SATYAM FRAUD ANALYSIS

Presented By: Abhishek Mehta

Anshul singh
Ashish Arora
Shanta Mohanty
Samarth Saxena
Company Profile
Set up in the year 1987 by
B.Ramalinga Raju.
India’s 4th biggest software
company with 9% market share.
Listed in BSE, NSE, NYSE and
Euronext (Amsterdam).
On 26th August, 1991 it was
converted into a Public Limited
Company and went for PUBLIC
ISSUE in 1992.
BSE IPO oversubscribed 17
times when made public.
The company employs
40,000 IT professionals
across development
centers in 6 continents.
It serves over 654 global
companies, 185 of which
are Fortune 500
corporations.
 B. Ramalinga Raju
Founder and Chairman,
Satyam Computers Limited.

B. Rama Raju
Promoter and CEO, Satyam
Computers Limited.
Controversies Surrounding Satyam
Computers Limited.
Upaid Lawsuit
World Bank Ban
Maytas Acquisition
Accounting scandal of 2009
UPAID
Controversy
UK mobile payments company
Upaid Systems filed a case of
intellectual fraud and forgery
against Satyam in 2007.
On 9-December-2009 Satyam
settled the lawsuit with UPAID for
$70Mn, of which $45Mn was
payable upon regulatory
approval, and the remaining
$25MM was payable a year after
the initial payment.
 The World Bank banned Satyam
from doing business with it for 8
World Bank Ban years due to inappropriate
payments to the World Bank's
staff.  The World Bank accused
Satyam of giving improper
benefits to its (the Bank's) staff
and of failing to maintain
documentation to support fees
charged for its subcontractors.
However, it clarified that Satyam
was not involved in incidences of
data theft or malicious attacks
that had been made on the Bank's
information systems. 
Maytas Acquisition
Controversy
 Satyam announced to buy Maytas Prop ($1.3
bn) & 51% stake in Maytas Infra ($300 mn)
 Deal was to be financed by Satyam’s
“surplus” cash.
 Satyam’s share prices fell reflecting share
holders disbelief.
 Valuation of Maytas turned out to be
fraudulent.
Raju and family own up to 35% stakes in
Maytas.
 Raju was siphoning the money from
Satyam to Maytas since last 6 years. With
Satyam in deep cash crunch, Raju wanted to
buy Maytas to cover up Satyam’s inflated
cash.
Satyam’s justification for Maytas buyout
deal
De-risk the core business
 The integrated organization would be stronger and
more diversified to deal with the uncertainty of the
market.
feeling that in the recent times it is difficult to make a
strategic deal with other IT companies.
 Reaction of Investors
The shareholders realised that the buyout was not
profitable for them. Satyam using the reserve cash to
purchase Maytas Infra and Maytas Properties was a big
risk.
 Result of Investor’s Reaction
The result of investors reaction was that part of
investors succeeded to thwart the buyout attempt by
the minority-shareholding promoters who thought of
using the firm’s cash reserves to buy two companies
already indirectly owned by them — Maytas Properties
and Maytas Infra.
The aborted attempt towards expansion precipitated a
collapse in the price of the company’s stock and also led
to the shocking confession of financial manipulation
and fraud from its chairman, B. Ramalinga Raju.
 The Satyam Accounting Scam Finally
Exposed

E D Satyam scam is the biggest

O S fraud in India's corporate

X P history.
E The company management,
primarily its disgraced
chairman B Ramalinga Raju,
kept everyone in the dark for
nearly a decade.
The Scam and Raju’s Confession
On 7 January 2009, company’s previous Chairman Ramalinga Raju resigned
after notifying board members and the Securities and Exchange Board of
India (SEBI) that Satyam's accounts had been falsified.

Raju confessed that Satyam's balance sheet of 30 September 2008 contained:

1. Inflated figures for cash and bank balances of Rs 5,040 crores as against
Rs 5,361 crore reflected in the books.

2.An accrued interest of Rs. 376 crore which was non-existent.

3. An understated liability of Rs. 1,230 crore on account of funds was arranged

by himself.

4. An overstated debtors' position of Rs. 490 crore (as against Rs. 2,651 crore

in the books.
 RAJU’S CONFESSION
Excerpts from his confession:
 It was like riding a tiger, not knowing how to get off
without being eaten.
 Every attempt made to fill the gap failed. As the
promoters held a small percentage of equity, the concern
was that poor performance would result in a take-over,
thus exposing the gap.
 The aborted Maytas deal was the last attempt to fill the
fictious assets with real ones.
Raju’s Confession Statement
ACTUAL DEBT
WAS 2161.
OVERSTATED
490 CRORES.

