doesnt mean the independent directors should be held directly liable
for any act or omission. It is not possible for an independent director to
check and verify, each and every information presented by the board. It
would defeat the motive of independent directors as it will make it difficult
for the companies to find the right person who is ready to take the risk.
Independent directors cannot be expected to act as investigative agencies.
In the absence of grounds for suspicion, a director is justified in trusting
officials to perform duties honestly. The independent directors are not
expected to personally go and check bank balances or the accounts. It is
normal for the audit committee and the independent directors to accept the
figures presented by the management. It is the responsibility of the board
and the internal and external audit agencies to sure that the facts and figures
presented are accurate. However if an independent director is directly
involved in or responsible for any breach or violation or has wilfully
defaulted or has shown gross negligence towards his duties then he can also
be held liable.

WHY DID RAJU COMMITTED THE FRAUD?

What is known as of now is that over an extended period of time, the
promoters decided to inflate the revenue and profit figures of Satyam. In
the event, the company has a huge hole in its balance sheet, consisting of
31

SATYAM SCAM

non-existent assets and cash reserves that have been recorded and liabilities
that are unrecorded. According to the confessional statement of Mr. Raju,
the balance sheet shortfall is more than Rs.7000 crore.
Why did a leading company in one of Indias most successful industries of
recent years need to inflate profits? After all, the revenues of Indias IT
industry have grown at a scorching compound annual rate of almost 30 per
cent in the past eight years, driven by exports.
Why then did the fourth largest IT company choose to take the criminal
route of falsifying accounts and indulging in fraud? One possible cause
could be the desire to drive up stock values. The benefits derived by
promoters from high stock values are obvious, allowing them to buy into
real wealth outside the company and giving them the invasion money to
acquire large stakes in other firms. This tendency was epitomised by the
benefits derived by America Online when it merged with Time Warner.
Although the latter had more assets, revenues, and customers, AOLs
higher market capitalisation led to that company and its chairman, Steve
Case, getting more out of the deal than did long-time giant Time Warner.
There is some suspicion that Mr. Raju and his family may have sought
similar benefits. The family chose to build its shareholding in Satyam
Computer Services and shed it when required. For example, in year 2000
Satyam Computer merged with a related company, Satyam Enterprises.
Rajus cousin, C. Srinivasa Raju, who held 800,000 shares, or 19 per cent,
in Satyam Enterprises, was reportedly allotted an equivalent number in
Satyam Computer, leading to criticism that relative prices did not justify
the 1:1 swap.

32

SATYAM SCAM

But the original promoters share held by the Raju family and their
subsequent acquisitions were not for keeping. Though the precise numbers
quoted vary, according to observers the stake of the promoters fell sharply
after 2001 when they held 25.60 per cent of equity in the company. This
fell to 22.26 per cent by the end of March, 2002, 20.74 per cent in 2003,
17.35 per cent in 2004,
15.67 per cent in 2005, 14.02 per cent in 2006, 8.79 in 2007, 8.65 at the end
of September 2008, and 5.13 per cent in January 2009 (Business Line,
January 3, 2009). The most recent decline is attributed to the decision of
lenders from whom the family had borrowed to sell the shares that were
pledged with them. But the earlier declines must have been the result either
of sale of shares by promoters or of sale of new shares to investors.
According to audited balance sheet figures (if they are to be trusted)
available from the CMIEs database, the paid-up equity in Satyam
Computer Services rose from Rs. 56.24 crore in March 2000 to just Rs.
64.89 crore by March 2006 and further to Rs. 133.44 crore in March 2007.
Overall, the number of shares held by the promoter group fell from 7.16
crore (22.8 per cent) to 5.8 crore (8.6 per cent) between September 2001
and September 2008. This points to a conscious decision by the promoters
to sell shares, which may have been used to acquire assets elsewhere. The
more inflated the share values, the more of such assets could be acquired. It
is quite possible that the assets built up by the eight other Raju family
companies under scrutiny, including Maytas Properties and Maytas
Infra, partly came from the resources generated through these sales. If true,
this makes Rajus confession suspect, since he stated that neither myself,
nor the Managing Director (including our spouses) sold any shares in the
33

