Satyam Scam: How an Accounting Manipulation Led to 7000 Crore Fraud?

This blog is an explanation on how, when and why Mr. Raju along with others, defrauded the shareholders and why he did not succeed in accomplishing his evil intentions.

The infamous Satyam scam broke out on 7 January 2009 with a confession email from Chairman Mr. Ramalinga Raju, He described that he has fraudulently hiked up the company's profit and cash balance over the years amounting to 7,000 crores. This news splashed the shockwaves around the nation as India's biggest accounting scandal at the then 4th largest IT company. Weeks before the confession, Raju in an interview gave the famous statement saying that “he was riding a tiger and did not know how to get off without being eaten”.

Satyam computers and Ramalinga Raju

Ramalinga Raju was born on 16 September 1954 in a farmer’s family, He did his B.Com from Andhra Loyola College, Vijayawada and then he moved to the USA and did his MBA from Ohio University. He returned to India in 1977 and before Satyam he invested 9 crores in many businesses like hotels, mills, etc. but his businesses failed miserably before Satyam he started a construction company also named Mytas infra ltd.

After that Ramalinga Raju and his brother Rama Raju formed Satyam Computers in 1987 in Hyderabad which offered IT-related services with 20 employees at the beginning. Satyam’s major breakthrough arrived in 1991 with a first outsourcing deal involving a “Fortune 500’ company John Deere which is a US-based manufacturer of agricultural equipment, you must have seen their typical green color tractors.

Satyam had the first-mover advantage in the outsourcing market and after the successful business with John Deere, the company attracted a huge number of corporate clients for outsourcing.

Another remarkable achievement was its listing on the BSE (Bombay Stock Exchange) in 1992, after that the company started building its offices in different countries with the vision to expand its operations in the global market. After the turn of the century, Satyam was seen as an inspirational story of success and became the 4th largest IT company just behind TCS, Wipro, and Infosys with a revenue of 2 billion. Meanwhile, Raju himself became a brand and won several awards like EY Entrepreneur of the year in 2008, the “Golden Peacock Award” for corporate accountability in the same year, and many more.

Before the scam broke out, Satyam had an average operating profit of 21%, CAGR of around 40%, and the share price increased more than 300%.

What went wrong at Satyam?

The first signs of worry came In 2008, when Satyam announced a merger with Maytas which was the same real estate company that started before Satyam and it was owned by Mr. Raju only, but the board had to roll back the decision within 12 hours because of a bad reaction from the shareholders, another set-back came when the world bank imposed the sanction on Satyam that it cannot do business with them till 8 years, they said that Satyam has given “improper benefits to the bank’s staff'' to get contracts and they also “lacked documentation for the invoices submitted” but the final blow to Satyam came when Mr. Ramalinga Raju announced his resignation on 7th January 2009 as the chairman.

How Raju executed this fraud?

• Raju began to jack up the profit and cash balance by creating around 7,500 fake invoice bills, these bills were created using ERP developed by Satyam only. It was also easy to generate dummy bank statements and transaction receipts.
• The internal audit team of Satyam Computers created nonexistent client IDs and they also created a nexus of more than 350 companies that were present only on paper.
• Raju also drew out 3 million every month in the employee's name which was unreal.
• He spent the money raised by Satyam in Maytas construction to buy property in Hyderabad.

Raju’s master plan was to use the money raised from Satyam in Maytas for buying land around an upcoming metro project which he knew from inside sources. His intention was to merge both Satyam and Maytas, and then balance the overall accounts to get both businesses going. But he failed when shareholders didn’t respond positively and he didn’t know how to get away from the debt he borrowed and make his way out of this mess.

PWC: The unproven partner-in-crime

PWC ( PricewaterhouseCoopers ) is one of the big four accounting firms alongside KPMG, Deloitte, and Ernst & Young. PWC India was the external auditors of Satyam computers and they deliberately overlooked the problems in Satyam’s accounts. An External auditor is required to check the financial statements and catch any error or any misleading item in a company’s accounts. Basically, the auditors are known to be the reliable sources that put a stamp on the credibility of financial statements of any company.
Initially, SEBI banned PWC from issuing any audit certificates to any listed company or financial intermediary for 2 years. In response to that, the investors became suspicious and distrustful for accounts of other companies whose auditor was PWC.
Later, SAT (Securities Appellate Tribunal, which hears the appeals against orders passed by SEBI) overturned the decision of 2 years ban on PWC stating that there is not enough evidence to convict PWC for a penalty.

How this saga ended

The after-effects of Raju’s resignation saw a disruption in the Indian stock market and in response to that the government appointed a board with an aim to sell the company within 100 days. Later, Satyam was purchased by Mahindra and became Mahindra Satyam, eventually, it became part of the parent company Tech Mahindra. In April 2015 Raju was sentenced to 7 years imprisonment and his brother, Internal head, and 2 PWC auditors were also sent to jail and were charged with fines.

What could have been a renowned name among India’s IT leaders, that company did not have any presence today. The obvious reason for that is the then chairman MR. Ramalinga Raju, a case of corrupt corporate governance but also the role of PWC as auditors cannot be overlooked. To stop the recurrence of such unlawful events, SEBI amended clause 49 of the companies act 2013 to safeguard investors’ interest.