Satyam Computers services limited was a consulting and an Information Technology (IT) services company founded by Mr. Ramalingam Raju in 1988. It was India’s fourth largest company in India’s IT industry, offering a variety of IT services to many types of businesses. Its’ networks spanned from 46 countries, across 6 continents and employing over 20,000 IT professionals. On 7th January 2009, Satyam scandal was publicly announced & Mr. Ramalingam confessed and notified SEBI of having falsified the account.
The essential facts associated with the case are as follows:
- On 27 June 1987, Ramalinga Raju founded Satyam Computer Services along with his brother-in-law. At first, there were as little as twenty employees, but the organization determined itself as a large-scale player in the country’s IT sector, concentrating on the services concerned with software outsourcing.
- In 1991, the company made a successful first public appearance on the Bombay Stock Exchange. In four years, the company launched Satyam Infoway (“Sify”) that suggested back-office outsourcing services to a variety of customers in the US and Europe. In 1999, Sify was operating in thirty countries and became the first company from India to be listed in NASDAQ (National Association of Securities Dealers Automated Quotations).
- Raju was getting on good terms with Indian business and political leaders. In 2000, during the US President’s visit to Hyderabad, Raju shared the podium with him. He built friendly relationships with many other leaders and important people.
- In 2007, Satyam was appointed the official IT service provider for the FIFA World Cup in 2010 in South Africa and the FIFA World Cup 2014 in Brazil. In the same year, Raju was awarded the Ernst and Young Entrepreneur of the Year award for expanding his IT company to more than 50,000 employees. Raju was regarded to be one of the most successful Indian businessmen in many countries of the world.
- In 2008, the company’s revenues exceeded $2 billion, and Satyam won many distinguished awards. In November, Raju co-chaired the World Economic Forum Summit that took place in New Delhi, India. At the summit, Raju announced his firm’s outstanding performance and promised to find a way out for Satyam in the global economic crisis.
- The company’s downfall started at the end of 2008, after Raju’s shocking confession about inflating the data concerning the company’s performance. On 23 December, Satyam became blacklisted for eight years by the World Bank on the basis of bribing the bank officials and data theft. The beginning of 2009 was marked by the fall of the company, preceded by Raju’s shocking confession about numerous manipulations and fraudsters in Satyam. After the confession letter, the company’s drop in share price was 78%.
- The actual cash and bank balance of Satyam were $65 million, while the inflated balance was $1.03 billion. The inflated accrued interest was $7.7, whereas, in fact, there was none. The actual liability was undisclosed, while the inflated liability was $252 million. Moreover, the actual number of employees was 10,000 smaller than the number reported by Raju – there were 40,000 employees instead of 50,000 mentioned. Raju used made-up names to redirect $4 million monthly out of the company’s accounts.
There were four major issues that led to Satyam’s disgraceful collapse: including the independent directors in the company’s board committee, drawbacks in audit, problems with disclosure and transparency, and the failure in CEO/CFO role.
- The failure of Satyam was closely associated with the role played by independent directors. These people were supposed to control the company’s activity. However, they did not express either interest or anxiety with the state of things in Satyam. The independent directors had to inquire why the company had so much cash at its disposal, but they never raised such a question. On the contrary, they continued to keep silent for several years while knowing that such a way of conduct could be harmful to the company’s stakeholders and partners. The way in which Satyam’s independent directors behaved may be called carelessness at best. In fact, this negligence bordered on fraudster, since keeping silence about such a major crime almost equals participating in the crime.
- The main role of an audit committee in any company is to make sure that its activity is transparent and clear to all stakeholders. In the case with Satyam, however, the audit committee did not perform its functions. Such actions led to the failure of the company’s control system and did not present a true picture of the financial matters at Satyam. The audit committee did not perform the necessary role in restricting false information about the financial matters in Satyam. The failure of the audit committee to provide the board with realistic facts negatively affected the organization’s performance.
