Presentation by –

Vijendra N Chaure (09)Runali Nirbhavane ( )Rohan Kadam ( )Ashok Ambulkar ()Ram Bendre ()Venkatesh Damale ( )Jitendra Pasi ( )Rajani Dulera ( )

All about Satyam Scam

MANAGEMENT INTRODUCTION HOW ITS HAPPENED WHAT WENT WRONG? IMPACT ON INDIAN IT INDUSTRY INDIA’S STEP TO SAVE SATYAM WHO WILL ACQUIRE? RECOMMENDATIONS CONCLUSIONS

CONTENTS

FOUNDER : Mr. Raju Ramalinga CEO : Mr. A. S. Murthy

MANAGEMENT

Satyam was established in 1987. 4th fastest growing IT company in India. 9 % market share 40,000 employees Revenue $2.1 billion It is the first company of India listed in three

International Exchanges i.e. NYSE, DOW and EURONEXT

INTRODUCTION

About

Saty

am

Few milestones:1987 Incorporated as private limited company in 1987 1991Recognized as a public limited company; debuts on the Bombay Stock Exchange (BSE)

IPO oversubscribed by 17 times 1993Satyam signs joint venture with Dun & Bradstreet for IT Services Joint venture with GE announced 1999Satyam Infoway (Sify) becomes the first Indian Internet company listed on NASDAQ Satyam forms joint venture with TRW Inc. Presence established in 30 countries

2007Becomes the Official IT Services Provider for the FIFA World Cups, 2010 (South Africa) and 2014 (Brazil)Announces acquisition of UK-based Nitor Global Solutions Limited Becomes the first Asian company to feature in the Training Magazine’s list of Top 125 companies for learning

About

Saty

am

2008 Scandal….

Cooking books of accounts

Satyam Maytas Fiasco

Satyam Computers has decided on 16 December 2008,announced that will acquire two groups firms1. Maytas peoperties2. Maytas Infra

The BOD of Satyam approved the founders proposals to buy 51% stack in Maytas Infrastructure and 100 % in Maytas Properties

The total outflow of the both acquisitions was expected to be US $1.6billion comprising of US $ 1.3 billion for the 51% stake in Maytas infra.

This is move that sparkled a row over alleged violations of corporate governance law

This deal is not profitable for investors. So after this announcement they started to raise their voices against the deal.

Maytas Infra

The Company is run by sons of Ramlingam raju

It was started in late 1980’s by Ramlingam Raju

The main reason for the debacle of Maytas Infra is due to the debacle of Satyam

Maytas Properties limited

One of the reason for the debacle of Maytas Properties is the on going economic slowdown.

The company has huge lands banks and the prices have dropped down in the real estate significantly.

Why he failed

The promotes decided to inflate the revenue and profit figures of satyam. In the event, the company had a huge role in its balance

So to fill up this gap…..

Company announce acquisitions 51 % stake in Maytas Infra and 100 % stake in Maytas Properties on 16 Dec 2008 but the deal was not profitable for investors.

Investors dumped Satyam’s Stock and threatened action against the management of Satyam Computer.This was mainly due to hide the irregularities in the Accounts of Satyam.It is also said the close association with the political leaders is one of the reasons.

Ramalinga Raju, chairman

“None of the board members, past or present, had any knowledge of the situation in which the company is placed.”

He INFLATED (non existent) cash and bank balance of Rs 5,040 crore(as against Rs 5,361 crore) reflected in the books.

AN accrued interest of Rs 376 crore is non-existent.

He has understated liability to the tune of Rs1,230 crore in accounts of funds arranged by me.

He hasover-stated debtors position of Rs 490 crore (as against Rs 2,651 crore reflected in the books.)

FOR sept 2008, we reported Rs2,700 crore revenue and operating margin of Rs 649 crore against actual revenue of Rs2,112 crore and margin of Rs 61 crore.

From

the

con

fess

ion

Vadalamani Srinivas, CFO

From

the

con

fess

ion

“I was asked specifically to not look into bank statement”

AUDITOR never pointed out any “deficiencies” during their discussions. Fixed deposits were unreal and fictitious which were managed with an understanding between the audit section and management.

BANK deposit were handled directly by Raju and the CFO was specially asked for “not to look into it”

“RAJU and his brother used to take decisions and tell us to do as instructed.”

THE CFO admitted that the account were manipulated for about seven years.

PRIOR to quarterly board meetings, Ramakrishna, VP,finance,would prepare the balance sheet. ”I do not pay much attention to the details of that balance sheet.”

Scenario I Forgery incThe scam team forged invoices to show collection of revenue abroad, forged bank statement to show inflow of money, showed transfer of money to fixed deposits (FDs) through forged FD receipts and reflected all this in the final accounts. The assets and liabilities are altered Q2Q to reflect rising income and rig share price.

CAVEAT This would require matching of revenue With staff strength and salary cost. Would also require forging of TDS certificates for income from FDs.

POSSIBILITY High, as there is logic and objective.

Sto

ry b

ehin

d t

he s

cam

Next

Scenario II True LiesSatyam did make money on export. Raju raised invoices for export abroad; money did come through the banking channels and was transferred to long term FDs and reflected in the books. Once the FDs were recorded in the books the deposits were dissolved and money transferred to multiple accounts. The books continued to reflect the FDs as you don’t need to surrender certificate anymore. Siphoned money was use to acquire land, property, pay for political patronage for Maytas Infra and Maytas properties.

CAVEAT This again require forging of TDS certificates for accrued interest and connivance of auditors.

POSSIBILITY Very high

Ext

rem

e Scenario III Hawala IncRaju receives political slush money abroad, brings it as invoiced billings, shows it in his book and transfers it to FDs to be dissolved latter.The money transferred to multiple accounts is siphoned to repatriate politicians’ money and for funding the activities of Maytas.

