Author: G. Harini, 4th Year B.A. LL.B, Government Law College, Theni
INTRODUCTION:
One of the largest accounting scams in India was committed by the company Satyam Computers. Until its founders brought it to its knees in 2009 due to financial misconduct, Satyam Computers was the jewel in the Indian Information Technology (IT) industry. The company’s sudden demise sparked a conversation about the CEO’s role in leading a company to new heights of success as well as the CEO’s interactions with the Board of Directors and the establishment of critical committee. As the Satyam scam case shocked the market, particularly Satyam investors, and damaged India’s reputation in the global market, the controversy brought attention to the importance of corporate governance (CG) in the development of auditing committee standards and member of the board duties. Let’s start by defining the Satyam scam.
WHAT IS SATYAM SCAM?
The term “Satyam scam” refers to a massive corporate fraud that was carried out in 2009 by Ramalinga Raju, the chairman and founder of Satyam Computer Services. Raju admitted to inflating cash balances, personnel numbers, sales, and earnings in the company’s books and to taking money for personal use. At one point, the Satyam fraud was valued at approximately Rs. 7800 crores and was thought to be the largest business scandal in India. The Satyam Computers scam had serious ramifications for the company, its auditors, its board of directors, and its stockholders. It also exposed a lack of corporate governance, auditing standards, regulatory monitoring, and ethical behaviour at one of India’s largest IT firms. Investors, customers, workers, and stakeholders in the Indian IT sector lost faith and confidence as a result of the Satyam scam.
BACKGROUND OF THE SATYAM CASE:
Satyam Computer Services Limited was a rising star in the Indian outsourced IT-services market. Mr. Ramalinga Raju founded the company in Hyderabad in 1987, and it quickly grew from 20 employees to become a global enterprise with operations in 65 countries. Satyam was the first Indian company to be listed on three international stock exchanges: the New York Stock Exchange (NYSE), DOW Jones, and EURONEXT.
The corporation had significant expansion in the 1990s, leading to the formation of Satyam Renaissance, Satyam Info way, Satyam Spark Solutions, and Satyam Enterprise Solutions. Satyam Info Way (Sify) was the first Indian internet business to be listed on the NASDAQ. In the new century, Satyam acquired a number of firms, expanded its operations to a number of countries, and signed Memorandums of Understanding with number of international corporations.
Satyam proceeded to enhance its credentials by initiating the world’s first Customer-Oriented Global Organization training program in May 2000, inking agreements with numerous global entities such as Microsoft, Emirates, TRW, i2 Technologies, and Ford, and being the first ISO 9001:2001 company certified by BVQI. Additionally, Satyam expanded its global reach by opening offices in Singapore, Duba, and Dubai.
With total revenues of Rs. 25,415.4 million in the 2003–2004 fiscal year, Satyam had more than tripled its sales revenue by March 2008, growing at a compound annual growth rate of 38 percent. The company’s average operational profit, net profit, and operating cash flows were 28, 33, and 35 percent, respectively.
Satyam was a rising star and a household brand in the global IT industry, and its profits per share (EPS) increased at a 40 percent compound annual growth rate, from $0.12 to $0.62. Satyam clearly generated significant corporate growth and shareholder value. Regrettably, less than five months after winning the Global Peacock Award, the company was the target of a major accounting scam.
TIMELINE OF THE CASE:
Timeline of events that contributed to the Satyam fraud case:
June 24, 1987: Satyam Computers was launched in Hyderabad.
1991: Debuts in Bombay Stock Exchange with an IPO oversubscribed 17 times.
2001: Gets listed on NYSE: Revenue crosses $1 billion.
2008: Revenue crosses $2 billion.
December 16, 2008: Satyam Computers had announced the acquisition of a 100 percent share in Maytas Properties and Maytas Infra, two firms owned by Chairman Ramalinga Raju’s sons. The proposed $1.6 billion purchase was called off seven hours later owing to investor opposition to the buyout. However, Satyam’s stock dropped 55% in trade on the New York Stock Exchange.
December 23, 2008: Satyam had been barred from conducting business with the World Bank’s direct contracts for an eight-year term, one of the harshest penalties imposed by a customer against an Indian outsourcing company. Satyam was found ineligible for contracts, according to the bank, since it provided illegal incentives to bank employees and failed to maintain documentation to justify costs charged to its subcontractors.
December 25, 2008: Satyam had demanded an apology and a complete explanation from the World Bank for the assertions, which the outsourcer claims have harmed investor trust. Satyam did not challenge why the business was prohibited from contracts, nor did it seek for the prohibition to be lifted. Instead, it objected to the assertions made by bank personnel. It also ignores the accusations that the World Bank said rendered Satyam unsuitable for future contracts.
December 26, 2008: Following the World Bank’s scathing pronouncements, Mangalam Srinivasan, an independent director of Satyam, resigned.
