Wednesday, January 7, 2009

Satyam Computer Chairman Resigns Amid Billion+ Scandal

Another day, another billion dollar scandal… seems like the U.S. doesn’t have a lock on major scandals these days (what with Madoff and all... )

Chairman Admits to Fraud
As reported by Bloomberg’s Harichandan Arakali in Satyam Chairman Resigns After Falsifying Accounts this afternoon:

Satyam Computer Services chairman Satyam Computer Services Ltd. Chairman
Ramalinga Raju resigned after saying he falsified earnings and assets, prompting
a collapse in the stock of India’s fourth-largest software-services provider….
Of Satyam’s reported cash and bank balances of 53.61 billion rupees [over $1
billion) on Sept. 30, 50.4 billion rupees was non- existent, Raju said in [a]
letter sent to the Bombay Stock Exchange [and Satyam’s board]…. 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,” Raju said. “It was like
riding a tiger, not knowing how to get off without being eaten.
See also, Satyam Shares Plunge on Scandal in NYT Dealbook, edited by Andrew Ross Sorkin, which notes:

The chairman of Satyam Computer Services, a leading Indian information
technology company that serves numerous Fortune 500 companies, resigned on
Wednesday after disclosing major accounting irregularities, sending Satyam’s
shares down 77 percent, The New York Times’s Heather Timmons and Bettina
Wassener reported.
India’s Enron?
Satyam is already being called India’s Enron in articles like Collateral Damage Feared From Satyam Disclosure by V. Phani Kumar on Marketwatch, India’s Satyam Chairman Resigns, Shares Halve by Sumeet Chatterjee of Reuters as carried on Information Week, and Talk of India’s Enron as Satyam’s Shares Plunge in NYT Dealbook, which states:

The comparisons to Enron were repeated like a mantra Wednesday. …Before its
downfall, Enron was widely seen as a model for corporate innovation, having
transformed itself from a sleepy energy business to a high-tech energy-trading
powerhouse that churned out profits. In early 2000, Fortune magazine chose Enron
as America’s best-managed and most innovative company. In India, Satyam was
similarly viewed as a paragon of corporate success, growing over two decades
into one of the largest and most respected companies in India’s highly
successful outsourcing industry, with a roster of blue-chip clients around the
world. Just three months ago, Satyam received a Golden Peacock award from the
World Council for Corporate Governance for excellence in corporate governance.
And Investor Relations Global Rankings rated Satyam as the company with best
corporate governance practices for 2006 and 2007, according to a Satyam press
release. Now, Satyam’s chairman has resigned, saying that about $1 billion, or
94 percent of the cash on the company’s books, was created out of thin air.

The Dealbook article continues by noting that some parallels are being drawn to the Madoff scandal, which appeared to be blown open when there was an inability to meet investors calls for withdrawals. In the case of Satyam, says Dealbook, there was “scrutiny from investors over a botched acquisition that prompted Satyam’s chairman to own up to the fraud.”

Role of Auditors, Directors, Bankers Being Questioned
Riddle me this: in the Satyam affair, where was the billion of missing cash, and why didn’t the auditors catch the discrepancy? Unlike the Madoff scandal in the U.S., Satyam was audited by a Big Four firm – PwC. However, if fraud is involved in the Satyam affair, there may be an argument that the audit firm was defrauded as well.

India’s Institute of Chartered Accountants is launching an investigation, as noted in ICAI Seeks Explanation From Satyam’s Auditor, PwC, published in Financial Express, ICAI To Issue A Show Cause Notice to Satyam Auditors, PwC, by Debjoy Sengupta in the Economic Times, and India to Examine Role of Satyam’s Auditors, Directors, by Reuters.

Also of interest is Thoughts on the Fall of Satyam Being a Precursor to a Global Meltdown, in the anonymous Eggplant Wizard’s CAPs blog in Motley Fool. The Eggplant Wizard posits:

Either the auditors at PwC were complicit with the fraud, which is likely to
bring down PwC much as Enron brought down Arthur Anderson and shake people's
faith in the entire corporate governance structure
-OR -
Banks in India
were complicit with the Satyam fraud, which will cast aspersions on India,
emerging markets in general, and further depress non-precious metals commodities
prices, US shares, and lots of other stuff as investors lose confidence in
emerging markets and their recovery. This will trickle through to developed
countries because of globalization of trade.

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Bob said...

Well, if the government of India is looking for help establishing an affordable SOX like alternative, let them know we would be interested in helping them out.

Bob Benoit
Lord & Benoit

Francine McKenna said...

Audit firm defrauded? The "We've been duped" defense? Come on Edith, don't give them an excuse so early in the process. I suspect there is complicity, incompetence or both with either the auditors or their customers or both. Either way, like Parmalat and all the cases which prompted Mark Olson and PCAOB to include "inadequate procedures over confirmations" in his summary of recurring errors cited in PCAOB inspections reports, the auditors missed something really big.

Edith Orenstein said...

Bob and Francine,thanks for your comments... Bob means what he says about offering SOX consulting services, and Francine, you're right, this fraud, with an immense amount of missing cash, sounds (at least on the surface) a lot like Parmalat...

I forgot to note in my original post: Satyam means “truth” in Sanskrit - according to Bloomberg writer Harichandan Arakali, whose article I cited in the post.

Anonymous said...

This fraud makes no sense. Revenue recognition, confirmations and related party transactions? this is risk assessment 101. Someone besides management has to be involved in this.

Edith Orenstein said...

The NYT online is reporting today: "Satyam Officers Had Help in Fraud, Investigators Told." According to the article by Heather Timmons, a team within Satyam "fabricated and prepared false documents like sales invoices, bank statements and bank confirmations" and that the “scam had occurred owing to a carefully crafted fraud by creating normal trails and backup support documents and records."