(A)SATYAM

A case of day light robbery defying Ethics and Morality

Aditya Maheshwari IMT Ghaziabad

Abstract: Satyam, the strong brand that had been created, with a name that meant truth, was respected by its customers and was attractive to very high quality talent. The independent directors on the board were people with top credentials and the auditors were one of the top four names in the business. Yet, both the size of the deceit and the length of time it went on were remarkable, leading to a justifiably strong and loud outcry. It has raised serious questions about how Indian companies define and practice corporate responsibility. This case study is about the ethical dilemmas faced by Satyam as a company, its auditors, and ChairmanRamalingaRaju.If the basic culture is not ethical, then what good will rules do? It is time for deep introspection at our companies, at our business schools, and at our financial media.

Introduction Satyam Computer Services Ltd., a leading global consulting and information technology services provider, has won the coveted Golden Peacock Global Award for Excellence in Corporate Governance for 2008. The honor is especially relevant given that corporate governance best practices are considered key benchmarks by stakeholders who evaluate corporations. The fourth largest Indian IT company, with employee strength of around 53,000 people. On 7 January 2009 when Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified the Satyam Computer Services scandal was publicly announced. Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008. What is known as of now is that over an extended period of time, the promoters decided to inflate the revenue and profit figures of Satyam. In the event, the company has a huge hole in its balance sheet, consisting of non-existent assets and cash reserves that have been recorded and liabilities that are unrecorded. According to the confessional statement of Mr. Raju, the balance sheet shortfall is more than Rs.7000 crore. Why did a leading company in one of Indias most successful industries of recent years need to inflate profits? After all, the revenues of Indias IT industry have grown at a scorching compound annual rate of almost 30 per cent in the past eight years, driven by exports. This is remarkable, assuming that revenue and profit inflation have not excessively overstated performance. With cheap skilled labour having shored up profits that were lightly taxed when compared with the norm, net profits must have been substantial and rising too. Why then did the fourth largest IT company choose to take the criminal route of falsifying accounts and indulging in fraud? The Satyam scandal is a classic case of negligence of fiduciary duties, total collapse of ethical standards, and a lack of corporate social responsibility. It is human greed and desire that led to this fraud. This type of behavior can be traced to: greed overshadowing the responsibility to meet fiduciary duties, fierce competition and the need to impress stakeholders especially investors, analysts, shareholders, and the stock market, low ethical and moral standards by top management and greater emphasis on short term performance.

Company Profile Satyam Computer Services Ltd. was a rising star in the Indian outsourced IT services industry. The company was formed in 1987 in Hyderabad, India by B. Ramalinga Raju. The firm began with twenty employees and grew rapidly as a global business. It offers information technology (IT) and business process outsourcing (BPO) services spanning various sectors, including: aerospace and defense, banking and financial services, energy and utilities, life sciences and healthcare, manufacturing and diversified industrials, public services and education, retail, Tele communications and travel.

By 2003, Satyams IT services businesses included 13,120 technical associates servicing over 300 customers worldwide. At that time, the worldwide IT services market was estimated at nearly $400 billion, with an estimated annual compound growth rate of 6.4%. The markets major drivers at that point of time were the increased importance of IT services to businesses worldwide, the impact of the internet on E-Business, the emergence of a high quality IT services industries in India and their methodologies and the growing need of IT services providers who could provide a range of services. To compete against Accenture, BearingPoint, Cap Gemini, Deloitte, Hewlett Packard and IBM, CSC, Electronic Data Systems, Infosys Technologies, Tata Consultancy, and Wipro, the company embarked on a multi pronged business growth strategy. Firstly, the company would build upon its customer relationships to cross sell its array of services while maintaining a continued focus on enterprise wide business solutions and high quality IT services. Secondly, the company would expand its markets by penetrating new geographic markets throughout North America, Europe, Latin America, and the Asian Pacific regions. Thirdly, the company would further develop its industry expertise to access new customer groups, such as manufacturing, financial services, etc. Fourthly, Satyam wanted to attract and retain technical associates and augment employee training to improve retention and services offerings. And, finally, the company wanted to enhance the capabilities through technical alliances and strategic acquisitions, e.g. the proposed strategic acquisition of Citisoftplc, a niche oriented business consultancy in the United Kingdom. This multi pronged business growth strategy would be the stated means to grow Satyam and boost shareholder value. From 2003 to 2008, in nearly all financial metrics of interest to investors, the company grew measurably. Satyam generated USD $467 million in total sales. By March 2008, the company had grown to USD $2.1 billion. The company demonstrated an annual compound growth rate of 35% over that period. Operating profits averaged 21%. Earnings per share similarly grew, from $0.12 to $0.62, at a compound annual growth rate of 40%. Over the same period (2003 2009), the company was trading at an average trailing EBITDA multiple of 15.36. Finally, beginning in January 2003, at a share price of Rs 138.08, Satyams stock would peak at Rs 526.25 a 300% improvement in share price after nearly five years. Satyam clearly generated significant corporate growth and shareholder value. The company was a leading star and a recognizable name in a global IT marketplace. The external environment in which Satyam operated was indeed beneficial to the companys growth. But, the numbers didnt represent the full picture.