SATYAM SCAM

last eight years excepting for a small proportion declared and sold for
philanthropic purposes.
This may not have been the only way in which resources were transferred
out of Satyam Computer Services into other arms of the expanding Raju
family empire. Money could have been siphoned out through opaque
transactions with beneficiaries who were paid sums not warranted by their
business profile. Satyams business strategy did involve unusual
transactions. One example was the acquisition in 1999 by group company
Satyam Infoway, which was the largest private Internet Services Provider
in the country at that time, of IndiaWorld Communications, for a sum of
$115 million. The acquired company operated popular portals such as
samachar.com and khel.com that had no clear revenue model, and was the
principal beneficiary just as in the AOL deal. According to reports, the
owner of IndiaWorld was himself charged with intellectual property
violations by his erstwhile employer IndiaWorld.com, an
Internet services company managed by U.S.-based ASAP Solutions Inc.
Satyam Infoways position was that it was aware of the claim being made
by ASAP Solutions, but that its interest was not in IndiaWorld.com but was
limited to the URL indiaworld.co.in and the other portals under its
banner, for which it had of course paid a huge sum. There is reason to
suspect that this acquisition delivered little to the company, raising
questions about the motivation.
Mr. Rajus confession is also suspect for another reason, which has been
widely discussed in the media. Even if he and his colleagues were inflating
revenues and profits, the actual revenue earning capacity of the company,
as confessed by him, seems to be extremely low. He claims that the huge
34

SATYAM SCAM

difference between actual and reported profits in the second quarter of

2008-09 was because the ratio of operating margins to revenues was just 3
per cent rather than the reported 24 per cent. But even if Satyam Computer
Services was cooking its books, it was engaged in activities similar to that
undertaken by other similarly placed IT or ITeS companies and it too had a
fair share of Fortune 500 companies on its client list. It is known that many
of these companies have been showing operating margins that are closer to
the 24 per cent reported by
Satyam than the 3 per cent revealed in Mr. Rajus confession. Thus in
financial year ending March 2008, the ratio of profits before tax of Infosys
was 32.3 per cent of its total income, that of TCS 23.1 per cent, of Satyam
27.8 per cent, and that of Wipro 19.2 per cent.
This suggests that either Mr. Raju is exaggerating the hole in his balance
sheet or there is some other, more complex, and more disturbing
explanation. But whatever it is, the difference between 24 per cent and 3
per cent seems too large to be the industry standard.
Despite its award-winning reputation for corporate governance, its
impeccable board with highprofile independent directors, and its
appointment of big-four member PwC as its auditor, this still mysterious
accounting fraud occurred. The full truth, it appears, is not yet out.

35

SATYAM SCAM

WHAT WAS THE AUDITORS RESPONSIBILITY?

Satyam's bogus accounts had been audited by Price Waterhouse, the Indian
auditor that has been a member firm of PricewaterhouseCoooper
International since 2000-01. The company balance sheet as at March 31,
2008 was signed off by Srinivas Talluri, a partner of Price Waterhouse in
Hyderabad, the southern Indian city where Satyam was based.
With all the Satyam mess yet to be fully sorted out, my concerns are
directed towards PricewaterhouseCoopers, the auditing firm hired by them.
Inasmuch the fault lies with the top brass for trying to cook books, it is
another thing for the entrusted watchdogs to fail in their duty. An
accounting failure can mean one of two things:

Either PwC was hand in hand with Satyam or whatever documents

provided to them were false and forged by Satyam honchos themselves.

PwC failed miserably in it's duties. But if there was some sort of

forgery then more than 2-3 people would have to be involved, going
against the logic suggested by Ramalinga Raju that not many on the board
knew the truth.

