Satyam Computer Services Ltd is in a total mess with the Former Satyam Chairman B Ramalinga Raju

surrendering before the andhra pradesh police under sections 120B, 409, 420, 468, 471. Along with him
his brother and the companies CFO was also arrested on friday evening. The Securities and Exchange
Board of India [SEBI] has ordered for an enquiry to look into this matter in detail.

Along with this news the most important point would be the stock prices dipping more and reached
6Rs/share which is seriously very low considering it was trading it 400-500Rs levels a year back. The
stock prices clearly shows that the company has lost its value among the investors and everyone is
looking to sell out.

I would recommend all the investors to still hold the stock because when they have already lost 90% of
the value why not atleast risk with the 10%? If this 10% again grows back to atleast 30-40% after some
days by chance in case of the take over/ acquitision then you have a better option rather than regretting
in the future.

The stocks closed at 23.75Rs which is again 41% down from the last trading
day and it was originally moving up from the 6Rs figure which means that there are still many people
who believe in the company. The owners would be scammers but not the 53000 employees who worked
hard in the company to fulfil their targets and there are numerious Saytam clients who are still willing to
continue with the company and are ready to give contracts/orders.
The only problem would be that since the company is in a problem now, all their accounts would be
siezed and even if the business operations are operated the payments would be struck. This is the
reason the employees are in panic stage and have already started looking out for new job options in
case the company is closed for a while. Along with the already employed staff there are around 10000
freshers every year who are in waitlist waiting for their call from Satyam who are also going to not get a
call back and they now have to apply for other MNC’s.

I am sure its not along Raju in this whole drama who has claimed that he is alone responsible but how
do you think a single person can do such a big fraud? What about the people are always with him in his
business operations? What about the government who gave the company public lands at dirt cheap
amounts? Will the public have to bear the loss made by these big scammers?

Not only the satyam clients but their employees are also having a hufe confidence in the company and
are sure that the company will continue in the long run along with better growth but the question
stands the same – When?

One of the biggest Chartered Accountancy – PricewaterhouseCoopers

which is highly reputed in India because there are thousands of students trying to get into PWC for
completing their CA Course, is also in question because this firm was handling all the Satyam’s
operations and if such a big scam was running around how did PWC not find out? Or were these guys
also bribed by Mr Raju in tunes of crores of rupees and will this networked chain keep continuing?

The website of Ramalinga Raju which is ramalingaraju.com is also totally down which again adds up
another negative point because if you start hiding more and more stuff from the public you are going to
be accused more for your mistakes. Not only this small site but the corporate website ie satyam.com
was also giving problems in the last 3-4 days with no downloads given to the public for the company
data.

The retail investors amount to approx 25% who have now lost 90% of their value and along with the
already falling down stock markets satyam has added a big loss for everyone and now everyone is
looking for either selling the stocks for almost no value or else buy some more stocks at this low rates to
average their old portfolio and hope it recovers back soon to atleast the costs. The village from which
Ramalinga Raju hails still believes on him and all his known ones are buying huge amount of stocks at
the moment to prove that they believe him and there is no need to worry about the company. Lets wait
and see how this whole story turns out and where does Satyam stand after a month.

Hyderabad: Following is the text of the letter Raju wrote to the Satyam board:

"It is with deep regret and tremendous burden that I am carrying on my conscience, that I would like to
bring the following facts to your notice:

1. The Balance Sheet carries as of September 30, 2008,

a) Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in
the books);

b) An accrued interest of Rs 376 crore, which is non-existent

c) An understated liability of Rs 1,230 crore on account of funds arranged by me;

d) An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected in the books);

2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and an operating margin of
Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an actual
operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank
balances going up by Rs 588 crore in Q2 alone.

The gap in the balance sheet has arisen purely on account of inflated profits over several years (limited
only to Satyam standalone, books of subsidiaries reflecting true performance).

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 the company operations grew significantly
(annualised revenue run rate of Rs 11,276 crore in the September quarter, 2008, and official reserves of
Rs 8,392 crore).

The differential in the real profits and the one reflected in the books was further accentuated by the fact
that the company had to carry additional resources and assets to justify a higher level of operations
thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the
concern was that poor performance would result in the takeover, thereby exposing the gap. It was like
riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.
Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit.

One Satyam's problem was solved, it was hoped that Maytas' payments can be delayed. But that was
not to be. What followed in the last several days...

