Business & Professional Ethics 7th Edition by Leonard Brooks,Paul Dunn

Exercise 116

Satyam Computer Services Ltd. was founded in 1987 by B. Ramalinga Raju. By 2009 it was India's fourth largest information technology company with 53,000 employees, operating in 66 countries. It provided a variety of services including computer systems, customer services, as well as the outsourcing of accounting and finance. It had 185 of the Fortune 500 as customers, and acted as a back office to such companies as Nestlé, General Motors, and General Electric.
On January 7, 2009 Mr. Raju sent a letter of resignation to the Board of Directors and to SEBI (the Securities and Exchange Board of India). In his letter he outlined how he systematically falsified Satyam's financial reports. With respect to the September 2008 quarterly financial statements:
• the reported cash and bank balance of 5.36 billion rupee was overstated by 5.04 billion rupee (approximately $1 billion),
• the accrued interest of 376 million rupee was fictitious,
• there was an unrecorded liability of 1.2 billion rupee that Raju had with the company, and
• the quarterly revenue of 2.7 billion rupee was overstated by 22 percent, and the operating margin of 649 million rupee was overstated by 91 percent.
He revealed in his letter that what started as small discrepancies grew and, over time, reached unimaginable proportions. "It was like riding a tiger, not knowing how to get off without being eaten." He said that he alone had perpetrated the fraud, and that no one on the board of directors knew about it. Raju concluded his letter by apologizing for what he had done, and announced that he was prepared to accept the legal consequences of his actions.
In his resignation letter Raju said that neither he nor any of his family had profited personally from the scam; none had sold their shares nor taken any money out of the company. However, it was later revealed that 13,000 of the 53,000 Satyam employees were fictitious, and that Raju was siphoning off approximately $4 million monthly from the company. Furthermore, it is alleged that Raju improperly transferred large numbers of Satyam shares to his mother and younger brother.
After the announcement of Raju's resignation and the details of the fraud, the price of Satyam's stock fell 78 percent bringing down the Bombay stock exchange, the Sensex index, by 7.3 percent. In April 2010 the company was sold to Tech Mahindra and renamed Mahindra Satyam.
There had been signs of problems at Satyam's prior to Raju's resignation. In October 2008 the World Bank said that it was refusing to conduct any further business with Satyam after a Satyam employee had hacked into the World Bank's computer system. In the Fall of 2008 Raju was concerned that his company was being targeted for a take-over, in which case the fraud would be detected. So, on December 16, he announced that Satyam would spend $1.6 billion to buy two construction companies, Maytas Property and Maytas Infra, each of which was run by two of his sons. (Maytas is Satyam spelt backwards.) His intention was to replace the fictitious assets with real ones. However, his offer was quickly retracted under shareholder pressure. The next day, in New York, the price of Satyam's ADRs lost 50 percent of their value. Also, in December, Forrester Research warned customers about continuing to do business with Satyam. The day before Raju's resignation, DSP Merrill Lynch, that had been hired to consider strategic operations for the company, suddenly resigned after it learnt about 'material accounting irregularities'.
Following the collapse of the company, people began to ask questions about the role of Satyam's auditor, Price Waterhouse (PW), the Indian branch of PricewaterhouseCoopers (PwC). People were wondering how PW could not detect, for example, that cash was overstated by 94 percent. The Indian exchange commission, SEBI, began an investigation into PW; PW had provided Satyam with clean audit opinions. The accusation is that by certifying the false financial statements as true, Price Waterhouse had misled investors. The investigation by SEBI has not yet concluded, nor has there been a court case on the Satyam Computer Services Ltd. fraud.
Mr. Raju did not commit this fraud on his own. What types of individuals probably assisted him either actively or by keeping quiet about what they knew he was doing?