- One of the keys to success in business is providing the transparency and disclosure of the company’s materials so that the real state of things could be seen and evaluated. By providing these principles, the organization demonstrates its capability or incapability of doing the business, and its prospects can be seen by the stakeholders. In the case with Satyam, neither transparency nor disclosure was provided. The data provided by Raju did not reflect the real state of things, which led to investors losing huge sums of money without even guessing it. All the data provided to stakeholders was fabricated, and no one suspected what was actually happening within the organization. Therefore, the norms of disclosure and transparency existing in Satyam greatly undermined the access to realistic data.
- Finally, Satyam had problems with the role played by CEO and CFO. The rules of corporate governance presuppose that the company’s CEO/CFO guarantees the accuracy and honesty of the company’s financial statements. Unfortunately, Satyam’s CEO Raju and CFO Vadlamani did not perform their functions properly. Because of their illegal activity that resulted in hiding the true financial data, the company’s investors, stakeholders, and clients did not even guess about the catastrophic situation with the matters in Satyam. The company’s strategy and performance suffered from such wrongdoing of the major people in the organization. The whole strategy was built in a wrong way because no one knew that the numbers were not true, and no one could plan any actions aimed at improving the situation.
Case Discussion
Satyam Computer Services was an Indian firm that specialized in IT services and back-office accounting. Back-office accounting refers to a type of accounting service when the workers do not directly contact or interact with clients. The company was founded by Ramalinga Raju in 1987, and by 2008 it was reported to be earning over two billion dollars in revenue. It was considered to be one of the top five Indian IT enterprises and employed 52,000 professionals inside and outside of India. However, in January 2009, Raju made a decision to confess to falsifying information regarding the company’s assets. This decision was not entirely voluntary as the company and his activities as its CEO had been under investigation by the Indian Central Bureau of Investigation at the time.
The result of the investigation revealed various instances of disorderly conduct performed by Raju. The roots of this misconduct had been placed as far as 1999 when he started to exaggerate the quarterly profits. He employed this tactic in order to meet the expectations set by the analyst. Raju was not the only member of the company’s establishing members that took part in the fraud. His brother, B. Rama Raju (who held the position of the firm’s managing director), helped Ramalinga Raju conceal his fraudulent actions. Due to their cooperation, they were able to carry out a wide and prolonged deception of auditors, senior managers, and board members.
The process of deception required several machinations to take place. The majority of the well-known accounting scandals are linked with related party transactions (RPT). The Satyam scandal is not an exception to this generalization. Raju performed transactions with RPT, with the firm selling services to a non-existent business entity. The receipts of these operations were recorded as receivables. Further, he took a loan that was not disclosed and, therefore, decreased the firm’s net borrowings. The balance sheet that was provided to the supervisors did not contain accrued interest from the loan, which, in turn, decreased net interest. Having taken these steps, Raju was able to perform various transactions using faux receivables. Despite the severity of these actions, the fraudulent activity was not limited to the assets within the company.
In addition to fake receivables and non-disclosure of accounting activities, in 2008, it was established that Raju had serious issues with the World Bank. In December 2008, the representatives of the World Bank announced that they were parting ways with Satyam. In fact, they prohibited the firm from using the bank for the following eight years, stating that it had been infringing upon the bank’s guidelines. These infringements included bribing the bank’s workers and stealing data. The World Bank problem was not the only warning sign of the fallout to come.
In December of 2008, Raju attempted to purchase Maytas Properties Ltd and Maytas Infrastructure Ltd. These companies belonged to Raju’s before-mentioned brother, and with his help, Ramalinga Raju was aiming to exploit the liquid resources of Satyam while he still had the chance. The bid was approximately 1.6 billion dollars for both of the companies, and if Raja’s plan had come to fruition, it would leave Satyam in debt by 400 million dollars. The investors did not agree with this decision (although Raju claimed that it was done for their benefit), and the plan failed. However, it is necessary to point out that despite the obvious concerns such a decision brings, the board of Satyam initially approved of the deal.
This approval shows how strong the control of the Raju family was on those who were supposed to supervise the legitimacy of the company’s practices. The inner circle actively perpetuated the lack of transparency in regard to their business practices. The company encouraged whistle-blowing, disruption, and postponement of audits. In addition, it cultivated a culture of weak independent directors that did not stand up for the investors’ sake. The amalgamation of these measures led to Raju’s control being able to last for as long as he had.