36

SATYAM SCAM

Several articles claim that DSP Merrill Lynch found out immediately (they
were apparently approached for help with a merger) that there were serious
accounting issues, while PwC found out nothing for years.
Merrill Lynch, meanwhile, had been retained by Satyam ten days before
Mr Raju's confession, to explore merger opportunities for the outsourcing
giant, which was already struggling with corporate governance issues.
Hours before Mr Raju admitted to the fraud, the investment bank severed
its ties with the company. We came to understand that there were
material accounting irregularities, which prompted our decision, a
spokesman for Merrill said. PwC and Price Waterhouse would not
comment yesterday, citing client confidentiality, although Price
Waterhouse added that it would co-operate with the regulators.
Dennis Beresford, a former chairman of the Financial Accounting
Standards Board, the US accounting watchdog, said: It's hard to miss $1
billion of cash.
The role of PWC has been widely criticised for overlooking the
manipulations mooted by B Ramalinga
Raju, the founder and
former Chairman of Satyam Computers.
Soon after their arrest, the PwC executives were sent to judicial remand till
February 6. The fraud-hit Satyam has been struggling for survival since
January 7 when its founder Ramalinga Raju resigned as chairman revealing
profits have been overstated for years and that one billion dollars in cash on
the books did not exist.
In the latest developments, the auditors have been slapped with charges of
cheating, forgery, criminal breach of trust and criminal conspiracy as per
the Indian Penal Code.
37

SATYAM SCAM

Matter stands postponed on 27th. On 28th, we have to issue notice to the

public prosecutor for the matter to be taken up.and they have been
remanded to judicial custody till the 6th of February, said Mastan Naidu,
counsel for the arrested executives of PricewaterhouseCoopers.

STEPS TAKEN BY REGULATORY AUTHORITIES

SEBI:
In one of the most significant changes post-Satyam, the SEBI Committee
on Disclosures and Accounting Standards (SCODA) has issued a
discussion paper containing some specific proposals that could result in
changes to Clause 49 of the listing agreement.

Post Satyam Scandal broke in Jan, Maytas Infra made a shocking

revelation to BSE in Feb, that three of its promoters B Ramalinga Raju, B

Rama Raju and B Nandini Raju had pledged their entire holdings of 15.14
percent to lenders. That made SEBI rethink on
38

SATYAM SCAM

Corporate Governance issues bringing new rules in Feb 09, requiring

greater disclosure by promoters of their shareholding and any pledging of
shares to third parties.

The key recommendations (or proposals for discussion as the SCODA

appears to solicit views on certain issues without taking concrete positions)
were as follows:

The appointment of the CFO is to be approved by the Audit

Committee after assessing the qualifications, experience and background of

the candidate. The SCODA did not find it necessary to prescribe particular
professional qualifications for the CEO.

Rotation of audit partners every five years. The SCODA did not go

down the path of insisting on rotation of audit firms.

Voluntary adoption of International Financial Reporting Standards

(IFRS) by listed entities, so as to ensure a state of preparedness by 2011

when the Indian standards are expected to be converged with IFRS.

Interim disclosure of balance sheets (audited figures of major heads)

on a half-yearly basis.

Streamlining of timelines for submission of various financial

statements by listed entities as required under the listing agreement.

COMPANY LAW BOARD:

39

SATYAM SCAM

After the scandal, on 10 January 2009, the Company Law Board decided to
bar the current board of Satyam from functioning and appoint 10 nominal
directors.
GOVERNMENT OF INDIA:
On 5th February 2009, the six-member board appointed by the Government
of India named A. S.
Murthy as the new CEO of the firm with immediate effect. The board
consisted of:

Banker Deepak Parekh.

IT expert Kiran Karnik.

Former SEBI member C Achuthan S Balakrishnan of Life Insurance

Corporation.

Tarun Das, chief mentor of the Confederation of Indian Industry and

T N Manoharan, former President of the Institute of Chartered

Accountants of

India.

ICAI:
India's chartered accountancy regulator urged the government to tighten
laws governing the profession to avoid frauds. A panel set up by the
Institute of Chartered Accountants of India (ICAI) recommended that the
names of errant accountants be made public and a corporate governance
code be defined for independent directors, audit committees and chief
financial officers of publicly listed companies.
The high-power committee made the suggestions in a report to the ministry
of corporate affairs (MCA) after its approval by the Icai council, a core
group at the regulator entrusted with taking key decisions. The findings
40

