SATYAM SCAM

Satyam scam has been the greatest scam in the history of corporate world of the
India. Satyam is the fourth largest IT Company in India. The CEO of the company
Ramlinga Raju has made a scam of around $2 billion. There has been a lot of
controversy regarding the misuse of the post by the CEO of the company. The fake
number of jobs which was shown by the CEO was an abuse of power and it was a
clear violation of the prevailing laws in India. This gives the impression that in
India the power and position is what matters and the people in the top position
make a clear violation of the rights provided to them. This scam has seriously
affected the corporate bodies in India. The role of an incorporated company is to
satisfy desires of investors, and to channelize their investment. But most of the
time entrepreneurs play with money of the investors. There are laws to safeguards
investors interest but the Satyam scam has raised the question on the fundamental
role of the government and corporate governance. On 16th December, 2008
Satyam board got the approval for acquisition of Maytas Infrastructure and
Maytas Properties (companies owned by his relatives). However the company
could not go on with the investment plan due to resistance by the investors.
Between 25th and 28th December, 2008, 3 independent directors of Satyam board
resigned and later on Mr. Raju confessed to fraud in the form of misappropriation
in the balance sheet of the company.

Exactly five years ago, Indians woke up to read a confession by B
Ramalinga Raju, chief promoter of Satyam Computer Services, that he had
committed financial fraud by overstating profits and cash in the bank to the tune of
around Rs 6,000 crore. This confession was made in a statement sent to the stock
exchanges on 7 January 2009. It was an open-and-shut case: a confession that was
sent voluntarily and not obtained under duress. All the Central Bureau of
Investigation (CBI) had to do was to arrest Raju, get him to make the same
confession in front of any magistrate (possibly under section 164) so that the
confession is valid as evidence, and get him sentenced even while investigating
his other frauds and dubious actions. But then, Satyam is not just any other case. It
is a case of super crony-capitalism, where Raju was favored by several powerful
Andhra Pradesh politicians, including and especially the Congress partys
strongman, the late YS Rajasekhara Reddy. When powerful politicians are
involved, you can be sure that crony capitalists will get a lot of leeway from the
legal system. This is precisely what has happened. Even though the CBI claims to
have iron-clad evidence to nail Raju, few months ago the Enforcement Directorate
(ED) launched another case against Raju and 212 others for allegedly laundering
money using a corporate veil. Normally, such cases would have to be heard
elsewhere, but the legal system sent this case too to the Special Court hearing the
primary case. And depending on what the judge decides, the cases could get
clubbed and/or prolonged indefinitely. As is the practice is all such cases, Raju
duly retracted his confessional statement - in which he said that the balance-sheet
as on 30 September had inflated cash and bank balances by Rs 5,040 crore,
accrued interest by Rs 376 crore, and had an overstated debtors position by Rs 490
crore.

According to a Times of India report, Raju told the court in April 2010 that
I am not the author of the email sent to various agencies that admitted to the
Satyam accounts being inflated. This is, of course, disingenuous, for in the same
mail Raju also claimed that he had lent the company Rs 1,230 crore from personal
funds, and in the second half of 2012, 37 companies belonging to the Raju family
and IL & FS, the company which took over another Raju company, Maytas, tried
to block the merger of Satyam with TechMahindra claiming they were owed
money. The confession apparently only denies the fraud, but not the part which
claimed that Raju and his private companies lent money to keep Satyam afloat. In
his 7 January 2009 confessional, after admitting to overstating cash and accrued
income, Raju had also said that the company had an understated liability of Rs
1,230 crore on account of funds arranged by me. It is not clear how long the
Satyam case will drag on . As someone who is already out of bail, the longer the
case prolongs, the better it is for Raju. Both CBI and ED took their time to file
charge-sheets - which show how much importance they attach to this case.


Recent news about this case in Economics Times on 4
th
April, 2014 says,
Satyam Computers founder Ramalinga Raju and another accused appeared before
a court here in connection with a prosecution complaint filed by Enforcement
Directorate against them for offences under the Prevention of Money Laundering
Act (PMLA).

The Enforcement Directorate in October last year had file the complaint
against Raju and 212 others, including 166 companies, before the XXI Additional
Chief Metropolitan Magistrate Court cum Special Sessions Judge here for
allegedly laundering funds under a "corporate veil" to perpetrate the accounting
scam that rocked the business world in 2009. ED in its prosecution investigation
report sought to "prosecute the accused for offence of money laundering" under
PMLA.

The court subsequently took cognisance of the complaint and had issued
summons against the accused seeking their appearance and accordingly they did.
The ED report said that Ramalinga Raju and the other accused, who have also been
probed by CBI, "derived proceeds of crime from the sale and pledge of inflated
shares of M/s Satyam Computers and Services Ltd (SCSL)".

The prosecution complaint (charge sheet), names 213 accused -- 47
individuals (among them Ramalinga Raju and nine other accused already named in
the CBI charge sheet in the multi-crore Satyam accounting fraud case) and 166
firms -- including SCSL.

