Satyam Fraud Analysis

8/9/2019 Satyam Fraud Analysis

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Company Profiley Set up in the year 1987 by

B.Ramalinga Raju.

y Indias 4th biggest software

company with 9% marketshare.

y Listed in BSE, NSE, NYSE andEuronext (Amsterdam).

y On 26th August, 1991 it was

converted into a PublicLimited Company and wentfor PUBLIC ISSUE in 1992.

y BSE IPO oversubscribed 17times when made public.


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y The c pa y e pl ys40,000 IT pr fessi als

acr ss evel p e tce ters i 6 c ti e ts.

y It serves ver 654 l alc pa ies, 185 f which

are F rt e 500c rp rati s.


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B. Ra ali a RajF er a Chair a ,atya C p ters Li ite .

B. Ra a Rajr ter a CEO, atya

C p ters Li ite .


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Controversies Surrounding Satyam

Computers Limited.y Upai Laws it

yW rl Ba Ba

y aytas cq isitiy cc ti sca al f 2009


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UPAID

Controversyy UK mobile payments company

Upaid Systems filed a case ofintellectual fraud and forgery

against Satyam in 2007.y On 9-December-2009 Satyam

settled the lawsuit with UPAIDfor $70Mn, of which $45Mn

was payable upon regulatoryapproval, and the remaining$25MM was payable a yearafter the initial payment.


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Maytas Acquisition

Controversy Satya a ce t y aytas

r p ($1.3 ) & 51% sta e i aytasI fra ($300 )

Deal was t e fi a ce y Satya ss rpl s cash.

Satya s share prices fell reflectishare hol ers is elief.

Val ationof aytas t rne out to efraudulent.

Raju and fa ily ownup to 35% sta es

in aytas. Rajuwas siphoning the oney fromSatyam to aytas since last 6 years.

WithSatyam indeep cash crunch,Rajuwanted to u y aytas to cover upSatyams inflated cash.


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Satyams justification for Maytas

buyout dealy De-ris the core usiness

y The integratedorganizationwould e stronger and

morediversified todeal with the uncertaintyof themar et.

y feeling that in the recent times it is difficult toma e astrategicdeal withother IT companies.


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Reaction of Investorsy The shareholders realised that the uyout was not

profita le f or them. Satyamusing the reserve cash topurchase aytas Infra and aytas roperties was a ig

ris .


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Result of Investors Reactiony The result of investors reactionwas that part of

investors succeeded to thwart the uyout attempt ytheminority-shareholding promoters who thought ofusing the firms cash reserves to uy two companiesalready indirectlyowned y them aytas ropertiesand aytas Infra.

y The a orted attempt towards expansion precipitated a

collapse in the price of the companys stoc and alsoled to the shoc ing confessionof financialmanipulation and fraud from its chairman, B.Ramalinga Raju.


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The Satyam Accounting Scam

Finally Exposed

Satyam scam is the iggest

fraud in India's corporatehistory.The companymanagement,primarily its disgraced

chairmanB Ramalinga Raju,ept everyone in the dar fornearly a decade.


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T

he Scam and Rajus Confessiony On 7 January 2 , com anys revious hairman amalinga ajuresigned after notifying board members and the Securities andxchange Board of India (S BI) that Satyam's accounts had been

falsified.

Raju confessed that Satyam's balance sheet of 3 Se tember 2contained:1. Inflated figures for cash and bank balances of s 5, croresas against

s 5,3 1 crorereflected in the books.

2. An accrued interest of s. 37 crore hich as non-existent.

3. An understated liability of s. 1,23 crore on account of funds asarranged by himself.

. An overstated debtors' osition of s. crore (as against s. 2, 51crore in the books.


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RAJUS CONFESSIONy Excerpts fromhis confession:

It was li e riding a tiger, not nowinghow toget off

without eing eaten.Every attempt made to fill the gap failed. s the

promoters held a small percentage of equity, the concernwas that poor performance would result in a ta e-over,thus exposing the gap.

The a orted aytas deal was the last attempt to fill thefictious assets with real ones.


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Rajus Confession StatementACTUAL

DEBT WAS

2161.

OVERSTATED490 CRORES.

ACTUAL CASH

IN BANK WAS

321 CRORES,

INFLATED

5040 CR.

NO ACCRUED

INTEREST

376.34 CR.


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U DERSTATED

LIABILITY

12 0 Cr.

Which was

ARRA GED BY

MR.RAJU

,040 + 76

+ 490 (Rs.

Cr)

Rs. 1,2

0

Cr

Rs.7,1 6

Cr


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Immediate Market ReactionSensex stoc index dropped y 7.3%.Satyam shares fell ynearly 78%.


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The guilty and the partners in

crimey The Satyam oard, including its five independentdirectors had approved the founder's proposal touy 51 per cent sta e in aytas Infrastructure and

all of aytas roperties, owned y the familymembersofSatyam chairmanB Ramalinga Raju.

y Despite the shareholders not being ta en intoconfidence, the directors went ahead with themanagement'sdecision.

y The decisionof acquisitionwas, however, reversed12 hours later after investors dumpedSatyam'sstoc and threatened action against themanagement.