Satyam fraud, unravelling the mystery

7 Jan 2009 morning, I tune into CNBC TV 18 and the host Udhayan Mukherjee is there
commenting on the up move of Satyam and saying it may be capped at around Rs.180 / 190
levels.

Capped it did and started moving southwards to a bottomless pit.  Why?

Because, the Chairman of Satyam, Ramalinga Raju decided to make a confession of sorts as he
was unable to  keep his conscience (?) quite for very long.  We don’t know how long he was
trying to keep his conscience shut before he decided to listen to conscience.  But, in his
confession letter, he has told for several quarters he was repeatedly fudging the books to
overstate profits and assets.

I went through his confessions in detail.  I was discussing with few friends of mine.  I as also my
friends were aghast that the auditors of the company did not detect this fraud earlier.  The
auditors of Satyam are not  a small name,  they are a reputed name and one of the Big Four  (the
way things are unfolding, that list may soon become Big Zero).

The fraud was committed not once.  The confession only reveals about the peak level of the
fraud.  It was being perpetrated on a continuous basis over many quarters or several years.  If the
Company needed growth in revenues and profits, they got it, the desired profit was just few book
entries away.  They most likely made these entries during the last week of the reporting period so
that the invented profits filled the blanks perfectly for analyst purposes.

And then, they were on the television bullshitting to the analysts about the minor percentage
point changes in the revenue numbers, overheads etc. etc.
It is all well if they were a small company, audited by another small firm of auditors.

Satyam was a big and strong company (till yesterday, I want to stress, because, they are now in
distress) and audited by one of the big four as already told.  It is required to strictly adhere to the
stricter IFRS (International Fianancial Report Standards) and GAAP (Generally Accepted
Accounting Practices) norms before the accounts were certified.

I have first hand experience of the audit style of atleast three of the Big Four firms.  I can tell for
sure that these firms have high quality standards for conducting audits.  Though they conduct
their audit through sample testing procedures, they ensure that an extended check is performed
where the sample fails to meet the expected results.

Hence, it was bemusing to me how Satyam could have indulged in accounts fudging without
getting detected by the auditors.

Before we can get into the exact, probable, modus operandi of Mr. Raju, let us see how a
company can fraudulently inflate its profits and how that gets detected by the auditors.

a) Book sales belonging to the subsequent year in the current year by pre-dating the invoice.
This is like catching the tiger by the tail.  Unless the sales improves, the Company will have to
follow the same thing in the subsequent years as well to ensure that the profit trend is
maintained. (The auditors can detect this by matching the dates of invoices, shipment advises,
gate passes, delivery receipts., physical stock verification reports, debtors confirmation etc.)

b) Book bogus sales to inflate profits in one year and show return sales in the subsequent
year. This is again like catching the tiger by the tail as the quantum will have to be increased
each year to compensate for the additional charge coming in the subsequent year due to return
sales.  (The auditors can detect this by checking the invoices, subsequent year sales returns,
debtor confirmations, stock tally etc.)

c) Book bogus other income.  This is done to inflate the profits and mostly to as a money
laundering exercise: Unaccounted money is laundered into the books by showing income for no
actual service rendered.   (Auditors can detect this by seeing the actual documents supporting the
other income and by comparing with the expertise available in the company to provide such
services)

d) By not booking purchases or overheads.  Companies try to inflate profits by not booking
purchase of material or overheads: This again has to be covered up in the subsequent year when
the creditors are to be paid.  (Some of the ways in which the Auditor can find these include,
comparison of the purchases with physical stock, quantitative tally of stocks and consumption,
trend analysis of overheads between two periods, obtaining creditor’s confirmation, bank
reconciliation statements to check for amounts paid but not accounted in books which will be
hanging as a difference between bank balance as per books and as per the bank statements for a
given cut-off date)
In all the cases of inflation of sales in the books, the company will credit the sales account to
increase the sales and pass the debit to a debtor account to show receivables.  The problem here
is that the receivables has to be squared off either by reversing the sale or by writing off as most
fraudulent companies do not introduce cash to square of the receivables for bogus sales.

However, Mr. Ramalinga Raju has introduced a new gambit in this (like we have a opening
called “Indian Gambit” in chess, we can refer to this henceforth as “Satyam Gambit”).

It shows the clever manner in which the fraud was crafted by Mr. Raju.