RamalingaRaju and the Saytam scandal Greed for money, power, competition, success and prestige compelled Mr. Raju to ride the tiger, which led to violation of all duties imposed on them as fiduciaries the duty of care, the duty of negligence, the duty of loyalty, the duty of disclosure towards the stakeholders. According to CBI, the Indian crime investigation agency, the fraud activity dates back from April 1999, when the company embarked on a road to double digit annual growth. As of December 2008, Satyam had a total market capitalization of $3.2 billion dollars. In the month of December 2008, the company, in an incomprehensible move, announced the acquisition of two of its promoter group companies namely Maytas Properties (unlisted) and Maytas Infrastructure (listed). Satyam planned to acquire a fifty one percent stake in Maytas Infrastructure, a leading Infrastructure Development, Construction and Project Management Company, for $300 million. The Rajus had a 37% stake. The total turnover was $350 million and a net profit of $20 million. Rajus also had a 35% share in Maytas Properties, another real estate investment firm. Satyam revenues exceeded $1 billion in 2006. In April, 2008 Satyam became the first Indian company to publish IFRS audited financials. On December 16, 2008, the Satyam board, including its five independent directors had approved the founder's proposal to buy the stake in Maytas Infrastructure and all of Maytas Properties, which were owned by family members of Satyams Chairman, B Ramalinga Raju, as fully owned subsidiary for $1.6B. Which the chairman in his letter acknowledges as a last attempt to fill the fictitious assets with real ones. The deal was called off within a space of 24 hours on strong opposition from the other stakeholders. Four independent directors quit the Satyam board and SEBI ordered promoters to disclose pledged shares to stock exchange. Investment bank DSP Merrill Lynch, which was appointed by Satyam to look for a partner or buyer for the company, ultimately blew the whistle and terminated its engagement with the company soon after it found financial irregularities. On 7 January 2009, Satyams 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 September 30, 2008, contained the following irregularities: y y y y Inflated figures for cash and bank balances of US$1.04 billion vs. US$1.1 billion reflected in the Books. An accrued interest of US$77.46 million which was non existent. An understated liability of US$253.38 million on account of funds was arranged by him. An overstated debtors' position of US$100.94 million vs. US$546.11 million in the books.

What could be the reasons?

Satyam experienced a pressure to perform and satisfy investorsexpectations. In todays go-go growth of grab companies are often compelled to show-off, window dress to convince customers and attract investors. Satyam has incurred the loan of Rs 1230 crore from various sources so they were under a pressure to show rosy picture of a company otherwise creditorswould have been skeptical. Temptation to be the best and aggressive growthmay create a temptation to follow easy and crooked path. Satyam did notshared much transparency with shareholders, so to keep them in confidence Raju got caught in vicious circle of cooking up books and it increased the gap over the years. It is notion that money and trust are poles apart but in modern era trust is the major component in financial institutions. Wealth is often considered as an instrument for fulfilling the basic needs, legitimate desires and the higheraspirations of human beings. This human factor is totally obscured when themain focus of financial management is quantitative number crunching and speculative manipulation. Satyam did focus on the short term gains rather than long term strategies to flourish the company thereby engaging in cooking up the accounting books and then without consideration of shareholders in order to rectify the gapmade an attempt to buy share in sister concern Maytas for $1.6 billion whichwas although granted by board but shareholders experienced an objectiveconflict of interest. However, the deal was called off.

Ethical Issues at Satyam A good corporate governance is one where a firm commits & adoptsethical practices across its entire value chain & in all of its dealing witha wide group of stakeholder s encompassing employee, customer,vendors, regulators & shareholders in both good and bad times. Corporate governance includes various parties: 1) Shareholders 2) Employee 3) Management 4) Bankers 5) Government