SATYAM SCAM

were given to MCA, ICAI's parent ministry, in May. Mint has reviewed a
copy of the report.
"We have made recommendations which are both for better regulation of
the profession as also empowerment of auditors in the report," said Amarjit
Chopra, ICAI president. "The idea is to make sure that scams like Satyam
do not surface again."
ICAI is currently investigating the role of S. Gopalakrishnan and Srinivas
Talluri, two senior Price Waterhouse, Bangalore, partners who were
recently been released on bail. The two were found prima facie guilty of
misconduct by Icai along with four others, including V. Srinivas, former
Satyam chief financial officer, and V.S. Prabhakara Gupta, former head of
the company's internal audit cell. Gopalakrishnan, who was an ICAI
council member, was removed as a member of its specialized committees.
According to the report submitted to the ministry, there had been a failure
of corporate governance at Satyam. Investigations thus far reveal that
resolutions submitted to banks for loans were not even entered in the
minutes of board meetings and that the audit committee was unaware of
these transactions
"Therefore, it is recommended that in the case of listed companies, the
details of bank balances, loans, advances, both secured and unsecured,
should be submitted to the audit committee every quarter," according to the
report.
An audit committee oversees financial reporting and disclosure.

41

SATYAM SCAM

The report also wants the government to encourage whistle-blowers on

issues relating to corporate governance of listed companies.

STEPS TAKEN BY LAW ENFORCING AUTHORITIES

The founder of Satyam was arrested two days after he admitted to
falsifying the firm's accounts. Ramalinga Raju is charged with several
offences, including criminal conspiracy, breach of trust, and forgery by
A.P.Police.
Andhra Pradesh police conducted a raid on the Hyderabad office of
PricewaterhouseCoopers (PwC), the former auditor of Satyam Computer
Services, as part of the probe into the Rs.70 billion fraud by the IT
bellwether.
Crime Investigation Department (CID) officials said a team raided the PwC
office in the up
market

Jubilee Hills

and

seized documents and

other

The raid was conducted after Satyam's former chief financial officer
Vadlamani Srinivas told investigators that the auditors never pointed out
any deficiencies in the accounts.
THE CENTRAL Bureau of Investigation (CBI) on Tuesday, November 24,
2009 finally got an assessment of the accounting fraud of the Satyam
Computers, saying that it is worth more than Rs 14,000 crores. The amount
was initially estimated as Rs 7,800 as per the information given by the
tainted Chairman B Ramalinga Raju.
42

records.

SATYAM SCAM

The Rs 14,000 crores figure was reached after counting the losses suffered
by both institutionalised investors and individual investors. The DIG of
police Lakshminarayana said that Ramalinga Raju and other promoters also
took loans to the tune of Rs 1,220 crores by bogus, forged board resolutions
in addition to the earlier loan he took in the name of 37 firms floated by
him and his family members. He also revealed that Ramalinga Raju had
created fake customers and inflated revenues by fake invoices to the tune of
Rs 430 crores.
The probing agency has also identified properties worth Rs 350 crores,
including six thousand acres of land and 40,000 square feet of housing
plots.

With this chargesheet, the probe has come to an end. It had required a multi
disciplinary team to complete this probe, with the team including income
tax, enforcement directorate and Reserve bank of India officials.

STEPS TAKEN BY PWC

Chennai, March 5 (IANS) Global audit firm PricewaterhouseCoopers
(PwC) is cleaning up its Indian stables in the wake of the accounting
scandal in Satyam Computer Services.
According to a statement by the firm, an advisory board is being set up to
provide guidance to the PwC leadership on its strategy and actions.
This board will comprise five members, four of whom will be from
outside the PwC network and will be leading individuals of repute and
standing in India, PwC haD said.
43

SATYAM SCAM

This comes after two of its partners were in the dock for the corporate fraud
at Satyam Computer Services, the board of the software company gave it
the sack notice and it was indicted by the Institute of Chartered
Accountants of India (ICAI) for the scam.
PwCs global network fully supports the steps taken by the leadership of
our member firm in
India, Samuel A. DiPiazza Jr., CEO of PricewaterhouseCoopers
International, was quoted as saying in the statement Thursday.
India is a very important market for PwC and one that we are committed
to supporting and developing.- said by one of PWC officials.
The Indian arm of the audit firm has asked the PwC global network to
identify a senior partner from another PwC member firm to serve as the
fifth member of the board.
PwC India will be thoroughly reviewing its work and processes and to
oversee this activity, a new head of quality assurance and risk management
will be appointed.
Its Hyderabad office will be placed under a new management after
suspending two of its partners who were involved in auditing the fraud-hit
Satyam Computer Services.
Trying to absolve PwC from the Satyam fraud, Ramesh Rajan, chairman of
PwC India, said in a statement: Pricewaterhouse appreciates the
profound impact that the fraud perpetrated by the previous management of
Satyam Computer Services Ltd has had on business confidence in India.

