Satyam Scam Case Study

Introduction of Scam

Satyam was established in 1987 and soon became the fourth fastest growing IT companies in India. It held 9% market share with a revenue of $2.1 billion and close to 40000 employees on its payroll. It was also the first Indian company listed on three international exchanges - NYSE, DOW and EURONEXT. When it debuted on the BSE in 1991, its IPO was unsubscribed by 17 times. It was awarded the ISO 9001 certification in 1993. In 2000, it won the National HRD Award from the Government of India. And Ramalinga Raju was named 'IT Man of the Year' by Dataquest.

Trouble began in 2008 when the Satyam Board of Directors approved the proposal to acquire 100% share in Maytas Properties and 51% stake in Maytas Infra. This deal was to be financed by Satyam's surplus cash. Skepticism led Satyam shares on the NYSE to fall by 55%. The deal was called off the next day and Satyam ADRs lost 50% of their value, literally overnight. 12 days from then, the Board of Directors begin to resign. 9 days from then, the Chairman backs out and laid the whole scam bare.

The financial misrepresentations included inflated Cash and Bank Balances of Rs. 5040 crores, fictitious accrued interest income to the tune of Rs. 376 crores, understated liability of Rs. 1230 crores and an overstated debtor's position of Rs. 490 crores. The gap was purely due to inflated profits over the past several years. For the September Q2, Satyam reported a revenue of Rs. 2700 crores and an operating margin of Rs. 649 crores as against the actual revenues of Rs. 2112 crores and an actual operating margin of Rs. 61 crores which was actually a mere 3% of revenues. The led to artificial Cash and Bank balance going up by Rs. 588 crores in Q2 alone.

As a result of this confession, the Sensex stock index dropped by 7.3% and the shares of Satyam fell by nearly 78%.

It was discovered that Mr. Raju and his family owned up to 35% stake in Maytas. He had been siphoning the money from Satyam to Maytas for the preceding 6 years. When Satyam faced a cash crunch, he thought of buying out Maytas to cover up Satyam's inflated cash. Mr. Ramalinga's final attempt to substitute fictitious assets with real ones failed and the already-sinking ship of Satyam drowned. The entire valuation of Maytas was fraudulent. What started out as just another acquisition turned into a revelation of the one of the biggest scams worldwide and the biggest in India.

Reasons behind the scam

* Mr. Raju has promoted Satyam and has played an integral part in shaping up the company over the years. And under his chairmanship, Satyam has grown into a leading player in the Indian IT services space.

* While confidence underlies decisive, strong leadership, overconfidence leads managers to cross the line and commits fraud like Satyam.

* The overly optimistic belief that promoters and executives have that they can turn their firms around before fraudulent behaviour catches up with them, is at the root of such frauds. All executives do not start out thinking that they would commit fraud. But they end up being in a position where they feel that it is the only way to get out of a bad situation.

* Mr Raju and people involved believed that firm was experiencing only a bad quarter or patch of bad luck. Initially, they thought it is in the best interest of everyone involved - management, employees, customers, creditors and shareholders - to cover up the problem in the short term so that these constituents do not misinterpret the current poor performance as a sign of the future.

* They were convinced that down the road the company will make up for the current period of poor performance. It was this optimistic or an overconfident outlook that caused the whole problem.

* Hence, stretched the rules just a bit or engaged in what we might call a 'gray area' of earnings management. But it turned out that they were wrong and things don't turn around as expected. Then managers and Mr Raju had to make up for the prior period.