Governance issue at Satyam arose because of non-fulfillment of obligation of the companytowards the various stakeholders. It proved a poor relationship with all the stakeholders. It is well known that a shareholder has a right to get information from the organization; such information could be with respect to the merger and acquisition. Shareholders expecttransparent dealing in an organization. They even have right to get the financial reporting andrecords. In the case of Satyam, the above obligations were never fulfilled. The acquisition of Maytas infrastructure and properties were announced, without the consent of shareholders. They were

even provided with false inflated financial reports. The shareholders were cheated. It is well known that the collapse of any organizations reputation has a direct impact on the employees job. As per the case, employees were shown with an inflated figure. The excess of employees in the organization were kept under Virtual Pool who received just 60% of their salaries and several were removed. The entire scam had its impact on management. Questions were raised over the credibility of management. Any organization has its obligation towards the Government by means of timely payment of taxes and abiding by the rules and laws framed up by the Government. As per the case with Satyam, the company did not pay advance tax for the financial year 2009. As per the rule, the advance taxis to be paid 4 times a year; such was not fulfilled by them.Finally the Satyam computer consultancy limited didnt have good relationship with bank too. SCS was blacklisted by World Bank over charges of bribery. It was declared ineligible for contracts to providing: 1) Improper benefits to bank staff. 2) Failing to maintain documentation to support fees. The revelation further deepened concerns about poor corporate governance practices at the company. Role of auditors Under the Companies Act, an auditor is required to express an opinion as to whether the annual accounts give a true and fair view of the companys state of affairs and financial position. To formulate such an opinion, the auditor needs to examine the companys internal accounting system, inspect its assets, test-check of accounting transactions. The auditor has a duty to inquire into certain matters and seek any information required for the audit, from the company. This could be in relation to security on loans and advances made by the company, any transactions entered into by the company and whether they are prejudicial to the interests of the company, whether personal expenses are recorded and charged to proper accounts, any transaction with respect to sale of shares and whether the position depicted in the books and balance sheet is correct, honest and proper. If there are any suspicious circumstances or unusual transactions like unavailability of original documents, or sudden increase or decrease in shareholdings or debt, employees given the liberty to access unauthorized documents etc., then the auditor is under a clear duty to probe into these transactions and ensure that they are proper and legal. At all times, auditor has to act with care and skill of a professional of reasonable competence. The degree of care and skill required however, varies from case to case. Under Section 227 of the Companies Act, the auditor is supposed to report to the beneficiaries of the company i.e. the shareholders in the general meeting, about the books and accounts of the company, the balance sheet and profit and loss account on the basis of their assessment. They have to give their opinion on the financial position of the company and also make sure that it has been fairly, truly and honestly depicted. The report should be complete, concise, clear and unambiguous and the auditor should be careful about the language used, as the readers of the report are all laymen. For the purpose of drawing up the report, the auditor is given the right to inspect and examine the books and accounts, balance sheets and vouchers or any other requisite documents necessary for the purpose of the audit. These documents can be accessed by the auditor at all times, irrespective of where they are kept. The auditor can also ask for any

information and explanation from the officers of the company, and the officer would be under a duty to furnish the information and explanation so needed. During the course of the audit, the auditor could come across situations where he discovers that a senior employee is defrauding the company or using unfair practices, then an obligation arises of the auditor to report what he has discovered to the management immediately so that appropriate action can be taken. If the auditor identifies the possible existence of fraud or other irregularities in accounting practices, the auditor should attempt to clarify it or report it. There may be circumstances, where the auditor needs to report to a third party without the consent and knowledge of the management, when he suspects that the management may be involved. The auditor should consider the magnitude of loss that will occur due to the fraud and irregularity and the number of people that will be affected by it or the possibility of recurrence of the fraud if gone unreported. As a measure of recoverable loss, the court noted that no losses would have been incurred from the date of discovery if the auditor had taken some action to blow the whistle. The auditors function is not just to verify the arithmetical accuracy of the accounts; but that it includes all the particulars required by law and that it presents a correct and honest view of the companys financial standing. Therefore he must examine all the records and books of the company with utmost care and precision. The day Raju confessed to its Board of Directors the accounting scam, which eroded nearly $2 billion of wealth that belonged to 3 lakh shareholders and the their net worth dropped from a positive Rs 8,529 crore to a negative Rs 278 crore. This fraud was not committed overnight; it was building up continuously from over years. The role of Satyams auditors is under scanner. They ignored some of the obvious indications of embezzlement and thus failed to catch on the massive scam, which could have been caught much before it acquired the massive status. Some of such indications are as follows: Decrease in holdings The holdings of Raju and his family decreased from 15.67% in 2005-06 to 8.61% in September 2008 and finally, early this year to a meagre 2.3% without anybody noticing. Further, in 2006, he transferred these shares to his familys company, SRSR Holdings Pvt. Ltd. from which he took out loan using his shares as collateral. It cannot be said that Raju did not benefit from it. He benefited, and that too substantially. High amounts of debt despite easy cash positions Satyam closed 2007-08 with $56 million of debt, even after having about $1.2 billion of cash. Further, an enormous amount of Rs.4462 crore was lying unused in its current account. This amount was neither distributed among shareholders in the shape of dividend, nor was it used to earn valuable interest, as it is usually done. But neither independent board members, nor the auditors seemed to question this. Imaginary fixed deposits

