SCANDAL AT SATYAM: TRUTH, LIES AND CORPORATE GOVERNANCE

PRESENTED BY: - Shivangi Gupta- Sweta Suporna - Lizabeth Dominic- Jaya Khemani - Gayathri M- Charvi Puri - Pavithra Narsimhan

OUR AGENDA

• Brief History• What Went Wrong With Satyam?• Why did Mr. Raju Confessed “Suddenly”?• Modus Operandi• Insider Trading• Audit Failure : Role of External Auditors• Audit Failure : Role of Internal Auditors• Consequence of Inefficient Corporate Governance• Challenges• Desired Policy Actions• Corrective Measures• Satyam Today

BRIEF HISTORY

• Satyam Company Cervices Ltd. was incorporated on June 24, 1987

• A leading global consulting and IT services company• Ranked as India’s fourth largest software exporter• Nearly 55,00 employees• Business is spread over 55 countries• Serves over 558 global companies, including over 185

fortune and 500 corporations• Satyam Infoway is the first Indian internet company to

be listed on NASDAQ, USA- 1999.• Company was listed in Bombay stock exchange in 1992• Listed on New York Stock Exchange- 2001

WHAT WENT WRONG WITH SATYAM?

• The promoters decided to inflate the revenue and profit figures of Satyam. In the event, the company had a huge hole in its balance sheet

• So to fill up this gap…….. Company announced Acquisition of 51% stake in Maytas Infra and 100% stake in Maytas Properties on 16th Dec 2008 but The deal was not profitable for investors.

• Investors dumped Satyam’s stock and threatened action against the management.

• On 7 January 2009 Ramalinga Raju confessed to massive fraud leading to the company’s stock crashing .

• Board of Directors were not aware of the fraud• MAYTAS acquisition deal was aborted as the last attempt to fill

the fictitious assets with real ones .• Every attempt made to eliminate the gap failed. It was like riding

a Tiger, not knowing how to get off without being eaten.

WHY DID MR. RAJU CONFESS TO THE CRIME SUDDENLY? … INTRIGUING!

• Confessed in early January 2009 in an emotionally-charged four-and-a-half page letter of startling revelations.

• WHISTLE-BLOWER: An ex-insider, claiming to be a former senior

executive in Satyam acted as the whistle-blower. His e-mail to a Satyam board member triggered a chain of events that ended in Raju’s decision to confess to the financial crime.• Also devised a plan to hide the colossal fraud.•  The scope of the falsification of accounts, which was

around INR 2.34 billion in 2001–02, skyrocketed to INR 54.22 billion by 2007–08 and INR 73.33 billion by late-September 2008. But after the unearthing of several hidden records, the CBI, pegged the figure at more than double the amount.

MODUS OPERANDI

The company created false invoices to show inflated sales.

Investigations revealed the use of fabricated invoices to artificially hike sales and the amounts shown as receivables in the books of accounts, thereby, inflating the company’s revenues. 

7561 invoices worth INR 51.17 billion were found hidden.

The re-routing of funds was done through European nations and was shown as investments in nearly 300 fictitious companies.

INSIDER TRADING

Investigations have evidenced Insider Trading by the top management of Satyam.

CID established that the promoters indulged in nastiest kind of insider trading of the company’s shares to raise money for building a large land bank.

In 2001, Raju had nearly 23 per cent shares, by 2008 Raju's share was just 8.27 per cent.

Nearly 3.9 crores shares were sold by the promoters of Satyam and their family members, collecting Rs 3029.67 crores and posed a healthy financial statement in the market.

Sell shares -> Raise money -> Healthy financial Statement -> Brand building

INSIDER TRADING

Satyam’s senior executives’ en-cashed employee stock options (Esops) shares in the December quarter when the stock was trading at Rs 264-150, ruling far below its May peak of Rs 500.

This proves he had an inkling that the bubble could burst and hence sold off his ESOP holdings in a hurry.

Soon after Raju’s confession, the price fell to an all-time low of Rs 6.30.44. Although the positions of chairman and CEO/CFO in Satyam were separated but the findings reveals that the chairman and the CFO were working in secret cooperation to defraud the stakeholders for their personal gain.

The findings of the investigations make it clear that Vadlamani was not only aware of the happenings in the company but was an equal partner in perpetrating the fraud.

ROLE OF INDEPENDENT DIRECTORS

• Who are they?

• SEBI regulation

• Six of the nine directors on Satyam’s Board were independent directors including US academician Mangalam Srinivasan , Vinod K. Dham (famously known as father of the Pentium, Rammohan Rao (Dean of Indian School of Business), US Raju (former director of IIT Delhi).They were men of standing & reputation.

• whether these directors were ‘independent’ is questionable

AUDIT FAILURE : ROLE OF EXTERNAL AUDITORS

The choice of PwC as auditors for SatyamInvolvement of S. Gopalakrishnan and Talluri

SrinivasProcess Failure?Auditors used Satyam’s investigative toolsWilfully withheld information from

shareholdersInvoices not checkedBank balances not verifiedThe strange audit fee

Coverage of audit not commensurate with size of business

The auditor did not do beginning to end transactions verification

Cash and bank balances were not verifiedFake invoices were ignoredThe matter was not reported to Audit Committee The audit plans were prepared on the basis of

the approval of the promotersSerious findings of the auditing team were

ignored by the audit team leader

AUDIT FAILURE : ROLE OF INTERNAL AUDITORS

Satyam had a reputation of excellent CG (Council for Corporate Governance awarded Satyam its Golden Peacock Award for Corporate Governance in 2008).

Indian Corporate Governance Securities and Exchange Board of India in 1992.

India 7th place in terms of corporate governance score in Asia Pacific region.

SATYAM FIASCO –A CONSEQUENCE OF INEFFICIENT CORPORATE GOVERNANCE (CG)??

Unsophisticated equity market vulnerable to manipulation and with rudimentary, traditional analyst activity.

Dominations and monopoly of family firmsHigh level of corruption, become visible

only after a revelation of big financial scam. Weak and non-transparent monitoring

system. Lack of respect for shareholders and low

financial disclosure

CHALLENGES TO EFFECTIVE CORPORATE GOVERNANCE

DESIRED POLICY ACTIONS TO PREVENT ANOTHER SATYAM

SEBI should follow two distinct approaches- preventive and palliative.

Preventive measures are more important as they are more likely to be effective in the long run.

Corrective action is long overdue if corporations are not to cheat stakeholders and the public.

CORRECTIVE MEASURES

• Setting up a Board of Audit, that cannot continue for more than 3 years.

• Appoint an independent regulatory body on the lines of Public Company Accounting Oversight Board of USA (PCAOB) of USA.

• Rotation of external auditors in non-financial institutions

• Split offices of Chairman and CEO• Exempt independent directors from vicarious

liability• Install whistleblower system• Enhance criminal and civil penalties

SATYAM TODAY

Tech Mahindra acquired Satyam, renamed it as Mahindra Satyam and replaced its executive board and directors.

Swift government action saved Satyam ultimately.However, the scale and magnitude of the Satyam fiasco

is unparalleled in the corporate history of India.It led to the questioning of accounting practices of

statutory auditors and corporate governance norms in India.

Corporate governance failures in the West led to the enactment of Sarbanes- Oxley Act, 2002. Similar kind of corporate governance reforms in India.

Harsh policy measures are needed.

• Although corporate governance mechanisms cannot prevent unethical activity by top management completely, they can at least act as means for detecting such activity before it’s too late.

• “ When an apple is rotten, there is no cure but at least the rotten apple can be removed before the infection spreads and infects the whole basket”.This is what corporate governance is all

about.