44

SATYAM SCAM

The firm remains keen to understand the nature and extent of the fraud
that took place at Satyam which was clearly designed to, and did,
circumvent the audit process.
PwC resigned as the statutory auditor by Satyam Computer Services after
the latters board recommend the audit firms removal to the government.

SATYAM AFTER SATYAM SCAM

45

SATYAM SCAM

After the Satyam Scam, there has taken place a major change in the
company and its management.
After the scandal broke, the then-board members elected Ram Mynampati
to be Satyam's interim CEO.
In April 09, Venturbay Consultants Pvt Ltd., a 100% subsidiary of Tech
Mahindra successfully bid for Satyam through which Tech Mahindra
acquired 43% stake in Mahindra Satyam resulting in equity infusion of US
$ 582 million. It now operates under the brand Mahindra Satyam with C.P
Gurnami as the current CEO.
As a result of the scandal, under the directions of the new Mahindra
management team, Satyam Computer Services restated its financial results
for the period 2002 to 2008. These restated results were published in
September 2009.
On June 21, 2009 Company unveiled its new brand identity, Mahindra
Satyam. It was stated in the annual report that this strategic move paves
the way for the emergence of a robust brand which draws from the Core
Values of the Mahindra Group and the inherent strength of Satyam brand.
The new vision of Mahindra Satyam is
'Business transformation, Together'!

Business
Transformation, Together
46

SATYAM SCAM

SATYAM SCAM AND CORPORATE GOVERNANCE

Analysts said that the Satyam case illustrated the need for reform of
corporate governance in
India. Saurabh Mukherjea, of Noble, the London-based investment bank,
said: We have run into listed companies where the advisory arms of the
audit firm earn consultancy fees for help with
M&A, new entity structuring and tax minimisation. In most Western
countries rules limit such activities, which could trigger conflicts of interest
for auditors.
A good corporate governance is one where a firm commits & adopts ethical
practices across its entire value chain & in all of its dealing with a wide
group of stakeholders encompassing employee, customer, vendors,
regulators & shareholders in both good and bad times.
Corporate governance includes various parties:

Shareholders

Employees

Management

Bankers

Government

Governance issue at Satyam arose because of non fulfillment of obligation

of the company towards the various stakeholders. It proved a poor
relationship with all the stakeholders.
It is well known that a shareholder has a right to get information from the
organization, such information could be with respect to the merger and
47

SATYAM SCAM

acquisition. Shareholders expect transparent dealing in an organization.

They even have right to get the financial reporting and records.
In the case of satyam, the above obligations were never fulfilled. The
acquiuisition of maytas infrastructure and properties were announced,
without the consent of shareholders. They were even provided with false
inflated financial reports. The shareholders were cheated.
It is well known that the collapse of any organizations reputation has a
diect impact on the employees job. As per the case, employees were
shown with a inflated figure. The excess of employees in the organization
were kept under VIRTUAL POOL who received just 60% of their salaries
and several were removed.
The entire scam had its impact on management. Questions were raised over
the credibility of management.
Any organization has its obligation towards the Government by means of
timely payment of taxes and abiding by the rules and laws framed up by the
Government. As per the case with satyam , the company did not pay
advance tax for the financial year 2009. As per the rule, the advance tax is
to be paid 4 times a year; such was not fulfilled by them.
Finally the satyam computer consultancy limited didnt have good
relationship with its bank too. SCS was blacklisted by World Bank over
charges of Bribery.It was declared ineligible for contracts to providing:

Improper benefit to bankstaff.

Failing to maintain documentation to support fees.

