satyam scandal - satyam saga

Economic Times Presentation 1

Satyam-Saga(A)

Group 7 - ET Presentation 2

Black Faces of Indian IT

Dinesh Dalmia(DSQ Software)

V Chandrashekharan (Pentamedia group)

Ramalinga Raju(Satyam)

Byrraju Ramalinga Raju is the biggest fraudster in the Indian software industry, but he is not the first.

Dinesh Dalmia, Vice-Chairman, DSQ Software, has been in jail for two years.

Pentamedia company promoter V Chandrasekaran was found to be in cahoots with tainted broker Ketan Parekh in rigging up share prices.

3

Satyam – A Snapshot

Founded in 1987 – Listed on NYSE, NSE, BSE, Euronext Controversies – Upaid Lawsuit, Worldbank, Maytas acquisition

A S MurthyKiran Karnik

"..we would like to assure Satyam’s customers that our immediate priority is to ensure sustainability of services with minimal disruption.."- Deepak Parekh, Board Member – Satyam

Deepak Parekh C Achuthan

Major Satyam Clients


Satyam Current News

Satyam Loses 46 Customers to Rivals (Economic Times Reports) Applied Materials Inc., Nissan Motor Co., Sony Corp., State Farm Mutual Automobile Insurance Co. to name a few - Dt. 17-Mar-09


World Bank banned Satyam from doing any of its work after it found Satyam employees had hacked into its system and gained access to sensitive information

It also did not renew their five-year contract

Slippery Slope to Disaster

December’08 brought news of pending litigation by a former client, online mobile-payments service Upaid Systems which filed a case of intellectual fraud and forgery against Satyam in 2007

On Dec. 16, when Raju announced the company would spend $1.6 billion to buy Maytas only to reverse the decision a few hours later under shareholder pressure

Satyam ADRs lost 50% of their value overnight


Satyam : Dec-2008 to Jan-2009


Raju and family own up to 35% stakes in Maytas. Raju was siphoning the money from Satyam to Maytas since last 6 years. With Satyam in deep cash crunch, Raju wanted to buy Maytas to cover up Satyam’s inflated cash. Last attempt to fill the fictitious assets with real ones failed. Raju nailed a hole in a sinking ship Satyam.

Satyam to buy Maytas Prop ($1.3 bn) & 51% stake in Maytas Infra ($300 mn) Deal to be financed by Satyam’s “surplus” cash Satyam’s share prices fell reflecting share holders disbelief. Valuation of Maytas turned out to be fraudulent

Satyam’s secret back office – Maytas

… riding a Tiger, not knowing how to get off …


What happened next???


The Balance Sheet carries as of September, 30, 2008:

• Inflated Cash and Bank balance of Rs. 5,040 Crores • Accrued interest of Rs. 376 Crores which is non-existent• Understated liability of Rs. 1,230 Crores• Over stated debtors position of Rs. 490 crores

• For the September Q2, reported a revenue of Rs. 2700 Crores and an operating margin of Rs. 649 Crores as against the actual revenues of Rs. 2,112 Crores and an actual operating margin of Rs.61 Crores ( 3% of revenues). This has resulted in artificial cash & bank balances going up by Rs. 588 Crores in Q2 alone.

Immediate Market Reaction:• Sensex stock index dropped 7.3%• Satyam shares fell nearly 78%

Raju’s Confession on 7th Jan’09


Satyam Vs Enron Vs

• Malpractices amounting worth USD 1.3 billion• Masterminded by its founder-owner R Raju (CEO) and his brother• SENSEX tanked 7.2 % when Raju announced of the fraud• Government appointed new auditors – KPMG and Deloitte• Government guaranteed safety of jobs for all 53,000 employees

• Accounting books were manipulated in conspiracy with its auditor Arthur Andersen• NYSE tanked 0.9% when Enron filed for bankruptcy • Government created Sarbanes Oxley Act• US S.E.C. revoked CPA license of Arthur Andersen

Satyam

Enron

• Scott Sullivan (CFO), David Myers and Buford “Buddy” Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining earnings• Arthur Andersen withdrew its audit opinion for 2001• Government created Sarbanes Oxley Act

Worldcom


Comments from Wharton Professors:"If there were one or two more such accounting scandals in the next six months, it would make international investors more wary.”

“Foreign investors will look a little more askance at accounting data from India. And that may not be a bad thing.”

"When you have companies that are ostensibly growing their top lines at 30%, 40% or 50%, it is possible to paper over things. When growth rates slow down, you are unable to hide the financial reality of how much cash you actually have. It is possible that during this slowdown period, more scandals will come to light.”

“shocking, painful & a good warning for other companies in the sector.”

“We reaffirm our commitment that we’ll focus on creating value for our customers with the same passion that we have demonstrated in the past while maintaining the highest ethical and governance standards.”

Experts’ Reaction


Perfect Auditors!!!


Role of PWC

PWC –Satyam’s auditors since Jun 2000 Credibility of PWC???...“amount too big to be noticed” PWC:

“our audit in accordance with the auditing standards generally accepted in India”

“Satyam's financial statements are the responsibilities of the company's management”

“under Satyam’s management controls over financial reporting and auditing”

“Audit reports between June 2000 to September 2008 unreliable”


Role of Independent Directors

SEBI's Listing Agreement, calls for certain proportion of independent directors in the board.

Companies appoint luminaries to the boards.

Key Responsibilities protect interest of shareholders and strategy of the organization.

Satyam’s Case - approval of buyout weakened the credibility of independent ‘spirit’.

Future Impact - Independent directors will try to gain a greater understanding of a company’s business.


The fallout…

Two class action suits files in US by shareholders of Satyam’s ADRs ICAI :

Issued two revised accounting standards – SA 500 and SA 720 to enhance quality of audits (effective April 1, 2010)

Joint Audits for companies Scheme of rotation of auditors Planning to set up a rating system for corporate governance Planning to set up a serious fraud detection cell to assist regulators like RBI

and SEBI to prevent similar incidents in future

Government: Reviewing The Chartered Accountant Act, 1949, and the Chartered

Accountant Regulations, 1988 to plug loopholes Serious Fraud Investigation Office (SFIO) of Ministry of Corporate Affairs

probing accounts of 325 companies tied to Raju and family

SEBI: Asks promoters of listed companies to disclose whether they have pledged

shares Places PWC under probe


… Today …

Board decides to sell 51% stake Prospective bidders must:

Submit detailed “expression of interest” Show at least $290 million dollars on books by March 20th

Eligible buyers will gain access to business, financial and legal documents Potential suitors:

Larsen & Toubro (has 12% stake) B.K. Modi’s Spice Group Tech Mahindra iGate IBM and others Fidelity

Open offer of at least 20% of shares after acquiring up to 31% through a preferential allotment


Thank You !

satyam scandal - satyam saga

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