As a Chartered Accountant, I have seen profit getting inflated by bogus booking of sales which
in turn will also inflate the debtors.  These debtors will remain sticky/ irrecoverable as no real
sales support them.  Companies will get rid of such debtors following one of the following three
methods,

a) write off the debtor

b) reverse the bogus sale (and book a new one so that a new debtor is created)

c) resort to money laundering to square off the bogus debtors

Such bogus sales, if the quantum is high, will not escape the auditors eyes as they will scrutinize
the receivables, seek for confirmation of the balance, will analyze the debtors to see if they are
one off customers or frequent buyers etc.

Showing such receivables becomes difficult in the case of a big company like Satyam as they
will have a relatively smaller number of customers contributing to significant portion of total
revenues of the company.   Any bluff will be quickly caught as high profile customers will be
quick to respond to balance confirmation requests.

So Mr. Raju did his master stroke.  He booked bogus income, most likely with fictitious
companies and cleared off the debtor balances by showing collections and there by increasing
the cash and bank balances.

How can one get actual collections from fictitious companies? No, he didn’t make any actual
collections.  He just got some more book entries made to clear the debtors and transferred the
debits to bank balances.

If something remains in debtors, it will raise questions from many quarters, starting from the
auditors to the Board of Directors to the analysts to institutional investors to (at least) some of
the intelligent retail investors.

If the debtor balance is converted into Bank balances? No one is going to doubt.  In fact, people
will become more happy to see the swell of cash.  The Company will be valued higher it is
sitting on a huge pile of cash.
Mr. Raju, had to however, overcome one more problem.  Normally, auditors will ask for
confirmation balances for the bank balances shown by the company.  How did he get away for so
many years without having actual bank balances?  Or how did he produce the needed
confirmation to the auditors for these balances?  Did the auditors (one of Big Four, mind you)
overlook seeking confirmation of balances?

To me that is impossible.  Auditors though by definition are not “bloodhounds” but are
“watchdogs”, they minimum become a nagging wife if confirmation for significant balances are
not received.  They will qualify such things in their audit report and also will draw the attention
of lack of confirmations to the Board of Directors and Audit Committee.

So how could Mr. Raju convinced the auditors.  Mr. Raju, most likely did one more clever thing.

He raised some personal money.  He didn’t sell the Satyam shares for this purpose (note that he
has told in his confessions that he has not sold any shares in the market).  Instead he pledged the
shares with the banks and raised cash.  That cash, either he sent using illegal route abroad to get
back as software sale realizations or simply made book entries for recoveries and went to banks
to create deposits in the name of Satyam Computers.

This exercise must have started on a small scale in the beginning.  With a favorable bull market,
he could have also easily raised the money needed by pledging the shares.  (This is how the
unaccounted liability of Rs.1,000 odd crore  (Rs.10 billion) started to accumulate – personal cash
used for making deposits for company will create assets for the company but no liability is
created).

But, as the expenses in Satyam balooned and as the requirement to meet the investor
expectations in terms of revenues and profits increased, Mr. Raju might have resorted to this
fudging route more often that the inflated bank balances reached the confessed high of Rs.5,040
crore (US $ 1 billion) over a period of several years.

At this manipulation high and falling Satyam stock price, it should have become difficult for Mr.
Raju to prove to the auditors the existence of the bank balances.  But, as I already told, the
auditors would have also become (atleast one) nagging wife seeking for confirmation of
balances.

So, what how did he over come this problem?

I think, he would have used the limited cash at his disposal (Rs.1,000 crore (Rs.10 billion) is
limited cash if you look to plug the gap of Rs.5,000 crore (Rs.50 billion)), to create bank
balances for Satyam Computers close to the quarterly reporting dates by creating and closing
multiple deposits while keeping the proof of making the deposits to convince the auditors.

The auditors, could have possibly, accepted such proofs and partial confirmations and most
likely would have documented accepting such evidence with their reasoning.
Another great benefit of such deposits for Mr. Raju was that he could show accrued interest on
such deposits and boost the profits.  (This explains the bogus accrued interest of Rs.3.7 billion
confession – how nice to have a bogus deposit and also have the added benefit of interest from
such deposits).

Still two questions remain to be answered.

Question 1. Knowing that Mr. Raju perpetrated fraud of such a magnitude, how can he be
such philanthropic to give Rs. 1 billion of his own money to the Company?