The revelation further deepened concerns about poor corporate governance

practices at the company. The case describes the corporate governance
48

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structure at Satyam, its code of conduct, roles and responsibilities of

different committees under the board, whistle blower policy etc. It
highlights the role played by the independent directors of
Satyam in approving the Maytas deal and discusses their limitations.
In case of satyam fraud, board was unable to fulfill its role &
responsibilities.
Now we discuss the responsibilities that should be followed ethically by
board and what it actually did

Ethical responsibilities:

Governing the organization by establishing broad policies and

objectives

Selecting, appointing, supporting and reviewing the performance of

the chief executive

Ensuring the availability of adequate financial resources

Approving annual budgets

Accounting to the stakeholders for the organization's performance

Actual scenario:

Despite the shareholders not being taken into confidence, the directors

went ahead with the management's decision

The Government too is equally guilty in not having managed to save

the shareholders, the employees and some clients of the company from
losing heavily
49

SATYAM SCAM

Simple manipulation of revenues and earnings to show superior

performance

Raising fictitious bills for services that were never rendered

Increased the Cash & bank balance

Operating profits were artificially boosted

So when the case came in light following are the actions that has been
taken:

Nasscum sets up panel to avoid satyam like case in future- formed a

corporate

Governance & ethics committee, chaired by N.R.Narayana Murthy

(chairman and chief mentor of Infosys)

Hinduja Global chalks out 100 day plan for satyam

Year ban on satyam to be reviewed

HOW DO ANALYST VIEW TECH MAHINDRA-SATYAM MERGER ?

The merger of Tech Mahindra and Mahindra Satyam (Satyam Computer
Services) is largely seen as a positive deal by analysts, considering that the
combined entity will become sixth largest software services provider and
will have a balanced revenue mix as it would lower client concentration.
British Telecom's share of total revenue will now come down to about 18%
from 35% and the overall telecom sector contribution will fall to 47% from
96%, thus reducing risks.
Tech Mahindra and Mahindra Satyam's boards approved merger of the two
firms on Wednesday. The combined entity will have revenue of USD 2.4
billion, 75,000 employees and 350 clients. The swap ratio for the merger of
50

SATYAM SCAM

Mahindra Satyam with Tech Mahindra has been fixed at 8.5 shares of
Satyam for every one share of Tech Mahindra.
Mahindra Satyam shares were up over 4% at Rs 80.85 on NSE on
Thursday in noon trade. Tech Mahindra also gained 4.2% at Rs 713.90.
Here's how analysts view Tech Mahindra-Satyam merger:
Edelweiss: We expect the combined entity to become a formidable
competition in the scale player league with complementary skill sets and a
well balanced revenue mix.
MF Global: Investor concerns regarding the merger ratio have been
allayed with the merger ratio being largely in tandem with the current
market price. While we believe that the combined entity will benefit from
synergies with respect to size and mix, it is too early to say whether it will
result in superior growth rates in the near term. Rating: Neutral (Tech
Mahindra). Motilal Oswal: The joint entity will have a unified 'go-tomarket' strategy and a more diversified revenue footprint geographically.
The combination will benefit from operational synergies, economies of
scale, sourcing benefits, and standardization of business processes. Rating:
Neutral (Tech Mahindra).
Prabhudas Lilladher: We see improved ability of the merged entity to bid
for the larger projects, but the crux would be a seamless integration of the
entities and reaping the benefits. We see a daunting task for the
management ahead, hence would wait before flagging a rerating. Rating:
Accumulate (Tech Mahindra).
INVESTORS STUNNED:

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SATYAM SCAM

For the last couple of days outside the Bombay Stock Exchange, all anyone
can talk about at the chai stalls and sandwich stores is how Ramalinga
Raju, the former boss of Satyam Computers, managed to rack up a billiondollar fraud right under their noses.
Investors in Indian shares were stunned by Mr Raju's revelation, in a letter
to the stock exchange this Wednesday, when he confessed his wrongdoing
and admitted that he had effectively cooked the books of his firm for the
last several years.
Satyam's shares plummeted on the news by
75%, dragging down India's stock main
market by 7%.
"I can't believe it," says investor Rajiv Gupta
outside the stock market.
"It's very worrying, and it's happened at the
worst possible time. Markets here were just started to look like they were
recovering. But this news - it is very very bad."
Ashok Bakliwal, another investor, agrees:
"This will put the spotlight on Indian companies, and overseas investors
will be wary of putting their money here without taking a good, hard look
at the company's books."
"As if India wasn't going through enough of a bad time - now this? I really
don't know what will happen next. How could a fraud of this magnitude
take place and go unnoticed? " What went wrong?
It's a question that everyone is asking.
The controversy has got many in corporate circles here wondering whether
it was India's new found love affair with capitalism that led to Satyam's
downfall.

