Corporate Governance

From the Pages of The Pomerantz Monitor: Scandal at Satyam

By Carolyn Moskowitz

In January, while the world was still reeling from revelations of Bernard Madoff?s $50 billion Ponzi scheme, another huge scandal shocked the markets: a billion dollar fraud at Satyam Computer Services Ltd. (?Satyam?), a leading Indian outsourcing firm whose name, ironically, means ?truth? in Sanskrit. As Tamar Weinrib reports in the February issue of The Pomerantz Monitor, on January 7, Satyam?s chairman, Ramalinga Raju, sent a letter to the board disclosing that he had fabricated $1 billion in cash for the Company and had reported inflated income for many years.

In the letter, in which Raju also tendered his resignation, he said that ?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 company operations grew. . . . It was like riding a tiger, not knowing how to get off without being eaten.? Satyam, which had reported an annual 24% growth rate in Satyam balance sheets assets, in fact actually grew by only 3%.  

Raju, his brother and Satyam?s former CFO are now in jail, while a full-scale investigation is under way. The investigation has reportedly already turned up a series of forged documents showing large illusory transfers of cash to Satyam from several banks. There is also evidence of  Raju siphoning cash off, through payments to an elaborate network of over 300 Raju-owned companies.  

Satyam is the back office of more than 185 Fortune 500 companies, many of which are headquartered in this country. Many worry that ?India?s Enron? could hamper the expansion of the country's $40 billion outsourcing industry, commonly heralded as the cause of India's economic rebirth. In today?s fraud ridden corporate climate, one thing has become clear: the size and reputation of a company does not render it impervious to scandal. 

The Indian government has essentially taken control of the company in an effort at damage control. It then passed new rules on January 9 that will require the largest public companies on India?s stock exchange to submit their financial results to additional review by outside auditors. The reason for the passage of these new rules is that poor accounting standards, that allow manipulation of figures without being detected by Indian regulators, are a major problem in India. As a result, Satyam may not be the last Indian company found embroiled in scandal in the near future. 

As happened with Madoff and the numerous other corporate scandals like WorldCom and Enron, it looks like Satyam?s outside auditor, PriceWaterhouseCooopers, may be implicated in the fraud. Indeed, they were responsible for ensuring that the over $1 billion in cash actually existed.

Full post as published by PomTalk on February 24, 2009 (boomark / email).