The below article is about the recent Accounting Fraud at Satyam, one of the fou rth largest software

services exporter in India. This article is an interesting piece of story for all accounting or non accounti ng college or university students to read and ponder about. After reading the article, we should ponder about the various areas: Professional ethnics of Chief financial officer and CEO Good Corporate Governance and Transparency The Importance of Having Proper Government Regulations Auditors responsibility and fees from big clients which might cloud their minds w hen auditing Accounting gimmicks that can cause disasters to the companys investors who might have lost all their hard earn monies by investing in this company Read on... Recently, the accounting fraud of Satyam rocked the world. Some even named it as Indian Enron. The fraud is Indias biggest corporate scandal since the early 1990 s and its first high-profile casualty since the start of the global financial cr isis. Actually before this accounting fraud is revealed, Satyam in recent months has b een under close scrutiny, after an October report that the company has been bann ed from World Bank contracts for installing spy software on some World Bank comp uters. Saytam denied it but World Bank confirmed it without elaboration on the c ause that Satyam had been banned. Also in December 2008, Satyams investors revolt ed after the company proposed buying two firms with ties to the chairman and CEOs son. By late December, it seems that he had little support from the board or in vestors and four of the companys directorsr resigned in recent weeks. About Satyam to India and the World: 1.0 It was the first Indian company to list on three international stock excha nges Mumbai, New York and Amsterdam. Since this massive accounting fraud, its sh are price has tumbled 80 % of its present level.( this fraud case sent Indian eq uity market into a tailspin with Bombays main benchmark index tumbling 7.3 percen t and the Indian rupees fell. Satyams share value slumped to about $550 million f rom around $7 billion. This company was listed in 1991.) 2.0 It is Indias fourth largest software services exporter. The company expande d from a family-owned concern with a handful of employee into a back-office gian t with a work-force of more than 53,000 and operations in 66 countries. 3.0 This New York-listed Satyam specializes in business software and back offi ce services for hundreds of Fortune 500 companies across the world like Unileve r and Nestl to Cisco, GE, Sony,the World Bank, General Electric, General Motors, United States government, Cisco Systems Inc. and others outsource their most cr itical data and computer systems to this Indian outsourcing company. In some cas es, Satyam is even responsible for clients finances and accounting. 4.0 Its accounts have been for many years being audited by one of big accounti ng four which is PriceWaterCooper(PwC) and yet the fraud went unnoticed for year s. 5.0 This accounting fraud seemingly looks very basic when the chairman and fo under,Mr Raju admitted the following about the latest Balance Sheet at 30th Sept 2008:(a) 94% (Rs5,040 crore) of the Cash at bank in the balance sheet at Sept08) R s53.61bn ($1.2bn) was inflated(ficititious) largely due to inflating profits and

ficitious assets; (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 himself (d) An over stated debtors position of Rs. 490 crore (as against Rs. 2651 re flected in the books) [ CLICK HERE TO LEARN ABOUT THE TYPES OF FRAUD, HOW IT OCCURS] 6.0 This accounting scandal will also raise questions over how outsourcing compa nies or other Indians companies have been and are regulated and audited The Saty am accounting fraud has, for the first time, comprehensively exposed the failure of the regulatory oversight mechanism in India. The first level of corporate go vernance is the companys board itself comprising illustrious professionals from V inod Dham of Intel fame to HarvardBusinessSchool professor Krishna Palepu and fo rmer Cabinet Secretary TR Prasad. The entire board failed to detect the fraud go ing on, as admitted by Raju himself, for the last several years. 7.0 Next, it seems strange that the extraordinarily large ficititious cash pile of bank deposits was not even been properly verified of its existence that rais ed doubts about the internationally acclaimed Auditors and their role, corporate Governance in the company and the role of Board of Directors. It might lead to some start up of some more regulated local Indian Act which might be similar to the U.S. Sarbanes-Oxley Act of 2002 (also known as the Public Company Accountin g Reform and Investor Protection Act of 2002) to take care of avoiding such scan dals in future taking place. A thorough overhaul of auditing practices might be also required. Who is Who Being Implicated In This Accounting fraud: (a) The founder, chairman and CEO Mr. B. Ramalinga Raju (54 years old) who res igned on Wednesday, 7 th January 2009 after admission of the accounting fraud. A ccording to Mr Raju, the board of directors are not aware of this fraud at all. ( Mr Raju started Satyam as a family business with his brother and brother-in-la w more than two decades ago) (b) Satyams long time auditor which is PwC, one of the big accounting four. Acco rdingly, PwC is still examining Mr Rajus statement but could not comment further due to confidentiality issues. Satyams long time Principal banker adviser, U.S.Merrill Lynch.The US bank has advised Satyam for close to a decade, during which time it has assisted with the companys US listing, follow-on share sales, rights issues and recently helping t he company to explore strategic opportunities. Merrill is now trying to disassoc iate itself from Satyam as fast as it can.However, rival bankers believe it is p ossible that Merrill will be named among the many defendants in any US class act ion lawsuits against Satyam. Reason(s) for the Accounting Fraud in Satyam: According to Mr Rajau, he explained in his letter to the Board about the the cov er-up, which he said started as an attempt to disguise a poor quarterly performa nce by artificially inflating the groups profit, got out of hand over time. It was like riding a tiger, not knowing when to get off without being eaten, He claimed that he and his family had never benefited from the fraud and his fellow board members were unaware of it. [Starting in 2006, Mr Raju raised money by pledging his family stake in the comp any of over 8 per cent to lenders as collateral for loans. He then injected the loans into the group to help cover up the income shortfall.But when the global f inancial crisis struck Indias stock markets, Satyams shares fell and lenders began selling off Mr Rajus pledged shares.In a final attempt to make ends meet and kee p the fraud under wraps, he launched an aborted attempt last month to buy two co mpanies controlled by his family for $1.6bn.This would have absorbed the fictiti ous cashpile and added some real assets to Satyams books but the deal was staunch ly opposed by institutional investors.] Others Salient notes on Satyams case:

The Chairman of Indias stock market regulator, the Securities and Exchange Board of India, CB Bhave announced it was launching an investigation into the fraud. US audit regulators raised concerns with Price Waterhouse, an affiliate of PwC, about its audit of Satyam after their visit to the firm last spring.[The visit w as one of a series conducted by officials from the Public Company Accounting Ove rsight Board to Indian auditors with clients registered in the US, including Sat yam.The PCAOB reviews deal with issues related to the conduct of the audit.] Satyam said in a letter to employees that Mr.Raju had named Ram Mynampati as int erim CEO, and named a SWAT team of senior managers to help him run the company. APPEND BELOW IS SATYAMS FOUNDER, CHAIRMAN AND CEO, MR RAJU LETTER TO HIS BOARD O F DIRECTOR: Lets look at Rajus letter (emphasis mine): To the Board of Directors Satyam Computer Services Ltd. From B. Ramalinga Raju Chairman, Satyam Computer Services Ltd. January 7, 2009 Dear Board Members, It is with deep regret, and tremendous burden that I am carrying on my conscienc e, 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. 5361 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 m e d. An over stated debtors position of Rs. 490 crore (as against Rs. 2651 reflect ed 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% 0f revenues) as against the actual reven ues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% of re venues). 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 ov er a period of last several years (limited only to Satyam standalone, books of s ubsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continue d to grow over the years. It has attained unmanageable proportions as the size o f company operations grew significantly (annualized revenue run rate of Rs. 11,2 76 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 f urther accentuated by the fact that the company had to carry additional resource s and assets to justify higher level of operations thereby significantly increasi ng the costs. Every attempt made to eliminate the gap failed. As the promoters held a small pe rcentage of equity, the concern was that poor performance would result in a take -over, 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 divest ment opportunity and a strategic fit. Once Satyams problem was solved, it was hop ed that Maytas payments can be delayed. But that was not to be. What followed in the last several days is common knowledge. I would like the Board to know: 1. That neither myself, nor the Managing Director (including our spouses) sold a ny shares in the last eight years excepting for a small proportion declared and sold for philanthropic purposes. 2. That in the last two years a net amount of Rs. 1,230 crore was arranged to Sa tyam (not reflected in the books of Satyam) to keep the operations going by reso

rting to pledging all the promoter shares and raising funds from known sources b y giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to pro vide for growth did not help matters. Every attempt was made to keep the wheel m oving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share by the lenders on account of margi n triggers. 3. That neither me, nor the Managing Director took even one rupee/dollar from th e company and have not benefitted in financial terms on account of the inflated results. 4. None of the board members, past or present, had any knowledge of the situatio n in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Hari T, SV Krishnan, Vijay Prasad, Manish Mehta, Murali V , Sriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Pr abhakar Gupta are unaware of the real situation as against the books of accounts . None of my or Managing Directors immediate or extended family members has any i dea about these issues. Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the fol lowing steps: 1. A Task Force has been formed in the last few days to address the situation ar ising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam: Subu D, T.R. Anand, Keshab Panda and Virender Agarwal , representing business functions, and A.S. Mu rthy, Hari T and Murali V representing support functions. I suggest that Ram Myn ampati be made the Chairman of this Task Force to immediately address some of th e operational matters on hand. Ram can also act as an interim CEO reporting to t he board. 2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities. 3. You may have a restatement of accounts prepared by the auditors in light of the facts that I have placed before you. I have promoted and have been associated w ith Satyam for well over twenty years now. I have seen it grow from few people t o 53,000 people, with 185 Fortune 500 companies as customers and operations in 6 6 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders, who hav e made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis. In light of the above, I fervently appeal to the board to hold together to take some important steps. Mr. T.R. Prasad is well placed to mobilize support from the government at this cruc ial time. With the hope that members of the Task Force and the financial advisor , Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well. Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is ex panded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible. I am now prepared to subject myself to the laws of the land and face consequence s thereof. (B. Ramalinga Raju)