It's a wake-up call

52

SATYAM SCAM

In the letter to his shareholders, Mr Raju says that he was trying to cover
up the losses at Satyam, and in doing so got Chanda Kochar, joint
managing caught up in a vicious cycle of lies and debts. director, ICICI
Bank He says this attempt to hide the losses from investors and
shareholders was like "riding a tiger, not knowing how to get off without
being eaten".
According to Mr Raju's statement, about $1bn (0.65bn), or 94% of the
cash on the company's books, was made up - and analysts say it was the
manipulation of the cash flow which could have been one reason why the
deceit was undetected.
Many analysts also say that the chase for huge profits, and the desire to
keep up with the breakneck speed of India's $50bn outsourcing industry's
growth rates that may have been behind Mr Raju's motivation in fudging
the accounts at his firm. Disappeared
But trying to get any answers from Mr Raju since his confession letter is
proving to be impossible - he has disappeared.

A company spokesperson has been quoted as

saying that his whereabouts remain unclear
for now.
At a company press conference on Thursday,
the acting chief executive Ram Mynampati
told journalists that he and other board
members had
no knowledge of the financial fraud and

53

SATYAM SCAM

were hoping to get back to business as soon as possible.

"Our only aim at this time is to ensure that the business continues," Mr
Mynampati says.
But it will be some time before it is business as usual for
the troubled tech firm.
Indian media is reporting that financial regulators have despatched
investigators to Hyderabad to launch a formal investigation into the case.
India's main stock exchanges have announced they are removing Satyam
Computers from their indices as of January 12 because of the stunning
revelations
Leading members of Indian industry have also expressed their shock and
disappointment that such an audacious act of deception could take place.
Chanda Kochar, the joint managing director of ICICI Bank, one of India's
biggest lenders, says she is shocked by the news.
How this could be avoided in future? /Recommendations:
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. The Satyam scandal is a classic case of

Negligence of fiduciary duties, Total collapse of ethical standards,

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
54

SATYAM SCAM

investors, analysts, shareholders, and the stock market,

Low ethical and moral standards by top management, Greater emphasis
on short term performance.
Some of the initiatives/ steps which an organisation can undertake in order
to avoid future Satyam are:

Lasting solutions can only be found by transforming human

consciousness through an inner discipline and higher moral reasoning. A

company can build sustainable competitive advantage through ethics,
values, excellence, quality, social responsibility and human development.
An integrated, value based vision of leadership and governance will go
along in creating corporate governance.

A transformed organizational culture which pays highest attention to

ethical conduct and moral values will strengthen sustainable roots of the
company.

Transparency and effective auditing and regulatory checks through

internal and external auditors and monitoring agencies will help establish
long lasting credibility for any company.

Companies should gather feedback, measure effectiveness, and

continually improve their code of conduct.

The top management should always distinguish between opportunities

and temptations. No matter what heights a person may reach, character

must be maintained at any cost.

Companies must take a step back when presented with challenging

decisions and individual must listen to the little voice in their head in
complying with law and to their heart in dealing with people. When making
corporate decisions, it is important to not lose sight of the individuals
55

SATYAM SCAM

ethical reasoning. Personal ethics, self-discipline, and high moral reasoning

are critical to avoiding unethical behavior.

Transparency in financial reporting as a moral duty and ethical

conduct is also very important for companies to adhere to in order to

uphold ethical standards. Benefits from such engagement include higher
trust and loyalty from stakeholders, increased goodwill, and higher investor
confidence.

It is also important for companies to establish an organizational

culture which supports ethical conduct through a code of conduct and

properly laid out corporate governance policies and procedures.
Advantages of this approach include fostering ethical behavior from
employees, increased inner discipline, and providing value based corporate
vision.

A lot of fraud schemes start out small, with the perpetrator thinking

that small changes here and there won't make a big difference- and is less
likely to be detected. This sends a message to a lot of companies: if your
accounts aren't balancing or if something seems inaccurate, even just a tiny
bit, it's worth investigating. Break down tasks so that there are checks in
each area. Dividing responsibilities across a team of people makes it easier
to detect irregularities or misappropriated funds.