Besides, Raju, the former chairman of Satyam Computers, his brother B
Suryanarayana Raju, Satyam's former MD B Rama Raju, ex-CFO Vadlamani
Srinivas, former PwC auditors Subramani Gopalakrishnan, T Srinivas and
Satyam's former internal chief auditor V S Prabhakar Gupta were among others
who appeared in the court and executed personal bonds of Rs 10,000 each.


ED which had earlier interrogated prime accused Ramalinga Raju, Rama
Raju, and the others had registered a case against the Satyam founder and his
family under PMLA, which defines money laundering offences as those involving
money derived from any activity connected with the proceeds of crime.
The Act provides for the freezing and seizure of the proceeds of crime. So far, 350
immovable and five movable properties, valued at a cumulative Rs 1,075 crore,
have been attached in the case, ED had said.

The Satyam scandal has often been compared to that of Enron by several
writers and analysts. However, a close scrutiny of the facts relating to both the
companies reveals that there are more dissimilarities, than similarities between the
two scams: (i) One similarity between the two companies is like Enron, Satyam too
had a board with the required quota of independent directors. Enron, for instance,
had 80 per cent of its board consisting of independent directors, one of whom, a
distinguished accounting professor, chaired the auditing committee of the firm.
Likewise, in Satyams case, Krishna Palepu, one of the seven independent
directors on its board, was the Ross Graham Walker Professor of Business
Administration and Senior Associate Dean for International Development, at the
Harvard Business School.

A specialist in corporate governance,

Krishna Palepu
was an advocate of tougher auditing rules and (ii) Another similarity between
Enron and Satyam has been the nexus, the heads of both the corporations
established with political bigwigs mainly with the view to currying favours from
them. Enrons Chairman Kenneth Lay had established very close personal
relationship with both President Bill Clinton and President George Bush and also
had donated generously to their election funds. With the political clout they
acquired through hefty political contributions, Enron tried to influence public
policies, either covertly or overtly, especially in the areas of business they were
operating. Likewise, Ramalinga Raju had developed close liaison with the then
chief ministers Chandrababu Naidu and Rajesekara Reddy, who were pitted against
each other and were heading parties on the opposite sides of political spectrum.
Raju obtained several favours from both of them, managed to get out-of-turn
contracts for building gigantic infrastructure projects and acquired huge tracts of
public lands at throwaway prices.
But the dissimilarities between the two are more telling: (i) Satyams is
a much bigger scandal than Enron. G. Ramakrishna, former SEBI chairman, holds
the view that the Satyam fraud was unique for its scale, the period of its
perpetration and the number of people involved. For instance, the amount stolen by
insiders from Enron was INR 28.66 million at current exchange rates. In the
Satyam case, according to the CBIs charge sheet, a much bigger amount of INR
140 billion was involved. Viewed from the Indian context, Satyam scam is by far
the biggest. Even globally, it ranks as the largest self-confessed scam. Also greater
are the number of defaulting agencies and their failures (ii) The impact of the
Satyam scandal had greater ramifications in as much as it adversely impacted its
53,000 employeesa number higher than the 40,000 Enron employees. Though
initially it was suspected that Satyam had only 40,000 employees and Raju
siphoned off the compensations of the non-existent 13,000 employees, a closer
scrutiny of the companys records supported by Provident Fund accounts
confirmed the fact that the company did have 53,000 employees on its payroll (iii)
The Enron fiasco, besides, was almost a stand-alone incident which affected only
the immediate stakeholders of the company, while in the case of the Satyam
swindle, the entire IT industry was badly hit just when the global economic
slowdown has already been severely hurting it. The World Banks ban on Satyam,
Wipro and Mega-soft for unethical practices further aggravated the industrys
difficulties and (iv) Satyams fiasco has caused a lot of damage to the image,
credibility, accountability and trust of India, Indian Corporate Inc., Indian
Outsourcing Industry and the Software Industry in the eyes of the
shareholders/stakeholders/public, the likes of which nobody had ever seen and
probably would never see. The harm cannot be quantified, the extent of the rot,
never imagined, and issues which it has raised and the levels at which it has raised
are of gargantuan proportions.

From Enron, WorldCom and Satyam, it appears that corporate
accounting fraud is a major problem that is increasing both in its frequency and
severity. Research evidence has shown that growing number of frauds have
undermined the integrity of financial reports, contributed to substantial economic
losses, and eroded investors confidence regarding the usefulness and reliability of
financial statements. The increasing rate of white-collar crimes demands stiff
penalties, exemplary punishments, and effective enforcement of law with the right
spirit.An attempt is made to examine and analyze in-depth the Satyam Computers
creative-accounting scandal, which brought to limelight the importance of
ethics and corporate governance (CG). The fraud committed by the founders of
Satyam in 2009, is a testament to the fact the science of conduct is swayed in
large by human greed, ambition, and hunger for power, money, fame and glory.
Unlike Enron, which sank due to agency problem, Satyam was brought to its
knee due to tunneling effect.

The Satyam scandal highlights the importance of securities laws and CG in
emerging markets. Indeed, Satyam fraud spurred the government of India to
tighten the CG norms to prevent recurrence of similar frauds in future. Thus,
major financial reporting frauds need to be studied for lessons-learned and
strategies-to-follow to reduce the incidents of such frauds in the future.