December 28, 2008: Three additional directors had resigned. Satyam had moved its board meeting from December 29 to January 10, when it was likely to announce a management restructuring. The action was intended to give the company more time to consider options other than a prospective share purchase. Satyam had also hired Merrill Lynch to evaluate strategic options for increasing shareholder value.
January 2, 2009: The promoters’ stake decreased from 8.64 percent to 5.13 percent when institutions that had pledged the shares ditched them.
January 6, 2009: Promoters’ stake fell to 3.6%.
January 7, 2009: Ramalinga Raju resigned after confessing to inflating the company’s financial statistics. He claimed that the company’s cash and bank accounts on the balance sheet were overstated and fudged to the tune of INR 50,400 million. Other Indian outsourcers were scrambling to prove their worth to clients and investors. The National Association of Software and Service Companies, an industry association in India, had jumped to defend the Indian IT sector as a whole.
January 8, 2009: Satyam was attempting to reassure customers and investors that it could keep the firm viable following the admission by its former CEO of India’s largest-ever financial fraud. However, law firms Izard Nobel and Vianale & Vianale filed class-action lawsuits on behalf of US shareholders, marking the first legal action against Satyam management following the scam.
January 11, 2009: The Indian government intervened in the Satyam outsourcing issue, appointing three persons to a newly formed Board of Directors in an attempt to save the company. Deepak S Parekh, Executive Chairman of Housing Development Finance Corporation (HDFC), C. Achuthan, Director of the National Stock Exchange and previous member of the Securities and Exchange Board of India, and Kiran Karnik, former President of NASSCOM, formed the new board.
January 12, 2009: Satyam’s new Board of Directors conducted a news conference, revealing that the business was searching for methods to obtain capital and stay afloat throughout the crisis. One way to earn funds might be to ask many of its Triple A-rated consumers to pay for services in advance.
PARTIES INVOLVED IN THE SATYAM CASE:
Parties involved in the Satyam fraud case: Mr. Raju was the main perpetrator of the deception; he has been charged with fraud by Indian authorities, along with secondary actors like the managing director, CFO, head of internal audit for the company worldwide, and Mr. Raju’s brother. The Board of Directors and Satyam’s auditors also bear some of the blame for the scam because they were unable to uncover it.Lastly, the ownership structure of Indian corporations made the Satyam crisis worse.
WHO EXPOSED THE SATYAM SCAM?
An anonymous whistleblower exposed the Satyam scam by sending emails under the alias Joseph Abraham to one of the company’s directors, Krishna Palepu, who then forwarded the emails to another director and S. Gopalakrishnan, a partner at PwC, the Satyam auditor. The emails also alerted the media and SEBI to the scam, prompting an investigation by the auditors and regulators that ultimately resulted in Raju’s confession and arrest.
HIGHLIGHTS OF THE SCAM:
In 2008, just five months before the Satyam scam came to light, Satyam had won the Golden Peacock Award for Corporate Accountability. That same year, Mr. Ramlinga Raju was given the Ernst and Young Young Entrepreneur Award. Reversely spelled, SATYAM is MAYTAS, the real estate company that Mr. Raju was trying to purchase. Finally, the World Bank had banned Satyam from doing business with its associates for a period of eight years. For more than two years, PwC, the external audit firm, has been prohibited from offering assurance and auditing services to publicly traded companies. Satyam is referred to as the “Enron Scandal of Indian History.” Enron was the biggest accounting and business fraud in US history, and it played a major role in the collapse of Wall Street.
Following the scandal, Satyam was bought by Tech Mahindra through a public auction, and the new business was dubbed “Mahindra Satyam.” Price Waterhouse (PwC), Satyam Computers’ auditor, was prohibited by SEBI from performing any audit procedures for any Indian company for two years, beginning in 2018. Satyam’s share prices fell from Rs. 554 on the BSE and $29.10 on the NYSE in 2008 to Rs. 11. 50 and $1.80, respectively.
CONCLUSION:
The Satyam Computers scam sparked more stringent regulations. The Satyam scandal highlights the need for ethics, strong governance, and accounting standards. Investigations into major financial crimes aid in the prevention of future incidents and encourage best practices. The Satyam scam case illustrates how human avarice and ambition influence behavior.
“The science of conduct is affected in great part by human avarice, ambition, and passion for power, money, fame, and glory,” as the Satyam founders’ 2009 accounting fraud proves. Scandals have shown that “excellent behavior based on solid corporate governance, ethics, and accounting and auditing standards is urgently needed.”
The Satyam fraud “spurred the government of India to tighten the CG norms to prevent recurrence of similar frauds in future,” which means that major financial reporting frauds need to be investigated for “takeaways” and “best practices” in order to limit the frequency of similar frauds in the future. The Satyam case highlights the need for securities laws and CG in emerging nations.
FREQUENTLY ASKED QUESTIONS:
Who acquired satyam?
Tech Mahindra, an Indian multinational technology company, acquired satyam computer after the satyam scam in 2012.
Who is to blame for the satyam case?
B. Ramalinga Raju former managing director of satyam computers.