Companies must be careful when selecting executives and top level

managers. These are the people who set the tone for the company- if there's
corruption at the top; it's bound to trickle down. Each employee must be
accountable for their actions, regardless of the role they play in the
company. Separate the role of CEO and Chairman of the Board. When the
same person takes on both roles, who left to check up on the CEO?
Splitting up the roles helps avoid situations like the one at Satyam.
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SATYAM SCAM

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. Indias biggest corporate scandal
in memory threatens future foreign investment flows into Asias 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 Bombays 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 publiccompanies 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.
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SATYAM SCAM

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.
Satyam fraud spurred the government of India to tighten corporate norms to
prevent recurrence of similar frauds in future. The government took action
to protect the interest of the investors and safeguard the credibility of India
and the nations image across the world.
It has forced the government to rewrite corporate governance rules and
tightens the norms for chartered accountants. Some of the regulations
include:

Promotion of shareholders democracy with protection of rights of

minority

Shareholders.

Responsible self-regulation with adequate disclosure and

accountability and

Lesser government control over internal corporate processes,

Voluntary corporate governance code,

Certificate of independence for independent directors,

An institution of mechanism for whistle blowers,

Cap at 10 percent on the revenues coming from a single client to an

audit firm. Promoters should be prohibited from interfering in the

recruitment of independent directors.
Independent directors should have challenging, skilled IDs, who have
time to devote to the business, rather than well-known faces.
Additional lessons include having an effective whistle blower policy in
place, education on ethical values, criteria for remuneration to key
personnel, and strengthening of quality review. Corporate governance
framework needs to be implemented in letter as well as spirit. The
58

SATYAM SCAM

increasing rates of white collar crimes demands stiff penalties and

punishment. The small distortions created by few immoral executives lad
far reaching negative consequences. Hopefully, creating an awareness of
the large consequences of small lies may help some to avoid this trap.
Recommendations:
1.

A statement from the resigning director should be mandated by

regulation so there is transparency as far as investors and other stakeholders

are concerned.

An outcome of the Satyam episode is that it seems to have instilled fear in

the minds of independent directors in India. Media reports say that more
than 500 directors have quit the BSE-listed company boards since January
1 this year citing reasons ranging from ill-health to work pressures. It is
difficult to establish the correct reason. It would be better if independent
directors are more transparent about the specific reasons for their departure
than to offer the standard lines.

2.

SEBI should nominate independent directors. If they have a right to

regulate, then surely they have a right to even suggest the appointment of
certain directors.

3.

There should be a limit on the no. of companies on whose board a

person can be an independent director. This would make sure that the
person spends adequate time in each board.
E.g.: Mendu Rammohan Rao, an Independent Director on the Satyam
Board, was on the board of 7 companies as Independent Director and on 3
companies advisory board.
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SATYAM SCAM

6. Conclusion :
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. 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, Indias 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. 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 Limiteds 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.
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SATYAM SCAM

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 nations 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 . 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.
The culture at Satyam, especially dominated by the board, symbolized an
unethical culture. On one hand, his rise to stardom in the corporate world,
coupled with immense pressure to impress investors, made Mr. Raju a
compelled leader to deliver outstanding results. On the contrary, Mr.
Raju had to suppress his own morals and values in favor of the greater
good of the company. The board connived with his actions and stood as a
blind spectator; the lure of big compensation to members further
encouraged such behavior. But, in the end, truth is sought and those
violating the legal, ethical, and societal norms are taken to task as per
process of law. The public confession of fraud by Mr. Ramalinga Raju
speaks of integrity still left in him as an individual. His acceptance of guilt
and blame for the whole fiasco shows a bright spot of an otherwise
tampered character. After quitting as Satyams Chairman, Raju said, I
am now prepared to subject myself to the laws of land and face
consequences thereof. Mr. Raju had many ethical dilemmas to face, but
his persistent immoral reasoning brought his own demise. The fraud finally
had to end and the implications were having far reaching consequences.
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SATYAM SCAM

Thus, Satyam scam was not an accounting or auditing failure, but one of
CG. Undoubtedly, the government of India took prompt actions to protect
the interest of the investors and safeguard the credibility of India and the
nations image across the world. In addition, the CG framework needs to be
strengthened, implemented both in letter as well as in right spirit, and
enforced vigorously to curb white-collar crimes.

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THE SATYAM SCAM

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