ACTUAL CASH
IN BANK WAS
321 CRORES,
NO ACCRUED INFLATED
INTEREST 5040 CR.
376.34 CR.
 UNDERSTATED
LIABILITY 1230
Cr. Which was
ARRANGED BY
MR.RAJU

5,040 + 376
Rs. 1,230 Cr
Rs. 7,136
+ 490 (Rs.
Cr)
Cr
 Immediate Market Reaction
Sensex stock index dropped by 7.3%.
Satyam shares fell by nearly 78%.
 The guilty and the partners in crime
The Satyam board, including its five independent
directors had approved the founder's proposal to
buy 51 per cent stake in Maytas Infrastructure and
all of Maytas Properties, owned by the family
members of Satyam chairman B Ramalinga Raju.
Despite the shareholders not being taken into
confidence, the directors went ahead with the
management's decision.
The decision of acquisition was, however, reversed
12 hours later after investors dumped Satyam's
stock and threatened action against the
management.
The guilty and the partners in
crime
It is said that the Satyam
management’s malpractices
led to Satyam’s fallout but
could only two or three people
of management cook the
accounts books for years of a
company for so long?
Here the role of auditors
started….
PWC –Satyam’s auditors since Jun 2000
Credibility of PWC???...“amount too big to be noticed”
PWC:
“our audit in accordance with the auditing standards
generally accepted in India”
“Satyam's financial statements are the responsibilities of
the company's management”
“under Satyam’s management controls over financial
reporting and auditing”
“Audit reports between June 2000 to September 2008
unreliable”
This was an advertisement that featured in
a leading daily during the crisis.
 What went wrong
Manipulation of softwares
Lack of audit controls and
Systemic reviews
Insider trading
 Changes in regulations
SEBI now allows certain changes or exemptions in
the takeover code in case of a company in crisis.
This helps the investors in the stocks of a company
like Satyam
Case in point—the value of Satyam shares was
only19 rupees after the revelation
However, six month share price average of share
was 270–275 rupees per share
 Regulations
SEBI requires at least half of the directors in the boards of
publicly held companies to be independent.
SEBI prohibits insider trading and has in place a strong
mechanism against it .
They keep track of the following:
 Details of acquisition of 5% or more shares in a listed company
Details of shares held by Director or officer of a Listed company
 Details of change in shareholding in respect of persons holding
more than 5% shares in a listed company
 Details of change in shareholding of Director or Officer of a
Listed Company
 Regulations(contd.)
Compulsorily appoint external auditors to do
internal audits
These auditors are also allowed to restate the
profits if required
Mandatory for companies to disclose the
percentage of promoter shareholding that is
encumbered
 TRAINING
National Institute of Securities Market, an initiative of SEBI
trains professionals in internal auditing

This programme aims at helping the audit professionals to carry

out an effective internal audit of the broker’s books in order to
satisfy the requirements of Sebi and the exchanges.

Ensures compliance with the provisions  of the Sebi Act, 1992,
Securities Contracts (Regulation) Act, 1956, Sebi (Stock brokers
and Sub- brokers) Regulations, 1992, circulars issued by SEBI
 Some additional measures
Requirement of professional qualifications/financial literacy
for Chief Financial Officer (CFO)
 Rotation of Audit firms / partners
 Appointment of an external audit firm as internal auditor of
the company
Modification in formats of limited review report and
statutory auditor’s report
 Voluntary adoption of International Financial Reporting
Standards (IFRS) by listed entities having subsidiaries
Interim disclosure of balance sheet items by listed entities
Timelines for submission of financial results by listed entities
 Lessons learnt
It is a collective failure of directors, auditors and
regulatory agencies in ensuring transparency
and accountability; As a consequence of this
fiasco, the overseas client may take a hard look
at most Indian outsourcing companies and
investment flows could be hit. 
The responsibility for preventing fraudulent
activities lies with the Board of directors. Their
acts and conduct impact the reputation of India
and, therefore, they must ensure that the
highest standards of corporate governance are
set.
 Lessons learnt( contd.)
The Quality Review Board ('QRB'), an independent body set
up under the MCA, is looking into the standards of audit for
chartered accountancy firms with a view to redefine new
stringent norms for audit firms. It may ask the SEBI and MCA
to mandate listed companies to rotate their auditors to prevent
Satyam-type frauds - practice being followed in public sector
companies.
There is a need of time to take the investigation procedure in
effective and efficient way to clear every issue and make it sure
that such incident will not happen again in future, it is
necessary to solve the above questions and to fill the gaps of
the loopholes.
 LEGAL
PROVISIONS IN OTHER COUNTRIES TO DEAL WITH THE
CORPORATE FRAUDS.
 

  FOREIGN CORRUPT PRACTICES ACT OF 1977

It aims at making it illegal for governmental officials to
take a bribe. One basic provision of the FCPA is that it
prohibits U.S.partnerships, companies, and
organizations from not only giving payments but also
offering or authorizing payments to foreign officials or
political parties with the objective of encouraging or
assuring business relationships.
 THE SARBANES-OXLEY ACT OF 2002

It is a United States federal law enacted on July 30, 2002 in response to
a number of major corporate and accounting scandals including those
affecting Enron, Tyco International, Adelphia, Peregrine Systems and
WorldCom. These scandals, which cost investors billions of dollars
when the share prices of the affected companies collapsed, shook
public confidence in the nation's securities markets.
The legislation establishes new or enhanced standards for
all U.S. public company boards, management, and public accounting
firms. It does not apply to privately held companies.
The Act establishes a new quasi-public agency, the Public Company
Accounting Oversight Board, or PCAOB, which is charged with
overseeing, regulating, inspecting, and disciplining accounting firms in
their roles as auditors of public companies. The Act also covers issues
such as auditor independence, corporate governance, internal control
assessment, and enhanced financial disclosure.
THANK YOU