How Satyams Raju beat Madoff
Satyam chief confesses to cooking the books
By Joe Leahy in Mumbai
Published: January 7 2009 08:03 Last updated: January 7 2009 08:03
The chairman of India’s Satyam Computer Services B Ramalinga Raju Wednesday confessed to fixing the company’s books for the past “several” years in the country’s first major fraud case to emerge following the global financial crisis.
In a letter to Satyam’s board, Mr Raju resigned after admitting to wildly inflating the company’s margins to paint a picture of good performance and retain his management position in one of the worst scams to have hit India’s outsourcing sector.
“It was like riding a tiger, not knowing when to get off without being eaten,” Mr Raju said, explaining how the fraud got out of control over a period of years.
India’s fourth biggest information technology outsourcing firm by revenue with listings in New York and Mumbai, the scam at Satyam has rocked the country’s business world.
India generally gets high marks for corporate governance among emerging markets, particularly for companies in its outsourcing sector.
These rely on their spotless reputations to persuade foreign Fortune 500 clients to entrust them with their confidential data and systems.
Satyam Computer’s shares imploded on Wednesday’s news, falling 71.19 per cent to Rs51.60 a share, leading the benchmark Sensex index down 5.68 per cent to 9,749.18 points.
In his letter, Mr Raju said the fraud originated several years ago from an attempt to cover up a “marginal” gap between actual operating performance and that reflected in the company books.
This swelled over the years to “unmanageable proportions” as the company grew.
Mr Raju admitted that the September quarter accounts for last year included a non-existent cash and cash balance of Rs50.40bn, non-existent accrued interest of Rs3.76bn and other irregularities.
In the September quarter alone, the operating margin was shown as 24 per cent of revenue compared with an actual operating margin of 3 per cent, due to inflated revenue and profit figures.
Mr Raju claimed that he and his family had never benefited from the fraud. It was designed entirely to cover the original gap in the margin.
To help cover up the gap in the books, Mr Raju had pledged his family stake in the company of over 8 per cent to lenders to raise money, which was then injected into the company to cover costs.
But the game was up when the global financial crisis struck India’s market. Satyam’s shares fell and lenders began selling off Mr Raju’s stake in the company that was pledged as collateral to satisfy margin calls.
In a final attempt to make ends meet and keep the fraud under wraps, he launched an aborted attempt last month to buy two companies controlled by his family for $1.6bn.
The proposed deal was aimed at absorbing some of Satyam’s mostly fictitious cash reserve while at the same time providing it with some additional external assets that could be used to plug the gaps in its books.
However, the deal was staunchly opposed by institutional investors, who at that time did not know about Satyam’s rigged books and thought Mr Raju was simply raiding its cashpile.
Satyam said Wednesday that DSP Merrill Lynch, which it had appointed to find a merger partner last month, has resigned the mandate.
The systematic fraud over several years in a company listed in New York and Mumbai raises serious questions over governance and auditing, analysts said.
PricewaterhouseCoopers was Satyam’s auditor.
“This event is a first of its kind in India and we need to learn a lot from this,” said the stock market regulator CB Bhave, chairman of the Securities and Exchange Board.
“We are already in touch with the stock exchanges and the ministry [of corporate affairs],” Mr Bhave added. ”We also need to check whether the audit was done properly.”
By Joe Leahy in Mumbai
Published: January 7 2009 08:03 Last updated: January 7 2009 08:03
The chairman of India’s Satyam Computer Services B Ramalinga Raju Wednesday confessed to fixing the company’s books for the past “several” years in the country’s first major fraud case to emerge following the global financial crisis.
In a letter to Satyam’s board, Mr Raju resigned after admitting to wildly inflating the company’s margins to paint a picture of good performance and retain his management position in one of the worst scams to have hit India’s outsourcing sector.
“It was like riding a tiger, not knowing when to get off without being eaten,” Mr Raju said, explaining how the fraud got out of control over a period of years.
India’s fourth biggest information technology outsourcing firm by revenue with listings in New York and Mumbai, the scam at Satyam has rocked the country’s business world.
India generally gets high marks for corporate governance among emerging markets, particularly for companies in its outsourcing sector.
These rely on their spotless reputations to persuade foreign Fortune 500 clients to entrust them with their confidential data and systems.
Satyam Computer’s shares imploded on Wednesday’s news, falling 71.19 per cent to Rs51.60 a share, leading the benchmark Sensex index down 5.68 per cent to 9,749.18 points.
In his letter, Mr Raju said the fraud originated several years ago from an attempt to cover up a “marginal” gap between actual operating performance and that reflected in the company books.
This swelled over the years to “unmanageable proportions” as the company grew.
Mr Raju admitted that the September quarter accounts for last year included a non-existent cash and cash balance of Rs50.40bn, non-existent accrued interest of Rs3.76bn and other irregularities.
In the September quarter alone, the operating margin was shown as 24 per cent of revenue compared with an actual operating margin of 3 per cent, due to inflated revenue and profit figures.
Mr Raju claimed that he and his family had never benefited from the fraud. It was designed entirely to cover the original gap in the margin.
To help cover up the gap in the books, Mr Raju had pledged his family stake in the company of over 8 per cent to lenders to raise money, which was then injected into the company to cover costs.
But the game was up when the global financial crisis struck India’s market. Satyam’s shares fell and lenders began selling off Mr Raju’s stake in the company that was pledged as collateral to satisfy margin calls.
In a final attempt to make ends meet and keep the fraud under wraps, he launched an aborted attempt last month to buy two companies controlled by his family for $1.6bn.
The proposed deal was aimed at absorbing some of Satyam’s mostly fictitious cash reserve while at the same time providing it with some additional external assets that could be used to plug the gaps in its books.
However, the deal was staunchly opposed by institutional investors, who at that time did not know about Satyam’s rigged books and thought Mr Raju was simply raiding its cashpile.
Satyam said Wednesday that DSP Merrill Lynch, which it had appointed to find a merger partner last month, has resigned the mandate.
The systematic fraud over several years in a company listed in New York and Mumbai raises serious questions over governance and auditing, analysts said.
PricewaterhouseCoopers was Satyam’s auditor.
“This event is a first of its kind in India and we need to learn a lot from this,” said the stock market regulator CB Bhave, chairman of the Securities and Exchange Board.
“We are already in touch with the stock exchanges and the ministry [of corporate affairs],” Mr Bhave added. ”We also need to check whether the audit was done properly.”
Comments
here are a few suggestions as to what jobs we can get Raju to do, forthwith, rather than preoccupy ourselves and him with stones that can otherwise go into building better infrastructure.
First, get him to advise the Institute of Chartered Accountants of India on where the big holes are in the Accounting Standards that whales manage to swim through happily.
Second, give him the financial statements of the top companies and ask him to tell us in total confidence where to dig deeper.
Third, instruct Raju to deliver pithy lectures, in every town and village, school and college, on why corporate fraud doesn't pay in the long run, and why it is no fun riding a tiger because you may not know how to get off without being eaten.
Four, very important, let him guide analysts on the right approach to company assessment.
Five, on a related note, put Raju on an investor guidance forum to help the lay cut the clutter that the maze of financial statements often project.
Six, counsel corporate chiefs who wish to come clean.