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The guilty and the partners in

crimey It is said that the Satyammanagementsmalpracticesled toSatyams fallout but

couldonly twoor three peopleofmanagement cook theaccounts books for years of acompany for so long?

y Here the role of auditorsstarted.


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y WC Satyams auditors since Jun 2000

y Credibilityof WC???...amount toobig tobe noticed

y WC:

y our audit in accordance with the auditing standardsgenerally accepted in India

y Satyam's financial statements are the responsibilities ofthe company's management

y under Satyamsmanagement controls over financialreporting and auditing

y udit reports between June 2000 toSeptember 2008unreliable


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This was an advertisement that featured ina leadingdailyduring the crisis.


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What t r gyManipulationof softwares

yLackof audit controls and

ySystemic reviews

y Insider trading


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Changes in regulations

y SEBI now allows certain changes or exemptions inthe takeover code in case of a company in crisis.

y This helps the investors in the stocks of a companylike Satyam

y Case in pointthe value ofSatyam shares wasonly19 rupees after the revelation

y However, six month share price average of sharewas 270275 rupees per share


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Regulationsy SEBI requires at least halfof the directors in the boards of

publiclyheld companies tobe independent.y SEBI prohibits insider trading andhas in place a strongmechanism against it .

Theykeep trackof the following:y Details of acquisitionof 5% or more shares in a listed

companyy Details of shares heldby Director or officer of a Listed

companyy Details of change in shareholding in respect of persons

holdingmore than 5% shares in a listed companyy Details of change in shareholdingof Director or Officer of

a Listed Company


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Regulations(contd.)

y Compulsorily appoint external auditors todointernal audits

y These auditors are also allowed to restate theprofits if required

yMandatory for companies todisclose thepercentageof promoter shareholding that is

encumbered


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T

RAININGy National Institute ofSecurities Market, an initiative ofSEBI trains professionals in internal auditing

y This programme aims at helping the audit professionals tocarryout an effective internal audit of the brokers books inorder to satisfy the requirements ofSebi and theexchanges.

y

Ensures compliance with the provisions of the Sebi ct,1992, Securities Contracts (Regulation) ct, 1956, Sebi(Stockbrokers andSub- brokers) Regulations, 1992,circulars issuedbySEBI


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Some additional measuresy Re uirement of rofessional ualifications/financial literacy for

hief inancial Officer ( O)

y Rotation of Audit firms / artners

y A ointment of an external audit firm as internal auditor of the

com anyy Modification in formats of limited revie re ort and statutory

auditors re ort

y oluntary ado tion of International inancial Re ortingStandards (I RS) by listed entities having subsidiaries

y Interim disclosure of balance sheet items by listed entities

y Timelines for submission of financial results by listed entities


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Lessons learnty It is a collective failure ofdirectors, auditors

and regulatory agencies in ensuringtransparency and accountability; s aconsequence of this fiasco, the overseas client

may take a hard look at most Indianoutsourcing companies and investment flowscouldbe hit.

y The responsibility for preventing fraudulent

activities lies with the Boardofdirectors. Theiracts and conduct impact the reputationofIndia and, therefore, theymust ensure that thehighest standards of corporate governance are

set.


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Lessons learnt( contd.)

y The Quality Review Board ('QRB'), an independentbody set up under theMC , is looking into thestandards of audit for chartered accountancy firms

with a view to redefine new stringent norms for audit

firms. Itmay ask the SEBI andMC tomandate listedcompanies to rotate their auditors to prevent Satyam-type frauds - practice being followed in public sectorcompanies.

y There is a needof time to take the investigation

procedure in effective and efficient way to clear everyissue andmake it sure that such incident will nothappen again in future, it is necessary to solve theabove questions and to fill the gaps of the loopholes.


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LEGAL PROVISIONS IN OTHER COUNTRIES TO DEALWITH

THE CORPORATE FRAUDS.

FOREIGN CORRUPTPR CTICES CTOF 1977

y It aims at making it illegal for governmental officials totake a bribe. One basic provisionof the FCPA is that it

prohibitsU.S.partnerships, companies, andorganizations fromnot onlygiving payments but alsoofferingor authorizing payments to foreignofficials orpolitical parties with the objective of encouragingorassuringbusiness relationships.


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THE SARBANES-OXLEYACT OF 2002

y It is aUnitedStates federal law enactedon July 30, 2002 inresponse to a number ofmajor corporate and accountingscandals including those affecting Enron, Tyco International,Adelphia, Peregrine Systems and WorldCom. These scandals,which cost investors billions ofdollars when the share prices ofthe affected companies collapsed, shook public confidence in the

nation's securities markets.y The legislation establishes new or enhanced standards for

all U.S. public companyboards, management, and publicaccounting firms. It does not apply to privatelyheld companies.

y The Act establishes a new quasi-public agency, the PublicCompanyAccounting Oversight Board, or PCAOB, which ischargedwithoverseeing, regulating, inspecting, anddiscipliningaccounting firms in their roles as auditors of public companies.The Act also covers issues such as auditor independence,corporate governance, internal control assessment, andenhanced financial disclosure.


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THANK YOU

Satyam Fraud Analysis

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