Raju admitted that Satyams fixed deposits which supposedly grew from Rs. 3.35 crore in 199899 to a massive Rs. 3320.19 crore in 2007-08 are all fake. The auditors are supposed to have an independent bank confirmation of such things in the form of a bank statement and should have obtained certificates from the banks on the tax deducted on the interest accruing on the fixed deposits. It wasnt as if no one was ever suspicious of Satyams dodgy numbers. It was accused of tax fraud and insider trading back in 2003. However, the company police- including the auditors seemed to ignore the accusations. The shareholders of a company place very high reliance on the auditors report, which apparently shows the true and fair view of the accounts of a company. The auditors should perform their duties with utmost care and vigilance to ensure that there are no illegal or improper transactions. But still, Satyam has happened

Ethical dilemmas faced by Ramalinga Raju An ethical problem cannot be resolved unless it is first recognized as a dilemma. Reward or punishment to ethical integrity and moral courage decide the act of an individual. The existence of rules, policies, job descriptions and cultural norms will discourage individuals from unethical behavior even if they have a feeble moral sense. But, in the presence of unethical organizational culture and structure, even highly moral individuals may become corrupt. The culture at Satyam, especially dominated by the board, symbolized such an unethical culture. In the case of Mr. Raju, Satyam, as the smallest of the big four players, was under pressure to show extraordinary results in order to survive. Apart from that there was greed, perhaps reckless greed, causing the brothers to indulge in illegal and unethical activities. On one hand, his rise to stardom in the corporate world coupled with immense pressure to impress investors made Mr. Raju a compelled leader to deliver outstanding results. On the contrary, Mr. Raju had to suppress his own morals and values in favor of the greater good of the company. The board connived with his actions and stood as a blind spectator. The lure of big compensation to members further encouraged such behavior. But, in the end, truth is sought and those violating the legal, ethical, and societal norms are taken to task. The fraud finally had to end and the implications were far reaching. The public confession of fraud by Ramalinga Raju speaks of integrity still left in the individual. His acceptance of guilt and blame for the whole fiasco shows a bright spot of an otherwise tampered character. After quitting as Satyam's Chairman, Raju said, "I am now prepared to subject myself to the laws of land and face consequences thereof."Mr. Raju had many ethical dilemmas to face, but his persistent immoral reasoning brought his own demise. Conclusion Corporate governance framework needs to be implemented in letter as well as spirit. The increasing rates of white collar crimes demands stiff penalties and punishment. The small distortions created by few immoral executives lad far reaching negative consequences. Hopefully, creating an awareness of the large consequences of small lies may help some to avoid this trap.For the whole world RamalingaRaju may be a villain, but for residents of his native village in West Godavari district, he is still a good samaritan. The villagers hail the development

works undertaken by the Byrraju Foundation, the charitable arm of Satyam. The Byrraju Foundation has taken up a number of development works in the fields of education, health, drinking water and several others in hundreds of villages in the coastal districts of West Godavari, East Godavari, Krishna, Visakhapatnam and others.

References: y The Satyam scam: separating truth from lies, C.P. Chandrasekhar, http://www.hindu.com/2009/01/14/stories/2009011455800800.htm Accessed on 1/02/2011 Indian Business Insight Database ,http://www.ibid.informindia.co.in/ Accessed on 1/02/2011 Satyam fraud: Misplaced faith in self-regulation, J. Shrinivasan, http://www.thehindubusinessline.in/2009/01/12/stories/2009011250340800.htm Accessed on 1/02/2011

"Letter from Raju to SEBI and Stock Exchange accepting the fraud"http://economictimes.indiatimes.com/photo.cms?msid=3946287 Accessed on 3/02/2011 Role of auditors, in light of Satyam scam, Harsh Gagrani&RitikaJhurani. http://www.mahindrasatyam.com/media/pr6sep08.asp Accessed on 3/02/2011

y y

A problem of ethical deficit, JanmejayaSinha,http://www.livemint.com/2009/01/11205630/A-problem-of-ethicaldeficit.html Accessed on 3/02/2011

How will mkts react to Satyam-Maytas deal?,http://www.moneycontrol.com/news/market-outlook/how-will-mkts-react-tosatyam-maytas-deal_371155.html#, Accessed on 4/02/2011 http://www.indianexpress.com/news/ramalinga-rajus-village-still-blesses-him/408725/, accessed on 10/02/2011.