WINDOW DRESSINGGROUP 1

Chairman of the board: how much profit did we make last year?

finance director: what profit do you want us to have made ? You can take your pick from the following profit figures.

OLD JOKES ARE THE BEST JOKES

‘Window dressing’ refers to attempts by business to present its financial position in the best light.

Its a form of creative accounting involving the manipulation of the figures to flatter the financial position of the business.

The focus of window dressing: liquidity : hiding a deteriorating liquidity

position profitability: massaging the profits

Window dressing

Some methods of window dressing are contrary to law or contrary to the accounting standards and would not be employed by reputable firms.

But accounting standards permit some flexibility of interpretation.

When coupled with managerial interest in presenting figures in most favorable light the result is window dressing.

The law and ethics

Some forms of window dressing are allowed within the law and accounting standards but if the intention is to deceive the stake holders then they are unethical.

In the continuum that follows there is no scope for creative accounting in 1,4 represents fraud where as 2 and 3 are grey areas.

1. No flexibility permitted.No scope of creative accounting

Accounting standards eliminate choice in accounting policies

2. Flexibility to give a true and fair view

Work within regulatory frame work to ensure the interest of stakeholders.

3. Flexibility used to give a creative view

Working within the regulatory frame work but this time to serve the interest of managers preparing the accounts

4. Flexibility used to give fraudulent view

Outside the regulatory frame work ,Therefore it is illeagle.

To show a strong market presentation that is warranted

To influence the share price. To reduce liability for taxation. To hide liquidity problems. To ward off take over bids. To encourage investors. To reassure lenders of finance. To hide poor management decisions. To satisfy the demands of major investors

concerning the level of return. To achieve sales or profit target thereby

ensuring that management bonuses are paid.

Reasons for window dressing

Sale and lease back Short term borrowings Chasing debtors Bringing sales forward Changing depreciation policy Including intangible assets Changing stock valuation policy

METHODS USED TO WINDOW DRESS

 Almost all mega frauds are clearly abetted by the members of this noble profession -that is what they call. Even prostitutes call their profession as noble profession.

LTCM (Long Term Capital Management , tagged $ 1 trillion)

Enron (tagged billions of dollars), WorldCom (also tagged for billions of dollars) Satyam Computers Services Ltd. Madoff• Stanford International Bank Ltd. and Stanford Trust

Company Ltd.in US /Antigua /Barbuda)

SCAMS

Satyam Computer Services Limited was set up in the year 1987 by B.Ramalinga Raju.

It is a leading global consulting and is the 4th largest IT outsourcing company of India.

In June 1991, Satyam Computers got its first Fortune 500 Client. In the same year in August, Satyam Computers was recognized as a Public Limited Company. Satyam went public in May 1992 and its issue was oversubscribed 17 times. .

It serves over 654 global companies, 185 of which are Fortune 500 corporations.

INTRODUCTION

Satyam was awarded ISO 9001 Certification in March 1995.

In December 1995, Satyam Infoway was incorporated. Later Satyam Infoway became the first Indian Internet company to be listed on NASDAQ.

In May 2000 Satyam became the first organization in the world to launch Customer-Oriented Global Organization training. In 2000 Satyam Computer Services Ltd., one of the fastest growing IT companies in the country had taken significant decisions by merging three of its subsidiaries with the parent company and a 1:1 bonus issue.

In March 2001 Satyam became first ISO 9001:2000 Company in the world as certified by BVQI. In May 2001 Satyam was listed on New York Stock Exchange.

In 2003, Satyam announced business continuity center in Singapore, the first of its kind outside India.

In 2005 -Satyam ranked 3rd in Corporate Governance Survey by Global Institutional Investors.

Satyam had nearly 40,000 employees on its rolls, working in development centers in India, the USA, the UK, the UAE, Canada, Hungary, Singapore, Malaysia, China, Japan and Australia. Satyam Computers' network is spread over 55 countries across 6 continents.

Satyam, one of India’s best known IT companies, which ironically had received the Golden Peacock Award for Corporate Governance in 2008.

The gap in the balance sheet has arisen purely on account of inflated profits over several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance).

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 the company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the September quarter, 2008, and official reserves of Rs 8,392 crore).

The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify a higher level of operations thereby significantly increasing the costs.

SATYAM SCAM

Every attempt to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in the takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

Satyam Computers had on December 16, 2008, announced that it will acquire two group firms - Maytas properties and Maytas Infrastructure.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit.

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

On December 16th The board of Satyam Computers Ltd unanimously decided to acquire these two companies and claimed to be de risking the core business by going ahead with this unrelated diversification, the stock dropped 50%.

until the Chairman of the Company Mr Rama Linga Raju resigned on the 7 th of January after faxing to a stock exchanges a long confession letter stating that he did not make even a single Rupee from the whole mess.