CAVEAT Have to show staff strength to match revenues or ramp up operating margins. Besides co-opting auditors and forging TDS certificates.

POSSIBILITY Very very high, is in sync with whispers of pressure to pay politicians and patronage.

Ext

rem

e Scenario III Hawala IncRaju receives political slush money abroad, brings it as invoiced billings, shows it in his book and transfers it to FDs to be dissolved latter.The money transferred to multiple accounts is siphoned to repatriate politicians’ money and for funding the activities of Maytas.

CAVEAT Have to show staff strength to match revenues or ramp up operating margins. Besides co-opting auditors and forging TDS certificates.

POSSIBILITY Very very high, is in sync with whispers of pressure to pay politicians and patronage.

Ext

rem

e Scenario III Hawala IncRaju receives political slush money abroad, brings it as invoiced billings, shows it in his book and transfers it to FDs to be dissolved latter.The money transferred to multiple accounts is siphoned to repatriate politicians’ money and for funding the activities of Maytas.

CAVEAT Have to show staff strength to match revenues or ramp up operating margins. Besides co-opting auditors and forging TDS certificates.

POSSIBILITY Very very high, is in sync with whispers of pressure to pay politicians and patronage.

Balance sheet of Satyam computer ltd.

SOURCES OF FUNDS AS ON 30.09.08 (In INR Cr)

ADJUSTED BALANCE SHEET (In INR Cr)

ADJUSTMENTS

1. Shareholders funds a. Share capital (share application

money , pending)

b. Allotment

c. Reserves and surplus

134.70

2.76

8392.23

134.70

2.76

(-)415.47

2. Loan Funds

a. secured loans

b. unsecured loans

____________________

30.49

234.80______8794.98_______

30.49

1464.80_______1217.28_______

1230.00_______1230.00________

APPLICATION OF FUNDS AS ON 30.09.08

ADJUSTED BALANCE SHEET

ADJUSTMENTS

1. Fixed assests2. Investments3. Tax4. Current assests a. sundry debtors b. cash c. accrued interest d. Loans

LIABITIESNet current assests

TOTAL APPLICATION OF FUNDS

1381.10618.64118.75

2651.365312.62376.34502.22

2166.056676.49

_______8794.98

1381.10618.64118.75

490.00272.62-502.22

2166.05901.21

_________1217.28

1381.10618.64118.75

2161.365040376.34-

-5775.21(difference)________7577.7

Where is the money???

Fabricated Income statement of Satyam

1) If the company claims it has cash in its hand that should be enough signal for the auditors to check whether the cash in hand is available or not.

2) Bank balance has been invested properly or not-where all it has been invested –MFs,etc.

3) Whether the internal control mechanisms are in place.

4) Scrutinizes if the company has huge creditors and balance at the same time.

5) Look into why the company is not taking benefits and negotiating the price.

?

Questions to the auditors

cont……

6) Are the profit margin abnormal compare to industry norms?

7) Check if there has been a quantum jump in wealth.

8) Carry out an overall ratio analysis of the figures in the organization, previous year, similar industry.

9) Physical verification of assets owned by the company.

?

FACTORS CONTRIBUTING TO 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 & External• Aggressiveness of investment banks, commercial banks,• Rating agencies & investors• Weak Independent directors and Audit committee• Whistle blower policy not being effective

VICTIMS OF FRAUD

Employees

Clients

Shareholders

Bankers

Indian Government

Deepak S. ParekhExecutive Chairman HDFC group

Kiran Karnikpresident of Nasscom

C. Achuthanformer presiding officer of the Securities Appellate Tribunal

Tarun Das

Former president CII

T.N. Manoharan

S.B. Mainak

Post

sca

ndal

New board of director formation by company low board and Ministry of company affaires

Spice group

Tech Mahindra

Hinduja group

L&T

GE

Bidders for Acquisition

Finally Satyam acquired by tech mahindra….

LESSONS LEARNEDSatyam’s 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 nation’s image across the world. It has forced the government to re‐write corporate governance rules and tighten 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, and a 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 ID’s, 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.

RECOMMENDATIONSLasting 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 corporategovernance.A transformed organizational culture which pays highest attention to ethicalconduct and moral values will strengthen sustainable roots of the company. Transparency andeffective auditing and regulatory checks through internal and external auditors and monitoringagencies will help establish long lasting credibility for any company. Companies should gatherfeedback, measure effectiveness, and continually improve their code of conduct. They alwaysdistinguish between opportunities and temptations.

No matter what heights a person mayreach, character must be maintained at any cost. Companies must take a step back whenpresented with challenging decisions and individuals 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 individual’s ethical reasoning. Personal ethics, self‐discipline, and high moral reasoning are critical to avoiding unethical behaviour. Some of the advantages of these elements include avoiding unethical behaviour,performing fiduciary duties, and resolving ethical dilemmas. But such personal ethics may put a person in direct conflict with existing corrupt bureaucratic systems, increased ethical dilemmas, and exposure to stress and intense emotional pressure.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. Absolute transparency may lead to revelation of favourable and unfavourable performance which in turn may result in loss of investor confidence and inability to attract new capital.

It is also important for companies to establish an organizational culture which supports ethicalconduct through a code of conduct and properly laid out corporate governance policies andprocedures. Advantages of this approach include fostering ethical behavior from employees,increased inner discipline, and providing value based corporate vision. However, such a culturewill add new conflicts of interest, strict compliance with rules and regulations and extrasupervision.

CONCLUSION

Management control system and Corporate governance framework needs to be implemented in letter as well as spirit. The increasing rates of white collar crimes demands stiff penalties and punishment. The smalldistortions 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.