Question 2. How he would have planned to take it out from the Company?

Maytas deal is one answer.  By going ahead with that acquisition, he would have converted a
major portion of the non-existent bank balances as “inflated” investments and also taken away
the Rs.10 billion real cash available (funded by him).  With inflated acquisition price, this would
not have hurt him at all.

But, why the confession now.  Two reasons, one is very interesting and I must thank my friend
for highlighting this.

1. Maytas deal failed, the Satyam share price had further fallen, making it difficult for Mr. Raju
to further raise cash to fill the Rs.50 billion gap in the Balance Sheet.

2. He has already introduced Rs.10 billion of own money into the Company.  With increased
shareholder activism, it had almost become certain that he will get out of the Company sooner
than later.  In case he had to go out, how to get back the Rs.10 billion of personal money left
with the Company?  Make a confession and repeat multiple times in the open letter that there is
an unaccounted liability of Rs.10 billion so that that amount is secured for him, irrespective any
legal tangles he gets into by the confession.  This again, is a master stroke from Mr. Raju, in my
view.  Because, he is fully aware of the speed of legal process in India and so while the legal
battles are fought with intelligent lawyers for 10 or 15 years, he can continue to enjoy the money
and comforts.

How Satyam case has dented India Inc's image

The Satyam [ Get Quote ] bid to merge itself with two infrastructure companies controlled by
the same promoter group (the Raju family) will rightly go down in Indian corporate history as an
object lesson in corporate misgovernance.
The company's board has quickly reversed the merger decision, in the wake of a shareholder
revolt and a crash in the company's share price (by about 50 per cent in New York), and it now
seeks to recover lost ground through a share buyback offer.

But it is worth bearing in mind that, in the case of many companies, such an offer has ended up
being nothing more than a bid to bolster the share price, without any shares actually being
bought back.

How this will end is therefore too early to forecast, but there can be little doubt that the promoter
group, led by the company's founder-chairman, B Ramalinga Raju [ Images ] [ Images ], has lost
a good deal of shareholder trust, and some of it may never be regained -- with good reason.

It passes understanding as to how a promoter group can hope to change a company's principal
business without going to the general body of shareholders for their approval, especially when
the promoters hold no more than 8.6 per cent of the company.

The decision is even more dubious when the addition of a main line of business (with which
there is no synergy or indeed any connection whatsoever) is sought to be achieved by a merger
with firms controlled by the same group -- with no transparency on how the relative valuations
was done, because this information too has not been given to shareholders.

Promoter families taking other shareholders for granted is not new; indeed, it is all too common.
They got away with it in the past because retail shareholders felt powerless to influence the way
the company was being run, while domestic institutional investors (both the public financial
institutions of old as well as mutual funds) usually adopted a compliant attitude, even when they
were represented on the board.

Things began to change after foreign institutional investors (FIIs) came on to the scene some 15
years ago; in the latest episode too, it was the FIIs who led the revolt and immediately dumped
the company's stock.

It is worth noting that it was not any corporate governance rule or action by the stock market
watchdog that stopped the company in its tracks; nor was it the independent directors, on whom
so much reliance is placed in corporate governance regulation.

Indeed, the Satyam board was packed with independent directors who are men of standing, and
whose credentials no one would ordinarily question: the dean of a prestigious business school, a
well-known professor of Harvard Business School, a former director of the Indian Institute of
Technology in Delhi [ Images ], a retired cabinet secretary, and the like.

That such worthies could be parties to a decision that met with instant shareholder anger raises
legitimate questions about whether too much faith is in fact placed on independent directors.

The fundamental weakness in this model is the fact that independent directors usually have no
stake in the success of the business; indeed, in some other cases it has been revealed that
independent directors were being financially benefited in a variety of indirect ways (like supplier
contracts to relatives), and therefore beholden to the company management.

In the case of Reliance [ Get Quote ], for instance, the level of adherence to corporate
governance norms became known to the world at large only when there was dissension in the
promoter group, leading to several startling revelations.

While it would be wrong to paint everyone with the same brush, the Satyam episode certainly
raises questions about what standards of corporate governance exist, beyond the talk at seminars
and the many codes that have been framed.

It is unfortunate that Corporate India's [ Images ] image should be dented in this fashion; but it
would be even more unfortunate if the Satyam case did not lead to a more careful scrutiny of
what exactly goes on in Corporate India.