On 7 January 2009, company’s previous 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 of 30 September 2008 contained:

1. Inflated figures for cash and bank balances of Rs 5,040 crores as against Rs 5,361 crore reflected in the books.

2. An accrued interest of Rs. 376 crore which was non-existent.

3. An understated liability of Rs. 1,230 crore on account of funds was arranged by himself.

4. An overstated debtors' position of Rs. 490 crore (as against Rs. 2,651 crore in the books.

Satyam scandal

5. Overstated operating revenues which has resulted in artificial cash and bank balances going up by 588 core.

6. The actual number of employees is only 40,000 and not 53,000 as reported earlier and that Mr. Raju had been allegedly withdrawing INR 20 crore rupees every month for paying these 13,000 non-existent employees.

7.Operating margins were less than a tenth of the stated rupees 649cr’s

8.Forieign exchange gain

ACTUAL CASH AND BANK BALANCE

As per books of accounts

Inflated amount

Percentage inflated

Cash and bank balance

321 5361 5040 1570%

TABLE -1: SHOWING THE INFLATED CASH AND BANK BALANCES

Inflated figures for cash and bank balances of Rs 5,040 crores as against Rs 5,361 crore reflected in the books.

Accrued interest 376

TABLE -2: SHOWING NON EXISTING ACCRUED INTEREST SHOWN ON THE ASSETS SIDE OF THE BALANCE SHEET

An accrued interest of Rs. 376 crore which was non-existent was shown.

ACTUAL DEBTORS

As per book of accounts

OverstatedDebtors

Percentage inflated

Debtors 2161cr 2651cr 490cr 22.67%

 TABLE -3: SHOWING THE OVER STATED DEBTORS

An overstated debtors' position of Rs. 490 crore (as against Rs. 2,651 crore in the books).

ACTUAL DEBT WAS 2161.OVERSTATED 490 CRORES.

ACTUAL CASH IN

BANK WAS 321 CRORES,

INFLATED 5040 CR.

NO ACCRUED INTEREST 376.34 CR.

UNDERSTATED LIABILITY 1230

TABLE -4: SHOWING THE UNDERSTATED LIABILITY ON ACCOUNT OF FUNDS ARRANGED

An understated liability of Rs. 1,230 crore on account of funds was arranged by himself.

UNDERSTATED LIABILITY 1230 Cr.

Which was ARRANGED BY MR.RAJU

5,040 + 376 + 490

(Rs. Cr)

Rs. 1,230 Cr

Rs. 7,136

Cr

Actual revenues

As per books of accounts

Overstated amount

Percentage inflated

Revenues 2112 2700 588 3%

TABLE – 5: SHOWING THE INFLATED OPERATING REVENUES

Actual operating margin

As per book of accounts

Inflated amount

Inflated percentage

Operating margin

61 649 588 24%

TABLE6:SHOWING THE INFLATED OPERATING MARGINS

Actual no of employees

As per book of accounts

Inflated no’s

Percentage inflated

Employees 40000 53000 13000 32.5%

TABLE 7:EMPLOYEES

The actual number of employees is only 40,000 and not 53,000 as reported earlier and that Mr. Raju has been allegedly withdrawing INR 20 crore rupees every month for paying these 13,000 non-existent employees.

INTANGIBLE ASSETS

There were about 43,000 employees working for Satyam who were valued collectively Rs 65,668 crores. If you divide this sum by 43,000 employees, each employee of Satyam was valued at Rs 1.53 crores or Rs 15.30 million rupees or US$ 332,600 approximately.

HR VALUE

The reports say Satyam books have been overstated by Rs 5,000 to Rs 6,000 crore, leading to an inflated stock price that helped the top management make money.

INFLATED STOCK PRICE

Auditors do bank reconciliation to check whether the money has indeed come or not.

They check bank statements and certificates. So was this a total lapse in supervision or

were the bank statements forged? If the auditors were conned, it means that

either the bank statement and certificates were forged

Satyam's banks -- ICICI Bank, HDFC Bank, Bank of Baroda, etc

The bankers

WHAT HAPPENED NEXT

Stakeholders affected

Stakeholders Model

SATYAM

Shareholders

Directors

Customers

Employees

Competitors

Public

STOCK MARKET

Immediate Market Reaction:Sensex stock index dropped 7.3%.

Satyam shares fell nearly 78%.

An accounting fraud was the last thing investors in India would have imagined as a trigger for a reversal in investor sentiment.

This scam is likely to affect the image of Indian companies among foreign portfolio investors.

The share prices of Satyam saw a sharp fall after Raju’s confession. The share prices fell down to 30 (approximately) in a matter of a day.

The Takeover Of Satyam

Mahindra Satyam has tried immensely hard not to go down the same road that Satyam went. The company does not have a fixed vision and mission statement, but they do have a set of well formulated rules and regulations covering almost every aspect including fraud. We see that Mahindra Satyam is definitely one company which has learnt from the Satyam Scandal.

Mahindra Satyam………...

CONCLUSION